4,150,000 Shares
KOS PHARMACEUTICALS, INC.
Common Stock
- -----------------------------------------------------------------------------
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered are being sold by Kos Pharmaceuticals, Inc. ("Kos" or the
"Company").
Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of the factors that were
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
"KOSP".
- -----------------------------------------------------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
- -----------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -----------------------------------------------------------------------------
Per Share $ 15.00 $ 1.05 $ 13.95
Total(3) $62,250,000 $ 4,357,500 $57,892,500
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be
$600,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase an aggregate of up to 622,500
additional shares at the Price to Public, less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional
shares are purchased, the total Price to Public, Underwriting Discounts
and Commissions, and Proceeds to Company will be $71,587,500, $5,011,125,
and $66,576,375 respectively. See "Underwriting."
-------------------------------------------------------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York on or about March 12, 1997.
- -----------------------------------------------------------------------------
COWEN & COMPANY
DILLON, READ & CO. INC.
SALOMON BROTHERS INC
March 7, 1997
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the securities offered
hereby. This Prospectus, which constitutes part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with respect
to the Company and the securities offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules thereto. Statements
made in this Prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement is qualified in
its entirety by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at Judiciary Plaza, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New
York, New York 10048 and the Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material may also be obtained
from the Public Reference Section of the Commission located at Judiciary
Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of prescribed fees. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission with a Web site
address of http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by the Company's independent
accountants and to make available to its shareholders quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information.
- -----------------------------------------------------------------------------
NIASPAN/registered trademark/ is a registered trademark of the Company.
- -----------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS, INCLUDING "RISK FACTORS" HEREIN. EXCEPT AS OTHERWISE NOTED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION.
THE COMPANY
Kos Pharmaceuticals, Inc. ("Kos", pronounced Kos, or the "Company") is
engaged primarily in the development of proprietary prescription
pharmaceutical products for the treatment of certain chronic cardiovascular
and respiratory diseases. The Company intends to manufacture its products and
to market such products directly through its own specialty sales force. The
Company's cardiovascular products under development consist of
controlled-release, once-a-day, oral dosage formulations. The Company's
respiratory products under development consist of aerosolized inhalation
formulations to be used primarily with the Company's proprietary inhalation
devices.
The Company was founded in 1988 by the former Chief Executive Officer,
Chief Operating Officer, and Director of Product Development of Key
Pharmaceuticals, Inc., which was acquired by Schering-Plough Corporation in
June 1986. The Company believes that substantial market opportunities exist
for developing drugs that are reformulations of existing approved
prescription pharmaceutical products but which offer certain safety
advantages, such as reduced harmful side effects, or patient compliance
advantages, such as once-a-day rather than multiple daily dosing regimens,
over such currently existing products. Kos believes that developing
proprietary products based on currently approved drugs, rather than new
chemical entities, may reduce regulatory and development risks and, in
addition, facilitate the marketing of such products because physicians are
generally familiar with the safety and efficacy of such products. Seven of
the Company's nine products under development require new drug application
("NDA") filings with the United States Food and Drug Administration ("FDA").
Although more expensive and time consuming, developing products that require
NDA approval offers several advantages compared with generic products,
including potential for higher gross margins, limited competition resulting
from significant clinical and formulation development challenges, and a
three-year statutory barrier to generic competition.
The Company's objective is to become a fully-integrated specialty
pharmaceutical company that develops, manufactures, and markets its
proprietary products. The Company's management has significant experience in
implementing the principal elements of the Company's business strategy. These
elements consist of the following: (i) select products with unrealized
commercial potential where safety or patient compliance may be improved; (ii)
focus initially on the large, rapidly growing cardiovascular and respiratory
markets, which include many chronic diseases requiring long-term therapy;
(iii) develop proprietary formulations of currently approved pharmaceutical
compounds, which can reduce regulatory and development risks typically
associated with the development of new chemical entities; (iv) manage
internally the clinical development of its products; (v) manufacture its
products internally; (vi) market its products directly through the Company's
specialty sales force; and (vii) leverage its core competencies through
additional corporate and academic alliances.
On May 6, 1996, Kos submitted a NDA to the FDA for NIASPAN, its lead
product under development. NIASPAN is a once-a-day, oral, controlled-release
formulation of niacin for the treatment of multiple lipid disorders, which
are primary risk factors for coronary heart disease. Niacin is a water
soluble vitamin long recognized by the National Institutes of Health and the
American Heart Association as an effective pharmacological agent for the
treatment of multiple lipid disorders, including elevated low-density
lipoprotein ("LDL") cholesterol, total cholesterol, and triglycerides and low
high-density lipoprotein ("HDL") cholesterol. The Company submitted its NDA
based on six clinical trials, including three double-blinded,
placebo-controlled pivotal clinical trials, involving an aggregate of 633
NIASPAN-treated subjects at 17 sites throughout the United States. The
results of these
3
<PAGE>
trials produced statistically significant changes in all major lipid
components without serious treatment-related adverse events. Treatment with
NIASPAN demonstrated a 14% to 19% reduction in LDL cholesterol, a 25% to 35%
reduction in triglycerides, an increase of 22% to 29% in HDL cholesterol, and
a reduction of 24% to 29% in Lp(a). Moreover, NIASPAN'S controlled-release
formulation and dosing regimen reduced the liver toxicity and intolerable
side effects generally associated with currently available formulations of
niacin. There can be no assurance that the FDA will approve the Company's NDA
for NIASPAN on a timely basis, or at all.
The Company expects to launch NIASPAN in 1997, and Kos is establishing a
specialty sales force to market NIASPAN to the approximately 16,000
physicians who account for approximately 40% of the total prescriptions for
lipid-altering medications in the United States. The Company's marketing of
NIASPAN will focus on niacin's long-recognized position as first-line drug
therapy for the treatment of hyperlipidemia and on informing specialist
physicians as to the manner in which NIASPAN achieves its safety and efficacy
profile. In 1995, the market for cholesterol reducing drugs exceeded $2.0
billion in the United States and was one of the fastest growing sectors of
the cardiovascular market.
In addition to NIASPAN, Kos has three other once-a-day, controlled-release
cardiovascular products under development: (i) a combination of two currently
approved drugs for the treatment of multiple lipid disorders; (ii) a
formulation of captopril, an angiotensin converting enzyme ("ACE") inhibitor
for hypertension; and (iii) a branded generic form of
isosorbide-5-mononitrate, a nitrate for angina. In 1995, the disease segments
of the cardiovascular market for which the Company is developing its products
achieved aggregate sales in the United States of approximately $10.2 billion.
Kos is also developing five aerosolized inhalation pharmaceutical
products, dispensed in metered-dose inhalation ("MDI") devices for the
treatment of asthma. The Company is developing a generic version of
albuterol, a beta-agonist for asthma, dispensed in a generic MDI with a
chloroflourocarbon ("CFC") propellant. Kos anticipates that it will submit an
abbreviated new drug application ("ANDA") for its CFC albuterol in 1997. Kos
is also developing three non-CFC formulations using its proprietary breath
coordinated inhaler: two different inhaled steroids for asthma, triamcinolone
and flunisolide, and albuterol. In addition, the Company is developing a
proprietary breath actuated inhaler for pediatric and geriatric use with one
of its non-CFC formulations. The market for asthma products in 1995 was $2.4
billion in the United States.
In 1996, the Company entered into certain agreements with Fuisz
Technologies, Ltd., for the development of up to six products using Fuisz'
proprietary microsphere formulation technology. Fuisz has commenced the
development of three of these products, including the Company's combination
product for treatment of multiple lipid disorders, captopril and
isosorbide-5-mononitrate; up to three other products will commence
development during 1997. The Company is also presently sponsoring basic
research at Tufts University and Boston University and intends to enter into
corporate alliances to develop products identified through these research
programs.
Since its inception, the Company's operations have been funded entirely by
Michael Jaharis, one of the Company's founders and its Chairman who was
previously the Chief Executive Officer of Key Pharmaceuticals, Inc. The
Company employs approximately 105 people, of whom 68 are in product
development and 19 in manufacturing.
The Company was incorporated in Florida on June 25, 1996, as the successor
to Kos Holdings, Inc. (formerly named Kos Pharmaceuticals, Inc.), which was
incorporated in Florida on July 1, 1988. References in this Prospectus to the
Company include the operations of its predecessor until June 30, 1996 and its
wholly-owned subsidiary, Aeropharm Technology, Inc.
4
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common Stock offered hereby ........... 4,150,000 shares
Common Stock to be outstanding
after this offering .................. 14,150,000 shares(1)
Use of proceeds ........................ For research and development, establishment
of a sales and marketing organization for
the anticipated commercial launch of NIASPAN,
repayment of all or a portion of a loan from
Kos Investments, Inc., working capital, and
other general corporate purposes.
Nasdaq National Market symbol .......... KOSP
</TABLE>
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------------- ---------------------
1994 1995 1996 1995 1996
------------- ------------- ------------- ---------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues ................................................ $ 22 $ 14 $ -- $ -- $ --
Operating expenses:
Research and development ............................... 6,663 8,387 13,816 6,426 6,057
General and administrative ............................. 1,619 1,614 1,772 789 1,936
Expense recognized on modification of stock
option grants(2)....................................... -- -- 5,436 -- --
------------- ----------- ---------- ---------- ----------
Total operating expenses ................................ 8,282 10,001 21,024 7,215 7,993
Other income ............................................ (2) -- - - -- --
Interest (income) expense, net .......................... 1,108 1,052 (14) (8) 131
Minority interest (3) ................................... (164) 1 16 1 --
------------- ------------ ---------- ---------- ----------
Net loss ................................................ $ (9,530) $ (11,038) $ (20,994) $ (7,206) $ (8,124)
============= ============= ========== ========== ==========
Net loss per share (4) .................................. $ (0.84) $ (0.97) $ (1.85) $ (0.64) $ (0.72)
============= ============ ========== ========== ==========
Weighted average common shares in computing net loss
per share(4) ........................................... 11,340,000 11,340,000 11,340,000 11,340,000 11,340,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
ACTUAL AS ADJUSTED(6)
----------- ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET(5):
Cash and cash equivalents ........................... $ 358 $ 49,296
Working capital (deficit) ........................... (8,816) 48,477
Total assets ........................................ 3,197 52,135
Total debt .......................................... 8,355 --
Deficit accumulated during the development stage(7) (64,782) (64,782)
Shareholders' equity (deficit) ...................... (6,210) 51,083
</TABLE>
- -----------------------------------------------------------------------------
(1) Excludes 3,675,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Option Plan and 325,000 shares of Common Stock
reserved for issuance upon exercise of other outstanding options. Options
to acquire an aggregate of 2,330,500 shares of Common Stock at a weighted
average exercise price of $4.44 per share were issued and outstanding as
of February 7, 1997. Excludes 893,000 shares of Common Stock issuable to Kos
Investments, at March 7, 1997, upon the conversion, if any, of a note
representing a loan made to the Company by Kos Investments (the
"Convertible Note"). See "Management--Stock Option Plan" and "Certain
Transactions."
(2) Reflects a non-cash charge associated with an extension of the exercise
period for stock options granted during 1988 to 1990 to the Company's
Chief Executive Officer and two independent consultants; no other
material economic terms of these options were changed.
(3) Represents the minority shareholder's interest in Aeropharm Technology,
Inc., the Company's aerosol subsidiary, which interest was acquired by
the Company in June 1996.
(4) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share. Assuming the issuance
only of sufficient shares to repay indebtedness outstanding as of
December 31, 1996, supplementary pro forma net loss per share of common
stock would be $(0.67) for the six month period ended December 31, 1996.
(5) The Company has funded its operations since July 1, 1996 using the
proceeds of a loan from Kos Investments, Inc., a company that is
wholly-owned by, and serves as an investment vehicle for Michael Jaharis,
the Company's Chairman and one of its founders. As of March 7, 1997,
the Company had outstanding borrowings of $13,395,000 under such loan.
See "Use of Proceeds."
(6) Adjusted to reflect the sale of 4,150,000 shares of Common Stock offered
hereby and receipt by the Company of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
(7) In connection with the transfer on June 30, 1996 of assets and
liabilities from Kos Holdings, Inc. to the Company, net operating loss
carry forwards amounting to approximately $51.0 million and related tax
benefits, were not transferred to the Company. See "The Company" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE COMPANY AND
ITS BUSINESS BEFORE PURCHASING ANY OF THE COMMON STOCK OFFERED HEREBY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS
THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING
STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF
FACTORS, INCLUDING THOSE IDENTIFIED UNDER "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
"BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
The Company's success depends to a significant extent on whether its lead
product, NIASPAN, is successfully commercialized. There can be no assurance
as to the successful commercialization of NIASPAN. The successful
commercialization of NIASPAN may be affected by various factors, certain of
which are set forth below.
EARLY STAGE OF DEVELOPMENT; HISTORY OF OPERATING LOSSES; UNCERTAINTY OF
FUTURE PROFITABILITY
The Company is a development stage company. It has generated no revenues
from product sales and it does not expect to generate significant revenue
from product sales for at least the next nine months. As of December 31,
1996, the Company's accumulated deficit was $64.8 million. In connection with
the transfer of operations from Kos Holdings, Inc. to the Company on June 30,
1996, net operating loss carry forwards amounting to approximately $51.0
million and related tax benefits remained with Kos Holdings, Inc. and were
not transferred to the Company. Consequently, the Company had no tax assets
or liabilities as of June 30, 1996. See "The Company." To date the Company
has dedicated most of its financial resources to the development of NIASPAN,
the development of other products and general and administrative expenses.
The Company expects to incur significant operating losses for at least the
next 12 months, primarily due to the expansion of its research and
development programs and the establishment of a sales and marketing
organization. The Company's ability to achieve profitability will depend,
among other things, on its successfully completing development of its
products, obtaining regulatory approvals, establishing manufacturing, sales
and marketing capabilities, achieving market acceptance for its products and
maintaining sufficient funds to finance its activities. There can be no
assurance that the Company will be able to achieve profitability or that
profitability, if achieved, can be sustained. See "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business."
UNCERTAINTIES RELATED TO FDA APPROVAL OF NIASPAN
On May 6, 1996, the Company submitted a NDA to the FDA for NIASPAN. The
NDA requests authorization for the Company to market NIASPAN for the
treatment of multiple lipid disorders. The FDA generally requires that the
safety and efficacy of a drug be supported by results from adequate and
well-controlled clinical trials before approval for commercial sale. If the
FDA believes that the results of the pivotal clinical trials for NIASPAN do
not establish the safety and efficacy of NIASPAN in the treatment of any or
all of the referenced indications, or if the FDA fails to accept that the
long-term patient benefits from the treatment of such indications has been
established, the Company will not receive the approvals necessary to market
NIASPAN. Failure to obtain FDA approval to market NIASPAN would have a
material adverse effect on the Company. Securing approval for less than all
of the indications set forth in the NIASPAN NDA could have a material adverse
effect on the Company. The Company may be required to conduct additional
clinical trials in order to demonstrate the safety and efficacy of NIASPAN,
which trials also may not be acceptable to the FDA. Even if acceptable to the
FDA, such additional trials may delay the FDA approval process, which could
have a material adverse effect on the Company. There can be no assurance that
the results of any of the Company's pivotal clinical trials will be
satisfactory or that NIASPAN will obtain regulatory approval for
commercialization on a timely basis, or at all, with respect to all or any of
the indications for which the Company intends to market NIASPAN.
6
<PAGE>
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT
The Company has not yet completed the development of any products and,
accordingly, has not begun to market or generate revenues from the
commercialization of products. Although the Company recently submitted a NDA
to the FDA for NIASPAN, each of its other products under development is at an
earlier stage of development. There can be no assurance that the Company will
be able to successfully formulate any of its products as planned, or that the
Company will be successful in demonstrating the safety and efficacy of such
products in human clinical trials. These trials may be costly and
time-consuming. The administration of any product the Company develops may
produce undesirable side effects that could result in the interruption, delay
or suspension of clinical trials, or the failure to obtain FDA or other
regulatory approval for any or all targeted indications. Even if regulatory
approval is secured, the Company's products under development may later
produce adverse effects that limit or prevent their widespread use or that
necessitate their withdrawal from the market.
UNCERTAINTIES RELATED TO MARKET ACCEPTANCE
If the Company receives the required regulatory approvals to market
NIASPAN, the Company's ability to successfully commercialize NIASPAN will
depend in part on the acceptance of NIASPAN by physicians and their patients.
The Company believes that intolerable flushing is one of the principal
reasons why physicians generally have been reluctant to prescribe or
recommend currently available formulations of niacin. Flushing episodes are
often characterized by facial redness, tingling or rash. Although most
patients taking NIASPAN will sometimes flush, the formulation and dosing
regimen for NIASPAN have been designed to maximize patient acceptance and
minimize the occurrence of flushing. There can be no assurance, however, that
patients using NIASPAN will not suffer episodes of flushing that they
consider intolerable. The failure of physicians to prescribe NIASPAN or the
failure of patients to continue taking NIASPAN due to intolerable flushing or
other side effects would have a material adverse effect on the Company. The
Company believes that physicians have also been reluctant to prescribe or
recommend certain currently available formulations of niacin because of
potential liver toxicity associated with these formulations. Although
clinical trials conducted using NIASPAN demonstrated that fewer than 1% of
patients experienced clinically significant elevations in liver enzyme
levels, there can be no assurance that patients using NIASPAN will not
experience any clinically significant elevations of liver enzymes or other
side effects.
Unanticipated side effects or unfavorable publicity concerning any of the
Company's products under development or any other product incorporating
technology similar to that used in the Company's products under development
could have an adverse effect on the Company's ability to obtain regulatory
approvals; to achieve acceptance by prescribing physicians, managed care
providers or patients; and to commercialize its products, any of which could
have a material adverse effect on the Company.
PATENTS AND TRADEMARKS; INTERFERENCE
The Company's ability to commercialize any of its products under
development will depend, in part, on its or its licensors' ability to obtain
patents, enforce those patents, preserve trade secrets, and operate without
infringing on the proprietary rights of third parties. In addition, the
patents for which the Company has applied relating to NIASPAN and certain
other of the Company's products under development are based on, among other
things, the timed administration of NIASPAN. If the indications treated by
NIASPAN and such other products under development could be treated using
drugs without such timed administration, the Company's patents, if issued,
would not prevent the use of such drugs for the treatment of such
indications, which would have a material adverse effect on the Company. There
can be no assurance that the patent applications licensed to or owned by the
Company will result in issued patents, that patent protection will be secured
for any particular technology, that any patents that have been or may be
issued to the Company or its licensors will be valid or enforceable or that
any patents will provide meaningful protection to the Company.
In general, the U.S. patents and patent applications owned by or licensed
to the Company are method-of-use patents that cover the timed use of certain
compounds to treat specified conditions.
7
<PAGE>
Composition-of-matter protection is not available for the active ingredient
in NIASPAN. The active ingredient in NIASPAN, niacin, is currently sold in
the United States and other markets for LDL cholesterol lowering and for
other uses. Even in jurisdictions where the use of the active ingredient in
NIASPAN for lowering LDL cholesterol and other indications may be covered by
the claims of a use patent licensed to the Company, off-label sales might
occur, especially if another company markets the active ingredient at a price
that is less than the price of NIASPAN, thereby potentially reducing the
sales of NIASPAN. See "Business--Competition" and "Business--Government
Regulation."
The Company has a patent application pending in the U.S. Patent and
Trademark Office ("PTO") with claims covering NIASPAN's method of use
consistent with its recommended once-a-day dosing regimen. Certain of these
claims have recently been held allowable by the PTO, but have not yet been
issued as a patent. The patent examiner has, however, suspended prosecution
of the Kos application and referred such application to the PTO's Board of
Appeals to determine whether an interference should be declared between such
Kos application and a method-of-use patent issued to a generic manufacturer
allegedly claiming the same dosing regimen invention. It may take up to a
year or more for the PTO's Board of Appeals to determine whether to declare
such an interference. On February 7, 1997, the Company and such generic
manufacturer entered into a cross licensing agreement (the "License
Agreement") pursuant to which the parties agreed to resolve, as between
themselves, the effects of such potential interference by granting licenses
under their respective patent application and patent.
The patent positions of pharmaceutical and biotechnology companies are
highly uncertain and involve complex legal and factual questions. There can
be no assurance that the patents owned and licensed by the Company, or any
future patents, will prevent other companies from developing similar or
therapeutically equivalent products or that others will not be issued patents
that may prevent the sale of Company products or require licensing and the
payment of significant fees or royalties by the Company. Furthermore, there
can be no assurance that any of the Company's future products or methods will
be patentable, that such products or methods will not infringe upon the
patents of third parties, or that the Company's patents or future patents
will give the Company an exclusive position in the subject matter claimed by
those patents. The Company may be unable to avoid infringement of third party
patents and may have to obtain a license, defend an infringement action, or
challenge the validity of the patents in court. There can be no assurance
that a license will be available to the Company, if at all, on terms and
conditions acceptable to the Company, or that the Company will prevail in any
patent litigation. Patent litigation is costly and time consuming, and there
can be no assurance that the Company will have or will devote sufficient
resources to pursue such litigation. If the Company does not obtain a license
under such patents, is found liable for infringement or is not able to have
such patents declared invalid, the Company may be liable for significant
money damages, may encounter significant delays in bringing products to
market, or may be precluded from participating in the manufacture, use, or
sale of products or methods of treatment requiring such licenses.
The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent that the
Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. The Company seeks
to protect trade secrets and proprietary knowledge in part through
confidentiality agreements with its employees, consultants, advisors and
collaborators. Nevertheless, these agreements may not effectively prevent
disclosure of the Company's confidential information and may not provide the
Company with an adequate remedy in the event of unauthorized disclosure of
such information. If the Company's employees, scientific consultants or
collaborators develop inventions or processes independently that may be
applicable to the Company's products under development, disputes may arise
about ownership of proprietary rights to those inventions and processes. Such
inventions and processes will not necessarily become the Company's property,
but may remain the property of those persons or their employers. Protracted
and costly litigation could be necessary to enforce and determine the scope
of the Company's proprietary rights. Failure to obtain or maintain patent and
trade secret protection, for any reason, would have a material adverse effect
on the Company. See "Business--Patents and Proprietary Rights."
8
<PAGE>
The Company engages in collaborations, sponsored research agreements, and
other arrangements with academic researchers and institutions that have
received and may receive funding from U.S. government agencies. As a result
of these arrangements, the U.S. government or certain third parties may have
rights in certain inventions developed during the course of the performance
of such collaborations and agreements as required by law or such agreements.
Several legislative bills affecting patent rights have been introduced in the
United States Congress. These bills address various aspects of patent law,
including publication, patent term, re-examination subject matter and
enforceability. It is not certain whether any of these bills will be enacted
into law or what form such new laws may take. Accordingly, the effect of such
potential legislative changes on the Company's intellectual property estate
is uncertain.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has not yet established a sales and marketing organization nor
has it yet marketed, distributed or sold any product. The Company intends to
market NIASPAN and the majority of its other products under development
through its own specialty sales force. Substantial resources will be required
for the Company to establish its own sales force and promote the sale of
NIASPAN and its other products under development. There can be no assurance
that the Company will be able to establish a sales and marketing organization
prior to the Company's planned launch of NIASPAN in 1997 or at all, or that
the Company will devote resources to NIASPAN or its other products under
development sufficient to achieve market acceptance. The Company's failure or
delay in establishing a marketing and sales force prior to the planned launch
of NIASPAN in 1997 or its failure to expend the resources to adequately
promote NIASPAN would have a material adverse effect on the Company. The
Company's failure to establish a marketing and sales force or its failure to
expend the resources to adequately promote any of its other products under
development could have a material adverse effect on the Company.
COMPETITION AND TECHNOLOGICAL CHANGE
The active ingredient in NIASPAN, niacin, is available in several other
formulations, most of which do not require a prescription. Although the
Company believes that there are no currently available niacin formulations
that have been approved by the FDA specifically for once-a-day dosing, there
can be no assurance that physicians will not prescribe or recommend some of
these unapproved niacin formulations, using the NIASPAN dosing regimen, to
try to achieve the same results as NIASPAN. Substitution of other niacin
formulations for NIASPAN could have a material adverse effect on the Company.
Moreover, manufacturers of other niacin formulations could promote their
products using the NIASPAN dosing regimen and could promote the sale of their
products to treat the indications for which the Company has sought approval
to market NIASPAN. Although such promotion would be a violation of FDA
regulations, the occurrence of such practices would have a material adverse
effect on the Company. See "Business--Government Regulation" and
"Business--Competition." Moreover, many products are commercially available
for the treatment of elevated LDL cholesterol, and the manufacturers of such
products have significantly greater financial resources and sales and
manufacturing capabilities than the Company. There can be no assurance that
any products developed by the Company will be able to compete successfully
with any of those products.
Many established pharmaceutical and biotechnology companies, universities,
and other research institutions with resources significantly greater than the
Company's may develop products that directly compete with the Company's
products. Even if the Company's products under development prove to be more
effective than those developed by other entities, such other entities may be
more successful in marketing their products than the Company because of
greater financial resources, stronger sales and marketing efforts, and other
factors. These entities may succeed in developing products that are safer,
more effective or less costly than the products developed by the Company.
There can be no assurance that any products developed by the Company will be
able to compete successfully with any of those products.
9
<PAGE>
GOVERNMENT REGULATION; NO ASSURANCES OF REGULATORY APPROVAL
The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are
currently subject to extensive regulation by the FDA and may in the future be
subject to foreign regulations. The drug approval process takes many years
and requires the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying
interpretations that could delay, limit, or prevent regulatory approval.
Although the Company may consult the FDA for guidance in developing protocols
for clinical trials, that consultation provides no assurance that the FDA
will accept the clinical trials as adequate or well-controlled or accept the
results of those trials. In addition, delays or rejections of applications
for regulatory approval may result from changes in or additions to FDA
regulations concerning the drug approval process. Similar delays may also be
encountered in foreign countries. There can be no assurance that any
regulatory review will be conducted in a timely manner or that regulatory
approvals will be obtained for any products developed by the Company,
including NIASPAN. Even if regulatory approval of a product is obtained, the
approval may be limited as to the indicated uses for which it may be promoted
or marketed. In addition, a marketed drug, its bulk chemical supplier, its
manufacturer and its manufacturing facilities are subject to continual
regulatory review and periodic inspections, and later discovery of previously
unknown problems with a product, supplier, manufacturer or facility may
result in restrictions on such products or manufacturers, which may require a
withdrawal of the product from the market. Failure to comply with the
applicable regulatory requirements can, among other things, result in fines,
suspensions of regulatory approvals, product recalls, operating restrictions
and criminal prosecution, any of which could have a material adverse effect
on the Company.
The Company's business is also subject to regulation under state, federal
and local laws, rules, regulations and policies relating to the protection of
the environment and health and safety, including those governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling
and disposal of certain materials. The Company believes that it is in
compliance in all material respects with all such laws, rules, regulations
and policies applicable to the Company. There can be no assurance that the
Company will not be required to incur significant costs to comply with such
environmental and health and safety laws and regulations in the future. The
Company's research and development involves the controlled use of hazardous
materials. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by applicable state, federal and local regulations, the risk of contamination
or injury from these materials cannot be completely eliminated. In the event
of such contamination or injury, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company and materially adversely affect the Company's business, financial
condition and results of operations. One of the Company's products under
development involves the use of CFC propellants. The use of CFC propellants
is subject to significant U.S. and foreign regulations. Moreover, it is
possible that future international treaties or U.S. or foreign government
regulations will prohibit the use of CFC propellants. See
"Business--Government Regulation" and "Business--Respiratory Products."
DEPENDENCE ON FUISZ TECHNOLOGIES LTD. AND OTHER COLLABORATORS
The Company may rely on third parties for certain aspects of the
development of certain of its products under development. The Company has
entered into agreements with Fuisz Technologies Ltd. ("Fuisz") pursuant to
which the Company and Fuisz have agreed to collaborate in the development of
captopril, isosorbide-5-mononitrate ("IS-5-MN"), and the lipid-altering
combination product, as well as certain other products in the future. Under
the terms of these agreements, Kos is responsible for conducting
pharmacokinetic studies and clinical trials and Fuisz is responsible for the
formulation of such products. The Company is not aware of any approved
products that use Fuisz' microsphere technology, which will be used in the
future in certain of the Company's products under development. The Company's
ability to commercialize these products may depend to a significant extent
on the efforts of Fuisz, over which the Company has no control. There can be
no assurance that Fuisz will be successful in developing any of the Company's
products under development. The failure of Fuisz to develop any of the
Company's products may have a material adverse effect on the Company. The
10
<PAGE>
Company may also rely on other third parties for certain aspects of the
development of the Company's presently planned or future products. There can
be no assurance that the Company will be able to enter into future
collaborative arrangements on favorable terms, or at all. Even if the Company
is successful in entering into such collaborative agreements, there can be no
assurance that any such arrangement will be successful. The success of any
such arrangement is dependent on, among other things, the skills, experience
and efforts of the third party's employees responsible for the project, the
third party's commitment to the arrangement, and the financial condition of
the third party, all of which are beyond the control of the Company.
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP
Although the Company has manufactured sufficient quantities of certain of
its products to facilitate the conduct of human clinical trials and extensive
testing and research, the Company has no experience manufacturing products
for commercial purposes. At present, the Company manufactures clinical
materials in two manufacturing plants, both of which the Company believes
operate in substantial compliance with current Good Manufacturing Practices
("cGMP") regulations for the manufacture of pharmaceutical products. The
Company may need to further scale-up certain of its current manufacturing
processes to achieve production levels consistent with the commercial sale of
its products. Further, modifications to the facilities, systems and
procedures may be necessary to maintain compliance with cGMP regulations and
other regulations prescribed by various regulatory agencies including the
Occupational Safety and Health Administration and the Environmental
Protection Agency, in connection with manufacture for commercial sale.
Failure by the Company to successfully further scale-up or modify its
manufacturing process or to comply with cGMP regulations and other
regulations could delay the approval of the Company's products under
development or limit the Company's ability to meet the demand for its
products, either of which would have a material adverse effect on the
Company. Such occurrences may require the Company to acquire alternative
means of manufacturing its products, which may not be available to the
Company on a timely basis, on commercially practicable terms, or at all.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date by capital contributions and,
since July 1, 1996, a loan from Kos Investments, Inc. represented by a
promissory note convertible at the option of the holder into Common Stock at the
initial public offering price (the "Convertible Note"). Assuming successful
commercial launch of NIASPAN, the Company anticipates positive cash flows from
operations in 1998. The Company anticipates that it will use a portion of the
net proceeds of the offering to repay all or a portion of the Convertible Note.
See "Certain Transactions." The Company has expended and will continue to be
required to expend substantial funds to continue research and development,
including clinical trials of its products under development, and to commence
sales and marketing efforts if regulatory approvals are obtained. Although the
Company believes that the net proceeds of this offering (after repayment, if
any, of the Convertible Note) will be sufficient to fund the operations of the
Company for at least the next twelve months, the Company may need or elect to
raise additional capital. The Company's capital requirements will depend on many
factors, including the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
research, development and clinical trial programs; the costs and timing of
seeking regulatory approvals of the Company's products under development; the
Company's ability to obtain such regulatory approvals; the success of the
Company's sales and marketing programs; costs in filing, prosecuting, defending
and enforcing any patent claims and other intellectual property rights; the
extent and terms of any collaborative research, manufacturing, marketing or
other arrangements; and changes in economic, regulatory or competitive
conditions or the Company's planned business. Estimates about the adequacy of
funding for the Company's activities are based on certain assumptions, including
the assumption that testing and regulatory procedures relating to the Company's
products
11
<PAGE>
under development can be conducted at projected costs and within projected
time frames and that the Company's NIASPAN product receives regulatory
approval on a timely basis and is successfully marketed.
To satisfy its capital requirements, the Company may seek to raise funds
in the public or private capital markets. The Company's ability to raise
additional funds in the public or private markets will be adversely affected
if the results of the Company's ongoing or future clinical trials are not
favorable or if regulatory approval for any of the Company's products under
development is not obtained. The Company may seek additional funding through
corporate collaborations and other financing vehicles. There can be no
assurance that any such funding will be available to the Company, or if
available, that it will be available on acceptable terms. If adequate funds
are not available, the Company may be required to curtail significantly one
or more of its research or development programs or it may be required to
obtain funds through arrangements with future collaborative partners or
others that may require the Company to relinquish rights to some or all of
its technologies or products under development. If the Company is successful
in obtaining additional financing, the terms of the financing may have the
effect of diluting or adversely affecting the holdings or the rights of the
holders of Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DEPENDENCE ON SINGLE SOURCES OF SUPPLY
Some materials used in the Company's products, including the active
ingredient in NIASPAN, are currently sourced from a single qualified
supplier. The Company does not have a contractual arrangement with the sole
supplier of the active ingredient in NIASPAN pursuant to which the Company
obtains such ingredient. Although the Company has not experienced difficulty
in acquiring materials for product development to date, no assurance can be
given that supply interruptions will not occur in the future or that the
Company will not have to obtain substitute materials, which would require
additional product validations and regulatory submissions. Any such
interruption of supply could have a material adverse effect on the Company's
ability to manufacture its products or to obtain or maintain regulatory
approval of such products.
NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize successfully its products under
development is dependent in part on the extent to which appropriate levels of
reimbursement for the Company's products and related treatments are obtained
from government authorities, private health insurers and other organizations,
such as health maintenance organizations ("HMOs"). Third-party payors are
increasingly challenging the pricing of pharmaceutical products. The trend
toward managed healthcare in the U.S., the growth of organizations such as
HMOs and legislative proposals to reform healthcare and government insurance
programs could significantly influence the purchase of pharmaceutical
products, resulting in lower prices and reduced demand for the Company's
products under development. Such cost containment measures and healthcare
reform could affect the Company's ability to sell its products under
development and may have a material adverse effect on the Company.
Significant uncertainty exists about the reimbursement status of newly
approved pharmaceutical products. There can be no assurance that
reimbursement in the United States or foreign countries will be available for
any of the Company's products under development, that any reimbursement
granted will be maintained or that limits on reimbursement available from
third-party payors will not reduce the demand for, or negatively affect the
price of, the Company's products under development. The unavailability or
inadequacy of third-party reimbursement for the Company's products under
development would have a material adverse effect on the Company.
RISK OF PRODUCT LIABILITY CLAIMS; NO ASSURANCE OF ADEQUATE INSURANCE
Testing, manufacturing, marketing, and selling the Company's products
under development entails a risk of product liability. Although the Company
carries clinical trial product liability insurance in the aggregate amount of
$3,000,000, there can be no assurance that the existing coverage is adequate.
Furthermore, this existing coverage may not be adequate as the Company
further develops products. If
12
<PAGE>
the Company receives the required regulatory approvals and begins to sell
NIASPAN or any of its other products under development, there can be no
assurance that additional liability insurance coverage for a commercialized
product will be available in the future on acceptable terms, if at all. The
Company's business could be adversely affected by the assertion of a product
liability claim, and the Company could be rendered insolvent if it does not
have sufficient financial resources to satisfy any liability resulting from
such a claim or to fund the legal defense of such a claim.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent on its ability to attract and
retain highly qualified scientific and management personnel. The Company
faces intense competition for personnel from other companies, academic
institutions, government entities and other organizations. There can be no
assurance that the Company will be successful in attracting and retaining key
personnel. The loss of key personnel, or the inability to attract and retain
the additional, highly-skilled employees required for the expansion of the
Company's activities, could adversely affect the Company's results of
operations and its business. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The Company's sole shareholder, each current holder of options to acquire
Common Stock and Kos Investments, Inc., which holds the Convertible Note,
have agreed not to sell shares of Common Stock for a period of 180 days from
the date of this Prospectus. The Company has granted certain registration
rights to the Company's sole shareholder and to Kos Investments, Inc., the
holder of the Convertible Note, which entitle such entities to cause the
Company to effect three registrations under the Securities Act of sales of
shares of the Company's Common Stock owned by such entities. By exercising
these registration rights, these entities could cause a large number of
shares to be registered and become freely tradeable without restrictions
under the Securities Act (except for those purchased in the offering by
affiliates of the Company) immediately upon the effectiveness of such
registration. In addition, the Company intends to file, after the expiration
of such 180 day period, registration statements under the Securities Act to
register an aggregate of 4,000,000 shares of Common Stock issued or reserved
for issuance under the Company's employee benefit plans. Such sales may have
an adverse effect on the market price of the Common Stock and could impair
the Company's ability to raise additional capital. See "Shares Eligible for
Future Sale" and "Underwriting."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to this offering, there has been no public market for shares of the
Common Stock. Although the Company has submitted an application to have the
Common Stock approved for quotation on the Nasdaq National Market system,
there can be no assurance that a regular trading market will develop or be
sustained after the offering. The initial public offering price for the
Common Stock will be determined by negotiations between the Company and the
representatives of the Underwriters. See "Underwriting." The stock market,
including the Nasdaq National Market, on which the Company's shares are
expected to be quoted, has from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Common Stock, like
the stock prices of many publicly traded pharmaceutical and biotechnology
companies, may prove to be highly volatile. Announcements of technological
innovations or new commercial products by the Company or its competitors,
developments or disputes concerning patent or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by the Company or its competitors, regulatory developments in
either the United States or foreign countries, public concern as to the
safety of pharmaceutical and biotechnology products and economic and other
external factors, as well as period-to-period fluctuations in financial
results, among other factors, may have a significant impact on the market
price of the Common Stock.
13
<PAGE>
CONTROL BY EXISTING SHAREHOLDER
Upon completion of this offering, Michael Jaharis, the Chairman of the
Board of Directors of the Company and one of its founders, will beneficially
own approximately 71% of the outstanding Common Stock (approximately 68% if
the Underwriters exercise their over-allotment option in full), excluding
893,000 shares of Common Stock issuable to Kos Investments upon conversion,
if any, of the Convertible Note. Accordingly, this shareholder will be able
to control the outcome of shareholder votes, including votes concerning the
election of directors, the adoption or amendment of provisions in the
Company's Articles of Incorporation, and the approval of mergers and other
significant corporate transactions. This level of concentrated ownership by
one person, along with the factors described in "Risk Factors--Anti-Takeover
Provisions," may have the effect of delaying or preventing a change in the
management or voting control of the Company. See "Principal Shareholders."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws,
as well as the Florida Business Corporation Act, could discourage a third
party from attempting to acquire, or make it more difficult for a third party
to acquire, control of the Company without approval of the Company's Board of
Directors. Such provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain
of such provisions allow the Board of Directors to authorize the issuance of
preferred stock with rights superior to those of the Common Stock. Moreover,
certain provisions of the Company's Articles of Incorporation or Bylaws
generally permit removal of directors only for cause by a 60% vote of the
shareholders of the Company, require a 60% vote of the shareholders to amend
the Company's Articles of Incorporation or Bylaws, require a demand of at
least 50% of the Company's shareholders to call a special meeting of
shareholders, and prohibit shareholder actions by written consent. See
"Description of Capital Stock."
DILUTION; ABSENCE OF DIVIDENDS
Purchasers of the Common Stock in the offering will experience an immediate
dilution in net tangible book value of $11.39 per share. These investors will
also experience additional dilution upon the exercise of outstanding options.
See "Dilution." The Company intends to retain earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy."
14
<PAGE>
THE COMPANY
The Company's predecessor, Kos Holdings, Inc. ("Holdings"), which was
previously named Kos Pharmaceuticals, Inc., was incorporated in Florida on
July 1, 1988, to develop prescription pharmaceutical products principally for
the cardiovascular and respiratory markets. On June 25, 1996, Kos (named
after the Greek Island where Hippocrates founded the science of medicine) was
incorporated in Florida as the successor to the business of Holdings. On June
30, 1996, all of the assets and all of the liabilities of Holdings were
transferred to the Company in exchange for shares of common stock of the
Company (the "Reorganization"). The Reorganization was accomplished in order
to transfer the assets and operations of Holdings to the Company while
preserving Holdings' net operating loss carryforwards and related tax
benefits for Holdings. As a result, the Company had no tax assets or
liabilities as of June 30, 1996. Kos Investments, Inc. ("Kos Investments") is
the sole shareholder of Holdings. Kos Investments is wholly-owned by, and
serves as an investment vehicle for Michael Jaharis, one of the Company's
founders and its Chairman, who has solely financed the Company's operations
from inception. All references in this Prospectus to the Company include its
wholly-owned subsidiary, Aeropharm Technology, Inc. ("Aeropharm"), and the
business and operations of Holdings, its predecessor company, until June 30,
1996.
The Company's principal executive offices are located at 1001 Brickell Bay
Drive, Suite 2502, Miami, Florida 33131, and its telephone number is (305)
577-3464.
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered hereby
are approximately $57.3 million ($66.0 million if the Underwriters'
over-allotment option is exercised in full), after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company intends to use approximately $13 million to fund the
Company's research and development programs, approximately $6 million to
establish a sales and marketing organization and to fund marketing expenses
related to the commercial launch of NIASPAN, and the remaining amount for
general corporate purposes and working capital. The Company may, in the
discretion of its Board of Directors, use a portion of the proceeds to repay all
or a portion of the Convertible Note and currently anticipates that it will use
at least $8 million for such purpose. Kos Investments has the option to convert
such note into shares of Common Stock at the initial public offering price. No
assurance can be given as to whether Kos Investments will exercise such option.
The Convertible Note bears interest at First Union National Bank of Florida's
prime rate commencing July 1, 1996, escalating to a rate of 1% over such prime
rate during calendar year 1997, 2% over such prime rate during calendar year
1998, and 3% over such prime rate during calendar year 1999, until the maturity
date of June 30, 1999. As of March 7, 1997, the amount outstanding on the
Convertible Note was $13,395,000. These borrowings were incurred to fund the
Company's operations since July 1, 1996. See "Certain Transactions." The Company
may also use a portion of the net proceeds to acquire businesses, technologies
or products complementary to the Company's business, although the Company does
not currently have any commitment or agreement for any such acquisitions. No
material transactions of this nature are currently planned or being negotiated.
Pending application of the proceeds as described above, the Company intends to
invest the net proceeds of this offering in short-term, investment grade,
interest-bearing securities.
DIVIDEND POLICY
The Company intends to retain earnings, if any, for use in its business
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. Any future determination as to the payment of cash
dividends will be made at the discretion of the Board of Directors and will
depend upon the financial condition, capital requirements and earnings of the
Company, as well as upon other factors that the Board of Directors may deem
relevant. The Company has not paid any cash dividends since inception.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1996, and (ii) on an adjusted basis to reflect receipt and
application of the estimated net proceeds, after deducting underwriting
discounts and commissions and estimated expenses payable by the Company, from
the sale of 4,150,000 shares of Common Stock pursuant to this offering. As of
December 31, 1996, the Company's outstanding principal balance under the
Convertible Note was $8,355,000. See "Use of Proceeds" and "Certain
Transactions."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt .................................................. $ 8,355 $ --
--------------
Shareholders' equity (deficit):
Common stock; $.01 par value; 50,000,000 shares authorized;
10,000,000 shares issued and outstanding, and 14,150,000 issued
and outstanding, as adjusted (1) .............................. $ 100 142
Additional paid-in capital ...................................... 58,472 115,717
Deficit accumulated during the development stage ................. (64,782) (64,782)
----------- --------------
Total shareholders' equity (deficit) ............................. (6,210) 51,077
----------- --------------
Total capitalization ............................................. $ 2,145 $ 51,077
=========== ==============
</TABLE>
- -----------------------------------------------------------------------------
(1) Excludes 3,675,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Option Plan and 325,000 shares of Common Stock
reserved for issuance upon exercise of other outstanding options. Options
to acquire an aggregate of 2,330,500 shares of Common Stock at a weighted
average exercise price of $4.44 per share were issued and outstanding as
of December 31, 1996. Excludes 557,000 shares of Common Stock issuable at
December 31, 1996, to Kos Investments upon the conversion, if any, of the
Convertible Note.
16
<PAGE>
DILUTION
The net tangible book value of the Company as of December 31, 1996 was
approximately $(6,210,000), or $(0.62) per share. Net tangible book value per
share represents the amount of the Company's shareholder's equity, less
intangible assets, divided by 10,000,000, the number of shares of Common
Stock outstanding as of December 31, 1996.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in this
offering and the net tangible book value per share of Common Stock immediately
after completion of this offering. After giving effect to the sale of 4,150,000
shares of Common Stock in this offering at the initial public offering price of
$15.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, the net tangible book value
of the Company as of December 31, 1996 would have been $51,083 or $3.61 per
share. This represents an immediate increase in net tangible book value of $4.23
per share to the existing shareholder and an immediate dilution in net tangible
book value of $11.39 per share to purchasers of Common Stock in this offering,
as illustrated in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share ............... $15.00
Net tangible book value per share as of December 31, 1996 ... $(0.62)
Increase per share attributable to new investors ............ 4.23
-------
Pro forma net tangible book value per share after this
offering ..................................................... $ 3.61
------
Dilution per share to new investors ........................... $11.39
======
</TABLE>
Utilizing the foregoing assumptions, the following table summarizes the
total consideration paid to the Company and the average price per share paid
by the existing shareholder and by new investors purchasing shares of the
Common Stock in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------------- ------------------------------
AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------------- ------------- --------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Existing Shareholder 10,000,000(1) 71% $ 52,989,000 46% $ 5.30
New Investors ........ 4,150,000 29 62,250,000 54 15.00
---------------- ------------- --------------- ------------- ----------------
Total .............. 14,150,000 100% $115,239,000 100%
================ ============= ============= =============
</TABLE>
- -----------------------------------------------------------------------------
(1) If the Convertible Note is converted to shares of Common Stock, the
Shares Purchased by Existing Shareholders in the table will be 10,893,000
as of March 7, 1997, for Total Consideration of $66,384,000, and for
Average Price Per Share of $6.09.
The foregoing table excludes 3,675,000 shares of Common Stock reserved for
issuance under the Company's 1996 Stock Option Plan and 325,000 shares of
Common Stock reserved for issuance upon exercise of other outstanding
options. Options to acquire an aggregate of 2,330,500 shares of Common Stock
at a weighted average exercise price of $4.44 per share were issued and
outstanding as of December 31, 1996. See "Management--Stock Option Plan" and
Note 6 of Notes to Consolidated Financial Statements. To the extent
outstanding options are exercised, there will be future dilution to investors
in this offering. See "Management--Employee Benefit Plans--Stock Option
Plan.".
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial
statements and related notes included elsewhere in this Prospectus. The
statement of operations data for the five years ended June 30, 1996 and the
balance sheet data at June 30, 1992, 1993, 1994, 1995 and 1996 are derived
from the financial statements and the notes thereto of the Company audited by
Arthur Andersen LLP. The selected financial data, as of and for the six
months ended December 31, 1995 and 1996, have been derived from unaudited
financial statements of the Company that, in the opinion of management,
include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation as of and for such periods. The results of
operations for the six months ended December 31, 1996 are not necessarily
indicative of the results of operations to be expected for the entire fiscal
year.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------
1992 1993 1994 1995
-------------- ------------- ------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues ....................... $ -- $ -- $ 22 $ 14
Operating expenses:
Research and development ........ 2,476 4,930 6,663 8,387
General and administrative ..... 975 1,232 1,619 1,614
Expense recognized on
modification of stock option
grants(1) ..................... -- -- -- --
------------- ------------ ------------ -------------
Total operating expenses ...... 3,451 6,162 8,282 10,001
Other income ..................... (1) (1) (2) --
Interest (income) expense, net .. 428 556 1,058 1,026
Interest expense-related parties 15 29 50 26
------------- ------------ ------------ -------------
Total other (income) expense .... 442 584 1,106 1,052
------------- ------------ ------------ -------------
Loss before minority interest ... (3,893) (6,746) (9,366) (11,039)
Minority interest(2) ............. -- -- (164) 1
------------- ------------ ------------ -------------
Net loss ......................... $ (3,893) $ (6,746) $ (9,530) $ (11,038)
============= ============ ============ =============
Net loss per share (3) ........... $ (0.34) $ (0.59) $ (0.84) $ (0.97)
============= ============ ============ =============
Weighted average common shares in
computing net loss per share(3) 11,340,000 11,340,000 11,340,000 11,340,000
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JULY 1, 1988
DECEMBER 31, (INCEPTION) TO
------------- ---------------------------- DECEMBER 31,
1996 1995 1996 1996
------------- ------------- ------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues ....................... $ -- $ -- $ -- $ 37
Operating expenses:
Research and development ........ 13,816 6,426 6,057 44,762
General and administrative ..... 1,772 789 1,936 10,808
Expense recognized on
modification of stock option
grants(1) ..................... 5,436 -- -- 5,436
------------ ------------ ------------ --------------
Total operating expenses ...... 21,024 7,215 7,993 61,006
Other income ..................... -- -- -- (10)
Interest (income) expense, net .. (14) (8) (5) 3,409
Interest expense-related parties -- -- 136 266
------------ ------------ ------------ --------------
Total other (income) expense .... (14) (8) 131 3,665
------------ ------------ ------------ --------------
Loss before minority interest ... (21,010) (7,207) (8,124) (64,634)
Minority interest(2) ............. 16 1 -- (148)
------------ ------------ ------------ --------------
Net loss ......................... $ (20,994) $ (7,206) $ (8,124) $ (64,782)
============ ============ ============ ==============
Net loss per share (3) ........... $ (1.85) $ (0.64) $ (0.72) $ (5.71)
============ ============ ============ ==============
Weighted average common shares in
computing net loss per share(3) 11,340,000 11,340,000 11,340,000 11,340,000
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996
---------- ----------- ----------- ----------- -------------- ---------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET(4):
Cash and cash equivalents ........................ $ 27 $ 13 $ 18 $ 41 $ 193 $ 358
Working capital (deficit)(5) ..................... (8,407) (15,235) (25,394) (1,129) (8) (8,816)
Total assets ..................................... 586 686 1,574 2,355 2,281 3,197
Total debt ....................................... 8,232 14,742 24,790 -- -- 8,355
Deficit accumulated during the development stage (8,350) (15,096) (24,626) (35,664) (56,658) (64,782)
Shareholder's equity (deficit)(5) ................ (7,860) (14,606) (24,136) 943 1,914 (6,210)
</TABLE>
- -----------------------------------------------------------------------------
(1) Reflects a non-cash charge associated with an extension of the exercise
period for stock options granted during 1988 to 1990 to the Company's
Chief Executive Officer and two independent consultants; no other
material economic terms of these options were changed.
(2) Represents the minority shareholder's interest in Aeropharm, which
interest was acquired by the Company in June 1996.
(3) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share. Assuming the issuance
only of sufficient shares to repay the indebtedness outstanding as of
December 31, 1996, supplementary pro forma net loss per share of common
stock would be $(0.67) for the six month period ended December 31, 1996.
(4) The Company has funded its operations since July 1, 1996 using the
proceeds of the Convertible Note. As of March 7, 1997, the Company had
outstanding borrowings of $13,395,000 under the Convertible Note. See
"Use of Proceeds."
(5) In March 1995, Investments assumed repayment of a note payable to a bank
in the principal amount of $30,372,000. This assumption was accounted for
as a transfer to Investments and as an increase in additional paid-in
capital. See Note 4 of Notes to Consolidated Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
A predecessor corporation to the Company was formed in July 1988 under the
name of Kos Pharmaceuticals, Inc., principally to conduct research and
development on new formulations of existing prescription pharmaceutical
products. In June 1993, Aeropharm Technologies, Inc., a then majority-owned
subsidiary of the Company, was formed to conduct research and development
activities on aerosolized MDI products for the treatment of respiratory
diseases. During June 1996, this predecessor corporation acquired the
outstanding minority interest in Aeropharm; changed its name to Kos Holdings,
Inc.; established the Company as a wholly-owned subsidiary under the name Kos
Pharmaceuticals, Inc.; and, effective as of June 30, 1996, transferred all of
its existing assets, liabilities and intellectual property, other than
certain net operating loss carryforwards, to the Company. Accordingly, all
references in this Prospectus to the Company's business include the business
and operations of Holdings until June 30, 1996.
Since inception, the Company has been a development stage company engaged
primarily in the development of cardiovascular and respiratory pharmaceutical
products. The Company has not recorded any significant revenues since inception
and has funded its operations exclusively through equity contributions from its
sole shareholder. Through December 31, 1996, the Company had accumulated a
deficit from operations of $64.8 million. In connection with the transfer of
operations from Holdings to the Company on June 30, 1996, net operating loss
carryforwards amounting to approximately $51.0 million and related tax benefits
were retained by Holdings and not transferred to the Company. Consequently, the
Company had no deferred tax assets or liabilities as of June 30, 1996. The
Company expects to continue to incur significant operating losses for at least
the next 12 months.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996
The Company's research and development expenses decreased from $6.4
million for the six months ended December 31, 1995 to $6.1 million for the
six months ended December 31, 1996. The decrease was attributable primarily
to the absence in the December 1996 quarter of the clinical trials that were
completed late in calendar 1995 in support of the filing of a NDA during May
1996 for the Company's first product, NIASPAN. The decrease in clinical trial
costs was partially offset by an increase in personnel costs, principally in
connection with manufacturing scale-up and by an increase in development
costs associated with various third party development agreements. The Company
expects research and development activities to increase as personnel are
added and development activities are expanded to support the development of
additional products and conduct additional clinical trials.
General and administrative expenses increased from $789,000 for the six
months ended December 31, 1995 to $1.9 million for the six months ended
December 31, 1996. The increase was primarily attributable to the hiring of
additional personnel to support the Company's marketing activities and
administrative functions, and professional fees. The Company expects that its
general and administrative expenses will continue to increase in support of
its marketing efforts and research and development programs.
Since July 1, 1996, the Company has funded its operations from the
proceeds of a loan from Kos Investments, the sole shareholder of Holdings. As
of December 31, 1996, the Company had outstanding borrowings of approximately
$8.4 million outstanding under the Convertible Note. As a result of this
loan, the Company had $136,000 of interest expense for the six months ended
December 31, 1996,
19
<PAGE>
compared with no such expense for the six months ended December 31, 1995. The
Company expects to increase the amount of such borrowings from Kos
Investments, Inc. to finance its operating activities through the completion
of this offering.
The Company incurred a net loss of $7.2 million for the six months ended
December 31, 1995 compared with a net loss of $8.1 million for the six months
ended December 31, 1996. The Company expects to report substantial losses for
at least the next 12 months.
FISCAL YEARS ENDED JUNE 30, 1995 AND 1996
The Company's research and development expenses increased from $8.4
million for the fiscal year ended June 30, 1995 to $13.8 million for the year
ended June 30, 1996. This increase was attributable primarily to licensing
and development programs, hiring of additional personnel and increased
clinical trials costs. Of the total increase in research and development
expenses for the fiscal year ended June 30, 1996, $1.0 million is
attributable to a payment by the Company in connection with the execution of
an agreement with Fuisz to form a joint venture for the development of a
future product. This product is in the very early stages of development and
the Company cannot estimate when or if a commercially viable product will be
developed. The parties have generally agreed to share the expenses of
developing the product. Hiring of additional personnel principally related to
manufacturing scale-up of certain of the Company's products under development
and to support the filing of a NDA for NIASPAN.
General and administrative expenses increased from $1.6 million for the
fiscal year ended June 30, 1995 to $1.8 million for the fiscal year ended
June 30, 1996. This increase was attributable principally to the hiring of
additional personnel to support the Company's administrative functions, and
to the acquisition of market research data.
In June 1996, the Company recorded a non-cash charge of $5.4 million for
compensation expense associated with an adjustment of the exercise period on
certain stock options granted during 1988 to 1990 to an officer and to two
independent consultants of the Company.
During December 1994, the Company transferred its existing line of credit
facility with a local bank and its accumulated borrowings to Kos Investments,
Inc., the sole shareholder of Holdings. The effect of this transfer was to
increase the Company's paid-in capital in the amount of its accumulated
borrowings, of $30.4 million, outstanding on the date of transfer. As a
result of this transfer, the Company had $1.1 million of interest expense for
the fiscal year ended June 30, 1995 compared with no such expense for the
fiscal year ended June 30, 1996.
The Company incurred a net loss of $11.0 million for the fiscal year ended
June 30, 1995 compared with $21.0 million for the fiscal year ended June 30,
1996.
FISCAL YEARS ENDED JUNE 30, 1994 AND 1995
Research and development expenses increased from $6.7 million for the
fiscal year ended June 30, 1994 to $8.4 million for the fiscal year ended
June 30, 1995. This increase was attributable principally to hiring of
additional personnel in support of the Company's clinical trial activities on
NIASPAN. Research and development expenses also were higher in 1995 because
it was the first full year of operation of the Company's aerosol research and
development facility, which was launched during 1994.
General and administrative expenses, at $1.6 million, were essentially
unchanged from 1994.
As more fully explained above, during December 1994 the Company
transferred its existing credit facility with a local bank to Kos
Investments, Inc. As a result of the timing of this transfer, interest
expense decreased approximately $50,000 from the fiscal year ended June 30,
1994 to the fiscal year ended June 30, 1995.
20
<PAGE>
Minority interest expense decreased approximately $160,000 during the
fiscal year ended June 30, 1995 principally as a result of timing differences
in equity contributions made by the Company to its then majority-owned
aerosol subsidiary.
During 1995, revenue was recognized from consulting activities conducted
by the Company's Vice President of Aerosol Research and Development. These
consulting activities were of a non-recurring nature.
As a result of the foregoing, the Company incurred a net loss of $9.5
million for the fiscal year ended June 30, 1994 compared with $11.0 million
for the fiscal year ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations since inception until June 30, 1996
through capital contributions from Kos Investments, which totaled an aggregate
of approximately $53.0 million as of June 30, 1996. Since July 1, 1996 the
Company has financed its operations from the proceeds of the Convertible Note,
which totaled approximately $8.4 million at December 31, 1996. Borrowings under
the Convertible Note will continue to be the Company's principal source of
financing until completion of this offering. All or a portion of the Convertible
Note may be repaid using a portion of the net proceeds from the sale of the
Common Stock offered hereby and the Company currently anticipates that it will
use at least $8.0 million for such purpose. At December 31, 1996, the Company's
working capital deficit totaled approximately $8.8 million and cash totaled
approximately $358,000. The Company expects to continue to incur significant
costs in connection with its ongoing research and development activities and
with the establishment of its marketing capabilities.
The Company's primary uses of cash to date have been in operating
activities to fund research and development, including clinical trials, and
general and administrative expenses. As of December 31, 1996, the Company's
net investment in equipment and leasehold improvements was $2.6 million. The
Company expects that additional equipment and facilities will be needed as it
increases its research and development activities. The Company has no material
commitments for capital expenditures as of December 31, 1996. In connection with
its agreement with a privately owned generic drug manufacturer, see
"Business--Patents and Proprietary Rights," the Company anticipates recognizing
an expense of $3.0 million during the three months ending March 31, 1997. The
Company's obligations under its agreement with such privately owned generic drug
manufacturer, see "Business--Patents and Proprietary Rights," are not expected
to materially affect the Company's liquidity or capital resources.
Although the Company anticipates that the net proceeds from the sale of
the Common Stock offered hereby, together with available cash, cash
equivalents, short-term investments and expected interest income, will be
sufficient to fund the Company's operations for the next 12 months, the
Company's future cash requirements will be substantial and will depend on
many factors, some of which are outside the control of the Company. Such
factors include the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
research, development and clinical trial programs; the costs and timing of
seeking regulatory approvals of the Company's products under development; the
Company's ability to obtain such regulatory approvals; the success of the
Company's sales and marketing programs; costs in filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights; the extent and terms of any collaborative research, manufacturing,
marketing, joint venture or other arrangements; and changes in economic,
regulatory or competitive conditions or the Company's planned business. As a
result, the Company may need to raise substantial additional capital to fund
its operations before achieving anticipated positive cash flows from
operations in 1998, assuming the successful commercialization of NIASPAN. The
Company expects that it would seek such additional funding through public or
private equity or debt financings or through collaborations. To the extent
the Company raises additional capital by issuing equity securities, ownership
dilution to existing shareholders will result and future investors may be
granted rights superior to those of existing shareholders. There can be no
assurance, however, that additional funding will be available on acceptable
terms, or at all. See "Risk Factors--Future Capital Needs; Uncertainty of
Additional Funding."
21
<PAGE>
BUSINESS
OVERVIEW
Kos Pharmaceuticals, Inc. ("Kos", pronounced Kos, or the "Company") is
engaged primarily in the development of proprietary prescription
pharmaceutical products for the treatment of certain chronic cardiovascular
and respiratory diseases. The Company intends to manufacture its products and
to market such products directly through its own specialty sales force. The
Company's cardiovascular products under development consist of
controlled-release, once-a-day, oral dosage formulations. The Company's
respiratory products under development consist of aerosolized inhalation
formulations to be used primarily with the Company's proprietary inhalation
devices.
The Company was founded in 1988 by the former Chief Executive Officer,
Chief Operating Officer and Director of Product Development of Key
Pharmaceuticals, Inc., which was acquired by Schering-Plough Corporation in
June 1986. The Company believes that substantial market opportunities exist
for developing drugs that are reformulations of existing approved
prescription pharmaceutical products but which offer certain safety
advantages, such as reduced harmful side effects, or patient compliance
advantages, such as once-a-day rather than multiple daily dosing regimens,
over such currently existing products. Kos believes that developing
proprietary products based on currently approved drugs, rather than new
chemical entities ("NCEs"), may reduce regulatory and development risks and,
in addition, facilitate the marketing of such products because physicians are
generally familiar with the safety and efficacy of such products. Seven of
the Company's nine products under development require NDA filings with the
FDA. Although more expensive and time consuming, developing products that
require NDA approval offers several advantages compared with generic
products, including potential for higher gross margins, limited competition
resulting from significant clinical and formulation development challenges,
and a three-year statutory barrier to generic competition.
On May 6, 1996, Kos submitted a NDA to the FDA for NIASPAN, its first
product under development. NIASPAN is a controlled-release, once-a-day, oral
formulation of niacin for the treatment of multiple lipid disorders, which
are primary risk factors for coronary heart disease.
STRATEGY
The Company's objective is to become a fully-integrated specialty
pharmaceutical company that develops, manufactures, and markets proprietary
products directly through its own specialty sales force. The Company's
business strategy includes the following fundamental elements:
SELECT PRODUCTS WITH UNREALIZED COMMERCIAL POTENTIAL.--The Company
develops products that address unmet medical needs through formulation
improvements of existing drugs or distinctive marketing efforts. Kos
believes that the safety or patient compliance associated with certain
currently marketed drugs can be improved, thus providing substantial
market opportunities with the successful development of proprietary
formulations. In addition, Kos believes that substantial market
opportunities exist that can be addressed by marketing its products
through a direct sales force that can focus on specialist physicians and
provide those physicians with scientific information regarding the
therapeutic benefits of the Company's products.
FOCUS INITIALLY ON THE CARDIOVASCULAR AND RESPIRATORY MARKETS.--Kos has
initially concentrated its product development efforts on the
cardiovascular and respiratory markets because they are large and growing
rapidly and include many chronic diseases requiring long-term therapy.
Management believes that as a result of physician prescribing patterns in
these markets, a relatively small, direct sales force can effectively
market its products. The Company's management team has substantial
experience in identifying product opportunities and marketing products in
these two therapeutic categories.
22
<PAGE>
DEVELOP PROPRIETARY FORMULATIONS OF CURRENTLY APPROVED PHARMACEUTICAL
COMPOUNDS.--Kos believes that by developing proprietary products based on
currently approved drugs, rather than NCEs, the Company can reduce
regulatory and development risks and shorten the product development
cycle. Further, developing products that require NDA approval offers
several advantages compared with generic products, including the potential
for higher gross margins, limited competition resulting from significant
clinical and formulation development challenges, and a three-year
statutory barrier to generic competition. The Company's management and
scientific personnel have significant experience in formulation technology
using controlled-release and aerosolized delivery methods.
MANAGE CLINICAL DEVELOPMENT.--The Company managed the extensive clinical
trials for NIASPAN, and Kos intends to continue to manage directly the
clinical development of future products. The Company believes that its
commitment to this process ensures the quality of clinical development,
allows the Company to better coordinate the regulatory objectives of
clinical trials and maximizes the marketing utility of such trials.
MANUFACTURE PRODUCTS INTERNALLY.--In order to maximize the quality of
developed products, assure compliance with regulatory requirements, and
minimize costs, the Company currently intends to manufacture internally
all of its solid-dose (i.e., tablet) and aerosol products. Moreover, the
Company believes that certain manufacturing challenges associated with
aerosol formulations present a barrier to entry in the aerosol
pharmaceutical market. The Company's management has substantial experience
in manufacturing solid dose and aerosol products. Kos estimates that it
has sufficient capacity, with limited additional capital expenditures, to
accommodate sales volume for such products through the year 2000.
MARKET DIRECTLY THROUGH A SPECIALTY SALES FORCE.--The Company intends to
market its products through a direct sales force focused on providing
education-oriented product information to selected specialist physicians.
Kos intends to market all but one of its planned products in North America
through its direct sales force. In areas outside of North America, Kos
intends initially to market certain of its products through licensing
arrangements with third parties, although it may establish direct sales
and marketing capabilities in selected areas.
LEVERAGE CORE COMPETENCIES THROUGH ALLIANCES WITH CORPORATE AND RESEARCH
PARTNERS.--The Company intends to expand its product portfolio by
in-licensing existing products or technologies or entering into other
development collaborations with third parties. Kos is currently developing
three once-a-day cardiovascular products with Fuisz, using its proprietary
microsphere formulation technology. Additionally, the Company is
sponsoring basic research at Boston University and Tufts University and
intends to enter into corporate alliances to develop products identified
through these research programs. The Company intends to enter into
additional research alliances in the future. To date, the Company has not
identified any additional licensing or development partners or any
additional research partners.
23
<PAGE>
PRODUCTS UNDER DEVELOPMENT
Seven of the Company's nine products under development require NDA
filings. Although NDA approvals are generally associated with products
consisting of NCEs, which require extensive preclinical studies and clinical
trials, the Company's products under development consist of new formulations
of existing drugs. For products currently under development, the Company
typically will be required to perform Phase I clinical pharmacology and Phase
III safety and efficacy pivotal trials; limited preclinical toxicology
studies will also be required on some products. Compared with the development
of NCEs, the Company believes that its product development strategy generally
reduces regulatory risks and development costs and shortens overall
development time. In order to take advantage of certain market opportunities,
the Company is developing two products that require ANDA filings. The Company
has retained worldwide marketing rights for all of the products set forth in
the table below.
PRODUCTS UNDER DEVELOPMENT
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION AND REGULATORY DEVELOPMENT
PRODUCT THERAPEUTIC APPLICATION FILING STATUS
------- ----------------------- ---------- -----------
<S> <C> <C> <C>
CARDIOVASCULAR
Niaspan/ Niacin for lipid altering NDA NDA submitted May 1996
registered
trademark/
Combination Combination of two currently NDA Formulation; clinical
Product((1)) approved drugs for lipid altering pharmacology expected to
commence in 1997
Isosorbide-5- Nitrate for angina ANDA Clinical pharmacology commenced
Mononi- in November 1996
trate((1))
Captopril((1)) ACE inhibitor for hypertension NDA Formulation; clinical
pharmacology expected to
commence in 1997
RESPIRATORY (METERED-DOSE INHALERS)
Albuterol Beta-agonist for asthma ANDA Clinical validation study
(CFC) completed; clinical
pharmacology commenced
in January 1997
Triamcino- Inhaled steroid for asthma NDA Formulation; clinical
lone((2)) pharmacology expected to
(non-CFC) commence in 1997
Flunisolide((2)) Inhaled steroid for asthma NDA Formulation; clinical
(non-CFC) pharmacology expected to
commence in 1997
Albuterol((2)) Beta-agonist for asthma NDA Formulation; clinical
(non-CFC) pharmacology expected to
commence in 1998
Confidential Unnamed compound with novel NDA Formulation; clinical
Product((3)) device for treating asthma for pharmacology expected
(non-CFC) the pediatric and geriatric to commence in 1998
markets
</TABLE>
(1) Being developed in collaboration with Fuisz. See "--Collaboration with
Fuisz Technologies Ltd."
(2) Utilizing the Company's proprietary breath coordinated inhaler,
currently under development.
(3) Utilizing the Company's proprietary breath actuated inhaler, currently
under development.
24
<PAGE>
CARDIOVASCULAR PRODUCTS
The Company is developing once-a-day, controlled-release prescription
products for the treatment of lipid disorders, ischemic heart disease
(including angina), and hypertension. In 1995, such disease segments of the
cardiovascular market achieved aggregate sales in the United States of
approximately $10.2 billion.
NIASPAN
SUMMARY. NIASPAN is a once-a-day, oral, solid-dose, controlled-release
formulation of niacin for the treatment of multiple lipid disorders, a
condition typically associated with elevated cholesterol involving multiple
lipids that are primary risk factors for coronary heart disease ("CHD"). On
May 6, 1996, the Company submitted a NDA to the FDA for NIASPAN. If NIASPAN
is approved, the Company believes it will be the only once-a-day,
controlled-release niacin product approved by the FDA for the treatment of
multiple lipid disorders. The Company has conducted three double-blinded,
placebo-controlled clinical trials in which NIASPAN produced statistically
and clinically significant changes in several lipid components without
generating treatment-related serious adverse events. Moreover, in a two-year
safety study, less than 1% of patients discontinued use of NIASPAN because of
clinically significant elevations in liver enzyme levels.
LIPID-ALTERING MARKET.--Clinical research since the mid-1980's has
determined that an elevated level of LDL cholesterol, a condition referred to
as hyperlipidemia, is a critical atherogenic risk factor for CHD.
Hyperlipidemia is a lipid metabolism disorder that results in excess lipids
in the blood, which can block arteries and create adverse coronary events,
such as CHD and myocardial infarction. In addition to elevated LDL
cholesterol ("bad" cholesterol), low levels of HDL cholesterol ("good"
cholesterol) and high levels of triglycerides are risk factors for CHD
according to the National Institutes of Health ("NIH") and the American Heart
Association ("AHA"). HDL cholesterol is considered to be protective against
CHD because it removes harmful cholesterol from blood vessels and peripheral
tissues. Moreover, recent research has indicated that an elevated level of
lipoprotein (a) ("Lp(a)"), an LDL-like cholesterol component, may be as
important an independent risk factor for CHD as elevated total cholesterol.
As a result of the increased awareness and the prevalence of multiple lipid
disorders, lipid-altering drugs have emerged as one of the largest and
fastest growing pharmaceutical product segments. In 1995, the market for
cholesterol-reducing drugs exceeded $2 billion in the United States and $5
billion worldwide.
While the risks of multiple lipid disorders are becoming well recognized, the
condition remains significantly untreated worldwide. To address this large unmet
medical need, the NIH convened a panel of cholesterol research experts, the
National Cholesterol Education Program ("NCEP"), to establish recommended
cholesterol levels, principally total and LDL cholesterol, and to establish
other risk factors for CHD. Based on extensive research conducted during the
last 20 years, the NCEP established guidelines consisting of recommended lipid
goals and intervention criteria, such as diet and drug therapies, for reducing
the risk of heart disease and heart attack. According to the guidelines, an
estimated 52 million people in the United States have levels of LDL cholesterol
that exceed the levels recommended by the NCEP and, approximately 13 million of
these persons would require both diet and drug therapies to achieve adequate
reduction in cholesterol levels. The Company estimates that approximately half
of these 13 million people have one or more other lipid components that are
outside the levels recommended by the NIH and the AHA. Additionally, it is
estimated that as many as 30% of the 11 million patients in the United States
with confirmed CHD do not have elevated LDL cholesterol but do have clinically
deficient HDL cholesterol levels. Further, an elevated level of Lp(a) is
estimated to be present in 20% of the U.S. adult population. The Company
believes that the market for lipid-altering drugs should grow as awareness and
diagnosis of lipids, particularly those other than LDL cholesterol, continue to
increase.
When diet and exercise fail to adequately control cholesterol levels,
physicians typically prescribe lipid-altering medications. Physicians can
choose from the following four classes of medications when
25
<PAGE>
attempting to alter lipid levels: HMG CoA reductase inhibitors, or "statins"
(e.g., lovastatin); fibric acid derivatives (e.g., gemfibrozil); bile-acid
sequestrants (e.g., cholestyramine); and niacin. The statins are the most
widely prescribed lipid-altering medication, accounting for nearly $2 billion
in U.S sales in 1995 and 72% of the 35 million prescriptions for
lipid-altering medication in the United States in 1995. Generally, the
statins are highly effective in lowering total and LDL cholesterol but have
limited impact in raising HDL cholesterol or in substantially reducing
triglycerides. Gemfibrozil, the major fibric acid derivative in the U.S.,
accounted for approximately 20% of total lipid-altering prescriptions in
1995. Gemfibrozil is most commonly prescribed to reduce triglycerides and has
limited efficacy on total, LDL and HDL cholesterol. The remaining product
categories, including bile-acid sequestrants and existing preparations of
niacin, represented approximately 8% of U.S. lipid-altering prescriptions in
1995.
OVERVIEW OF NIACIN. Niacin is a water-soluble vitamin that has long been
recognized as an effective pharmacologic agent for the treatment of multiple
lipid disorders, including elevated LDL and low HDL cholesterol. In numerous
independent studies performed during the past 30 years, niacin has proven
effective in reducing total cholesterol, LDL cholesterol and triglycerides,
as well as in increasing HDL cholesterol. Additional clinical studies have
indicated that long-term treatment with niacin reduces morbidity and
mortality in patients with CHD. The NIH recommends niacin as first-line drug
therapy because of its low cost and its efficacy in altering multiple lipid
components.
Although niacin has demonstrated favorable efficacy on most major lipid
components, adverse side effects associated with currently available
preparations of niacin have prevented it from becoming widely used to treat
hyperlipidemia. Immediate-release ("IR") preparations of niacin generally are
administered three times daily and can cause multiple flushing episodes,
characterized primarily by facial redness and tingling, often accompanied by
rash. Because at least two IR niacin doses are usually taken during the
daytime, frequent flushing episodes are often embarrassing as well as
uncomfortable. Consequently, in many patients, these flushing episodes,
particularly in the daytime, result in non-compliance with the recommended
dosing regimen for the product or complete discontinuation of its use. In
order to remedy the side effects associated with IR niacin, several
manufacturers have developed sustained-release ("SR") preparations of niacin,
typically administered twice a day. Such SR preparations have not been
approved by the FDA for treatment of lipid disorders, and their
administration frequently has been associated with a high incidence of liver
toxicity. Consequently, despite its broad favorable effect on multiple lipids
and its position as the NIH's recommended first-line drug therapy for
treatment of hyperlipidemia, U.S. drug store sales of niacin were
approximately $14 million in 1995. The Company believes that a significant
opportunity exists to expand the market for niacin with an improved
formulation that maintains the compound's favorable efficacy profile while
reducing adverse events.
NIASPAN PRODUCT DEVELOPMENT.--Kos has developed a controlled-release
hydrogel matrix formulation of niacin that reduces the intolerable side
effects and frequent safety problems characteristic of currently available
niacin formulations. Kos believes that it is the unique controlled-release
nature of its NIASPAN formulation in conjunction with NIASPAN's specific
dosing regimen that minimizes adverse events while maintaining niacin's
positive effect on lipids. Kos also believes the recommended dosing regimen
for NIASPAN contributes to the positive effects on lipid levels because of
the chronobiology of lipid metabolism.
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Although niacin's efficacy on multiple lipid components has been well
documented for many years, relatively little has been published about
niacin's mechanism of action, its complete metabolic profile, or other
elements of its pharmacology. As a result, the Company's clinical development
of NIASPAN has included extensive pharmacokinetics research, including 14
studies involving 350 healthy volunteers, as well as two pilot studies, three
pivotal trials, and a long-term open label safety study. The Company's
clinical development program, which has studied the effects of NIASPAN in
1,212 persons, is summarized in the table below.
NIASPAN CLINICAL DEVELOPMENT PROGRAM
<TABLE>
<CAPTION>
NIASPAN DOSING STATUS
SUBJECTS PERIOD
-------- ------------ ---------
<S> <C> <C> <C>
14 PHARMACOKINETIC STUDIES 350 Up to 3 wks. Completed
2 PILOT STUDIES 39 2 mos. Completed
DOUBLE-BLINDED PLACEBO
CONTROLLED PIVOTAL TRIALS:
NIASPAN 1,500 mg 76 4 mos. Completed
NIASPAN 1,000 mg and 2,000 mg 82 4 mos. Completed
NIASPAN dose escalation to 3,000 mg 87 6 mos. Completed
LONG-TERM OPEN LABEL SAFETY STUDY 728 22 mos. Ongoing
Memo:
SUBJECTS INCLUDED IN NDA 633
TOTAL NIASPAN SUBJECTS 1,212
</TABLE>
In a total of six clinical trials conducted at 17 lipid research centers
in the United States, NIASPAN has been evaluated in 633 patients with
confirmed diagnoses of hyperlipidemia. Three of these clinical trials were
double-blinded, placebo-controlled pivotal trials. In each of these studies
involving males and females ages 21 to 75, subjects were evaluated for the
percentage change from baseline in LDL cholesterol, HDL cholesterol, total
cholesterol, triglycerides, apolipoprotein B, Lp(a) and apolipoprotein A-1.
Safety endpoints included objective measurements such as liver enzyme levels
and levels of fasting glucose and uric acid as well as subjective endpoints,
such as flushing and symptoms of gastrointestinal distress. Additionally, the
Company is conducting a 22-month, open label safety study, in approximately
728 patients, of which 133 patients had completed the study before May 1996.
The results from these 133 patients were included in the Company's NDA
submission for NIASPAN. This trial included a subset of patients dosed
concomitantly with NIASPAN and a statin or bile-acid sequestrant.
No clinically significant serious adverse safety trends arose during the
clinical trials of NIASPAN. Of all patients treated with NIASPAN in the
pivotal and long-term safety trials, only four patients with normal liver
function tests at baseline showed clinically significant elevations in liver
function tests (defined as elevations greater than three times the upper
limit of normal) during treatment with NIASPAN and only two patients treated
with NIASPAN discontinued the drug because of elevations in liver function
tests. Treatment with NIASPAN revealed no significant differences compared
with placebo in the incidence of subjective adverse events with the exception
of flushing and rash. The Company believes that such flushing episodes will
be acceptable to most patients when they do occur due to the combination of
NIASPAN's formulation, its dosing regimen, and proper dose titration. See "--
Cardiovascular Products--NIASPAN--Marketing Strategy for NIASPAN."
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<PAGE>
The following table sets forth results with respect to principal efficacy
endpoints of the Company's three double-blinded, placebo-controlled pivotal
trials and the one open label long-term safety study of NIASPAN. In these
studies, NIASPAN consistently showed clinically and statistically significant
changes (p/less than/0.001 compared with baseline) in all of the major lipids
measured, including those considered to be most important in the development
of CHD.
NIASPAN LIPID-ALTERING PROFILE((1))
PERCENTAGE CHANGE
FROM BASELINE(2)
--------------------
Total Cholesterol Decreased 11% to 12%
LDL Cholesterol Decreased 14% to 19%
HDL Cholesterol Increased 22% to 29%
Triglycerides Decreased 25% to 35%
Lp(a) Decreased 24% to 29%
- -------------------
(1) Intent-to-Treat Population at 2,000 mg Once-a-Day.
(2) Statistically significant for all indicated lipids at
p/less than/0.001.
Based on the results of the three double-blinded, placebo-controlled
clinical trials and the long-term safety study, Kos has filed a NDA seeking
approval for NIASPAN for the treatment of elevated total and LDL cholesterol
and elevated serum triglycerides, consistent with the FDA's standard labeling
for niacin when used as a lipid-altering agent (rather than as a nutritional
supplement). Kos believes that its clinical trial data will support the
approval of such standard labeling for NIASPAN. The Company also is seeking
approval as concomitant therapy with statins and bile-acid sequestrants to
decrease total and LDL cholesterol.
In the clinical trials performed by the Company, NIASPAN was shown to
decrease total and LDL cholesterol levels less than reported by statin
manufacturers in the 1996 Physician's Desk Reference (the "PDR"). These data
also indicate, however, that the statins are less effective than NIASPAN in
raising HDL cholesterol and lowering triglycerides. Numerous independent
clinical studies evaluating the effects of statins on Lp(a) indicate that the
statins have little or no effect on reducing Lp(a), whereas NIASPAN
significantly reduces Lp(a).
MARKETING STRATEGY FOR NIASPAN. The Company intends to market NIASPAN
directly to the specialist physicians within the cardiovascular market who
are among the leading prescribers of lipid-altering medications.
Specifically, the Company believes there are approximately 16,000 specialist
physicians, consisting primarily of cardiologists and internists, who account
for approximately 40% of the total prescriptions for lipid-altering
medications in the United States in 1995. The Company's initial sales force
is expected to consist of approximately 70 field representatives and managed
care specialists to be trained in explaining the features and benefits of
NIASPAN ("detailing") prior to its expected launch in 1997. Kos estimates
that it will be able to detail each of these physicians up to six times a
year with such a sales force. Kos believes that the significant prior
experience of members of its management team in recruiting and managing
specialty sales forces in this market, aided by favorable hiring conditions
in the pharmaceutical industry, will allow the Company to have its sales
force in place within the projected time frame. Within a year following
NIASPAN's launch, Kos expects to expand its direct sales force and possibly
to supplement it with a contract sales force that will detail selected
additional specialist physicians not addressed by the Company's specialty
sales force. Although the Company does not expect to hire its field sales
force before it receives an indication of the approvability of NIASPAN from
the FDA, it is possible that formal approval of NIASPAN could be delayed,
thus requiring the Company to pay the salaries of such personnel during any
such delay. Following the launch of NIASPAN in the United States, the Company
plans to license marketing rights to an established marketing partner in
major international markets.
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<PAGE>
If approved by the FDA, the marketing of NIASPAN will focus on the NIH and
AHA recommendation that niacin be used as first-line drug therapy for the
treatment of hyperlipidemia. Additionally, the Company intends to inform the
specialist physicians as to the manner in which NIASPAN achieves its safety
and efficacy profile. This marketing program will be implemented through
direct visits with selected physicians, medical journal reprints, seminars,
and clinical discussion groups. The Company also intends to educate patients
on the benefits and proper use of NIASPAN through brochures and product
sample "starter packs" to encourage proper dose titration. Information
delivered by the Company to physicians and patients will include a discussion
about the flushing side effects of NIASPAN, including the importance of
proper dose titration and adherence to the prescribed dosing regimen to
reduce this side effect. Although most patients taking NIASPAN will flush
occasionally, the Company believes that the combination of NIASPAN's
formulation, its dosing regimen, and proper dose titration should result in
an incidence of flushing episodes that are tolerable for most patients.
NIASPAN's dosing regimen provides for the drug to be taken once-a-day at
night; therefore, any flushing episodes will normally occur while the patient
is sleeping. The Company believes that flushing during the night will not
cause the discomfort or embarrassment that often accompanies the multiple
daytime flushing episodes that occur with IR niacin.
The Company expects that NIASPAN will be priced below the statins and
competitively with gemfibrozil, while retaining the gross margins typically
associated with NDA products. The Company believes that NIASPAN's relatively
low anticipated selling price combined with its favorable effects on multiple
lipid components also should make it attractive to the managed care market.
The Company plans to include a number of managed care sales specialists
within its sales force to address this market segment.
LIPID-ALTERING COMBINATION PRODUCT
In addition to NIASPAN, Kos is developing a product that consists of a
combination of two currently approved drugs for the treatment of multiple
lipid disorders. The combination product will require a NDA. The Company
believes that a once-a-day tablet combining the complementary properties of
its combination product represents an effective modality for treating
patients with multiple lipid disorders. The Company also believes that this
once-a-day product should offer significant improvements in patient
compliance compared with taking each product independently under their
recommended dosing regimens. The potential market for the combination product
consists of patients with multiple lipid disorders, including high total and
LDL cholesterol, high triglycerides or low HDL cholesterol.
The product is currently in the formulation development stage, and the
Company expects that clinical pharmacology trials will commence in 1997. By
or near the time of completion of the development of the combination product,
the patent for the one currently patented component compound will have
expired, which will enable the Company to market its combination product
following FDA approval. Although it is expected that generic versions of the
individual components will be marketed following patent expiration, the
Company believes that the positive effects of the combination product on
multiple lipid components and the convenience associated with taking one
tablet, once-a-day should support a price premium compared with any generic
versions of the individual drugs.
The combination product will be marketed by the same Kos specialty sales
force that will market NIASPAN and to essentially the same group of
physicians.
ISOSORBIDE-5-MONONITRATE
Kos is developing a once-a-day, controlled-release, oral, generic version
of IS-5-MN for the prophylactic treatment of angina pectoris. This product,
which will be a branded generic requiring an ANDA filing, is being developed
in order to provide Kos with a near-term product for the angina market and to
expand its cardiovascular product line. A formulation of IS-5-MN has been
developed
29
<PAGE>
and the Company began a clinical pharmacology study during November 1996. The
Company intends to leverage its specialty sales force by having its sales
representatives market IS-5-MN during physician office visits while detailing
NIASPAN.
Angina pectoris is a cardiovascular related disorder that is characterized
by thoracic pain and a feeling of suffocation, most often due to anoxia (lack
of oxygen supply) to the myocardium precipitated by physical exertion or
excitement. The treatment of angina pectoris includes several classes of
therapeutic compounds including nitrates, beta-blockers, and calcium channel
blockers. The beta-blockers and calcium channel blockers, as well as certain
forms of nitrates, are long-acting preparations most commonly prescribed for
prophylaxis of chronic angina pectoris. In 1995, U.S. sales of nitrate
products approximated $580 million. The only currently marketed once-a-day
mononitrate is the fastest growing product within the nitrate segment; U.S.
sales of this product grew by 260% in 1995 from 1994. Kos is aware of two
other companies that are developing a once-a-day formulation of IS-5-MN.
CAPTOPRIL
The Company is also developing a once-a-day, controlled-release captopril,
an ACE inhibitor for the treatment of hypertension for which a NDA is
required. At present, captopril is dosed as an IR tablet to be taken two or
three times daily. The U.S. patent on the branded product expired in the
first quarter of 1996 and there currently exist many generic forms of this
immediate-release product. The Company believes that its controlled-release,
once-a-day formulation of captopril will provide a competitive advantage
compared with the generic versions of IR captopril and this advantage will
support a modest price premium compared with generics. Captopril is currently
in the formulation development stage and the Company expects that clinical
pharmacology trials will commence in 1997.
Hypertension is a major health care problem in the United States that
accounted for almost half of all cardiovascular related physician visits in
1995. In 1995, U.S. sales of products addressing the antihypertensive disease
segment were estimated to be in excess of $5.6 billion. ACE inhibitors
constituted the second largest class of products of the antihypertensive
market, after calcium channel blockers, generating approximately $2.7 billion
in sales in the United States in 1995. In its existing two-to-three times a
day dosage forms, sales of captopril in the United States were approximately
$520 million in 1995, although 1996 sales have been trending lower because of
generic competition. Captopril accounted for approximately 13% of the 65
million prescriptions for ACE inhibitors in the United States in 1995. Kos is
aware of one other company that is developing a once-a-day formulation of
captopril.
RESPIRATORY PRODUCTS
The Company is developing five aerosolized inhalation pharmaceutical
products, dispensed in MDI devices, for the treatment of asthma. The
Company's management has substantial experience in formulating,
manufacturing, and marketing aerosolized products.
MARKET OVERVIEW
The respiratory market consists of the asthma and allergy segments. In
1995, the market for respiratory prescription drugs was $3.2 billion in the
United States, of which the market for asthma products was $2.4 billion.
Asthma is a complex respiratory disorder that results in troubled breathing
due to inflammation and constriction of the bronchial airways, caused by
factors including allergens, such as dust and pollen, or vigorous exercise.
Asthma is principally treated by two classes of therapeutic compounds,
bronchodilators and anti-inflammatory agents. Bronchodilators, which are used
to open constricted airways during asthma, include beta-agonists (e.g.,
albuterol), xanthines (e.g., theophylline) and anti-cholinergics (e.g.,
ipratropium). Anti-inflammatories, which include cromolyns (e.g., cromolyn
sodium) and corticosteroids (e.g., triamcinolone, beclomethasone, and
flunisolide) are used to diminish inflammation causing the asthma. Each of
these therapeutic compounds, except xanthines, is delivered primarily through
MDI devices. Drug delivery through such MDI devices is believed to be the
fastest
30
<PAGE>
growing form of drug delivery in the asthma market. Kos has focused on this
mode of delivery for the asthma market because of its efficacy and because of
management's experience with formulating and marketing aerosolized inhalation
products.
Currently, most MDI products use CFC propellants. Although, due to
environmental concerns, the use of CFC propellants has been banned or
severely restricted for most worldwide commercial uses, CFC's are still
permitted in limited amounts for MDI pharmaceutical products under an
"essential use" exemption available under the Montreal Protocol on Substances
that Deplete the Ozone Layer. It is expected, however, that such "essential
use" exemptions will grow more limited and will eventually expire. In
anticipation of these future restrictions, all of the Company's proposed MDI
products, with the exception of albuterol (CFC), are being developed with
environmentally safe non-CFC propellants. See "Government Regulations."
ALBUTEROL (CFC)
The Company is developing a generic version of albuterol (CFC) to be
dispensed in a generic MDI. The Company has commenced scale-up and completed
manufacture of clinical supplies of albuterol (CFC). It has recently
completed a human clinical validation study and a pivotal clinical
pharmacology trial commenced in January, 1997. The Company expects that it
will submit an ANDA for its albuterol (CFC) in 1997. Kos intends to
distribute albuterol (CFC) through a generic distributor. Although the
Company's long-term strategy is to market its own branded proprietary aerosol
products using non-CFC propellants, albuterol (CFC) will provide the Company
with limited near-term revenue opportunities. Moreover, albuterol (CFC) will
enable the Company to demonstrate its aerosol formulation and manufacturing
capabilities earlier than would be possible with a non-CFC product. The
Company believes that such demonstrated aerosol capabilities might provide it
with opportunities to cross-license products or collaborate with other
pharmaceutical companies, especially outside the United States, that lack MDI
capabilities but that might desire such products. The Company has not had
discussions with any third parties regarding any possible licensing
arrangements.
Albuterol is the most widely used MDI product approved for the treatment
of asthma, accounting for nearly $680 million in sales and 26 million
prescriptions in the United States in 1995, although 1996 sales have been
trending lower because of generic competition. Kos anticipates a relatively
limited number of generic competitors for generic albuterol because of the
manufacturing challenges and the high capital costs of entering the aerosol
pharmaceutical business.
TRIAMCINOLONE (NON-CFC) WITH BREATH COORDINATED INHALER ("BCI")
Kos is developing a proprietary non-CFC formulation of triamcinolone to be
used with the Company's proprietary breath coordinated inhaler ("BCI"). This
product will require the submission of a NDA. The Company believes that its
BCI may improve the coordination of inhalation with actuation of medication,
thereby offering possible benefits in patient compliance and uniform dose
administration. Triamcinolone is a corticosteroid that is used to treat the
underlying inflammation of asthma. Triamcinolone is currently in the
formulation development stage and the Company expects clinical pharmacology
trials to commence in 1997.
Inhaled steroids are being widely prescribed because their efficacy for
prophylactic treatment is greater than that of other asthma products that can
be delivered through MDIs. Triamcinolone, marketed by only one U.S. producer,
is the largest selling of the metered-dose inhaled steroids. U.S. sales of
inhaled steroids were approximately $450 million in 1995, of which
triamcinolone accounted for $199 million.
FLUNISOLIDE (NON-CFC) WITH BCI
Kos is developing a non-CFC proprietary formulation of flunisolide to be
used with its BCI. Flunisolide is a long-acting inhaled steroid for the
treatment of asthma. The Kos formulation of
31
<PAGE>
flunisolide, for which a NDA is required, is currently in development, and
the Company expects clinical pharmacology trials to commence in 1997.
Flunisolide, also marketed by only one U.S. producer, is the fastest growing
inhaled steroid, with U.S. sales of approximately $120 million in 1995,
representing an increase of 40% from 1994.
OTHER MDI AND DEVICE PRODUCTS
Kos is developing a non-CFC albuterol to address environmental regulations
ultimately that will require manufacturers to phase out the CFC-based MDIs,
including the Company's generic albuterol (CFC) product. Kos is also
developing a second proprietary MDI device, a breath actuated inhaler
("BAI"). The Company's BAI operates automatically and is being developed
principally to address the difficulties in taking inhaled medication often
faced by children and the elderly. The Company intends to develop the BAI
with one of its non-CFC formulations. Clinical pharmacology trials with the
BAI are expected to commence in 1998. The Company also is developing a
proprietary inhalation dose counter designed to indicate when sufficient
doses no longer remain in the aerosol canister, thereby alerting the patient
to obtain a "refill" prescription. At present, the Company intends to use the
inhalation dose counter on all of its inhalation products with the exception
of albuterol (CFC).
COLLABORATION WITH FUISZ TECHNOLOGIES LTD.
The Company has entered into certain agreements with Fuisz, a company
engaged in the development and commercialization of drug delivery and food
applications. Pursuant to these agreements, the Company will collaborate with
Fuisz in the development of up to six products principally using Fuisz'
proprietary microsphere formulation technology. Captopril, the combination
product and IS-5-MN are currently being developed pursuant to this
collaboration with Fuisz. Fuisz also committed to collaborate on the
development of up to three other products; one of these products may be
subject to a joint venture arrangement. Kos believes that Fuisz' proprietary
microsphere technology is uniquely well-suited to overcome the particular
formulation challenges associated with the Company's combination product and
with captopril.
Under the terms of such agreements, Fuisz is responsible for formulating
each product and Kos is responsible for the remainder of the development
program. The first milestone of Fuisz' formulation work will permit Kos to
file Investigational New Drug ("IND") applications with the FDA for
subsequent pharmacokinetics and clinical studies on the products. Except for
the possible joint venture project, Kos has exclusive rights to manufacture
the formulated products and Kos retains exclusive worldwide marketing rights
upon exercising its existing option rights. On those products, Kos will pay
the development costs and pay license and development fees based on milestone
achievement. In addition, the Company will pay royalties to Fuisz based on
product sales by Kos.
SPONSORED RESEARCH
BOSTON UNIVERSITY
Kos is sponsoring basic research at Boston University focused on the role
of apolipoproteins in cardiovascular and Alzheimer's diseases. The objective
of the research program is to identify molecular agents involved so that
pharmaceutical products can be developed for the cardiovascular and
Alzheimer's indications. Two patents have been filed related to this
research, one of which is owned by Boston University and licensed to the
Company and one of which is jointly owned by Boston University and Kos.
Although no products have yet been identified for development as a result of
this research, the Company would pay royalties upon the sale of such
products. The research is being led by Vassilis Zannis, Ph.D., Professor and
Director of the Section of Molecular Genetics of the Cardiovascular Institute
at Boston University Medical Center. Dr. Zannis is recognized as a leading
expert in the research of apolipoproteins.
32
<PAGE>
TUFTS UNIVERSITY
Since 1988, Kos has also been sponsoring research at Tufts University aimed
at identifying and characterizing the pathophysiological significance of mast
cell degranulation and mast cell-derived mediators in such diseases as migraine,
irritable bowel syndrome, interstitial cystitis, multiple sclerosis, and
urticaria. This research has generated one issued U.S. patent, licensed to Kos,
covering the use of inhibitors of mast cell degranulation for the treatment of
migraines, as well as five other patent applications claiming other therapeutic
areas. Although no products have yet been identified for development as a result
of this research, the Company would pay royalties upon the sale of such
products. This research is being led by T.C. Theoharides, PhD., M.D., Professor
of Pharmacology and Medicine at Tufts University School of Medicine and is being
conducted at Tufts and the New England Medical Center.
The Company's sponsorship of both research programs currently aggregates
approximately $500,000 annually. Kos intends to seek additional industry
development partners as research and development efforts increase. Kos has
exclusive worldwide rights to all compounds related to the research conducted
at both universities.
LICENSING AND OTHER ACTIVITIES
The Company intends to pursue collaborative opportunities, including
licensing the use of selected products and technologies from third parties
("in-licensing"); acquisition of complementary technologies, products or
companies; product co-marketing arrangements; joint ventures; and strategic
alliances. The Company believes that attractive collaborative opportunities
exist in which Kos may be able to leverage its competencies through such
potential alliances in order to increase revenue potential for the Company.
See "Use of Proceeds."
Many existing pharmaceutical products, or products currently under
development, may be suitable candidates for specialty promotional or
co-marketing campaigns. Kos intends to actively attempt to identify
licensing, co-marketing and product acquisition opportunities that can
complement the Company's future product portfolio. In addition, in situations
where third-party drug delivery technologies are complementary to the
Company's drug development formulation capabilities, the Company may pursue
licensing rights for such technology. The Company may also consider licensing
certain of its products and technologies to third parties ("out-licensing").
Kos intends to explore strategic development and marketing alliances with
one or more large pharmaceutical companies to pursue new chemical entities
that may emerge from the Company's sponsored research programs.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks, when appropriate and available, protection for
its products and proprietary information by means of United States and
foreign patents, trademarks, trade secrets and contractual arrangements.
Patent protection in the pharmaceutical field, however, can involve complex
legal and factual issues. Moreover, broad patent protection for new
formulations or new methods of use of existing chemical entities is sometimes
difficult to obtain and often of limited usefulness, primarily because the
active ingredient and many of the formulation techniques have been known for
some time. Consequently, some patents claiming new formulations or new
methods of use for old drugs may not provide meaningful protection against
competition. Nevertheless, the Company intends to seek patent protection when
appropriate and available and otherwise to rely on regulatory-related
exclusivity and trade secrets to protect certain of its products,
technologies and other scientific information. There can be no assurance,
however, that any steps taken to protect such proprietary information will be
effective.
The Company has a patent application pending in the PTO with claims
covering NIASPAN'S method of use consistent with its recommended once-a-day
dosing regimen. Certain of these claims have recently been held allowable but
have not yet been issued as a patent by the PTO. The patent examiner
33
<PAGE>
has, however, suspended prosection of the Kos application and referred such
application to the PTO's Board of Interference to determine whether an
interference should be declared between such Kos application and a
method-of-use patent issued to a privately owned generic manufacturer
allegedly claiming the same dosing regimen invention.
On February 7, 1997, the Company and such generic manufacturer entered
into an agreement pursuant to which the parties agreed to resolve, as between
themselves, the effects of such potential interference by granting each other
licenses under their respective patent application and patent, regardless of
whether such licenses would be required. Accordingly, under the agreement,
the generic manufacturer granted the Company a license to sell products under
the generic manufacturer's above referenced patent, under a formulation
patent owned by such generic manufacturer, and under corresponding foreign
patents owned by such generic manufacturer, and the Company granted the
generic manufacturer the right to sell such generic manufacturer's products
that are covered by the claims in the Company's patent application and
corresponding foreign applications owned by the Company. As consideration for
entering into the agreement, the Company agreed to pay the generic
manufacturer certain license fees and royalties on the net sales of NIASPAN
subject to a cap on such royalty payments in the United States and a separate
cap on such payments outside the United States. Neither the license fees nor
the royalty payments are material to the financial condition of the Company.
The Company may sublicense its rights under the agreement to third parties to
make, use, or sell products developed by or for the Company. The generic
manufacturer may not sublicense or transfer the license granted to it by Kos,
although the generic manufacture may sublicense to third parties the right to
supply to the generic manufacturer or market with or on behalf of the generic
manufacturer, products that are covered by the generic manufacturer's patents
but which are not covered by the Company's patent application. The Company
may terminate the agreement after February 7, 2001.
Various inhalation devices, technologies, and methods of use licensed
from, or assigned to Kos by, researchers and engineers engaged in development
projects or sponsored research on behalf of Kos are the subject of four
issued and one allowed U.S. patent, as well as various corresponding foreign
patents. Similar patents applied for in other foreign countries are pending
and being pursued by the Company. Six patent applications on certain of the
Company's products under development and pertaining to certain of the
sponsored research activities are pending at the PTO. The Company believes
that most of the once-daily oral products in development under Kos'
agreements with Fuisz are protected by various technology patents in the name
of Fuisz.
There can be no assurance, however, that the patents owned and licensed by
the Company, or any future patents, will prevent other companies from
developing similar or therapeutically equivalent products or that others will
not be issued patents that may prevent the sale of Company products or
require licensing and the payment of significant fees or royalties by the
Company. Furthermore, there can be no assurance that any of the Company's
future products or methods will be patentable, that such products or methods
will not infringe upon the patents of third parties, or that the Company's
patents or future patents will give the Company an exclusive position in the
subject matter claimed by those patents.
NIASPAN and Kos are the Company's principal registered trademarks,
although eight other marks have been allowed and published by the PTO and
will become registered trademarks upon their use by the Company. As the
Company is not yet marketing any product, none of its planned trademarks are
considered critical to the business of the Company.
MARKETING
Kos intends to market its branded proprietary products through its own
specialty sales force. A fundamental element of the Company's product
selection strategy is to focus on products where a relatively concentrated
group of specialist physicians account for a significant portion of the
prescriptions for the therapeutic indication addressed by the Company's
products. The Company believes that such specialist physicians will be the
most receptive to the patient compliance, safety, or
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<PAGE>
other therapeutic advantages that the Company's products will seek to offer.
Accordingly, the Company believes that significant market gains can be
achieved with such products through the use of a relatively small, well
trained sales force concentrating its detailing efforts on informing such
specialist physicians about the scientific basis for the therapeutic
advantages of the Company's products.
The Company has not yet established a sales and marketing organization nor
has it yet marketed, distributed or sold any product. Members of the
Company's management, however, have substantial prior experience in
establishing a sales force to market products to specialist physicians. The
Company anticipates having an initial sales force of approximately 70 field
sales representatives and managed care specialists in place prior to the
expected launch of NIASPAN in 1997. Following the launch of NIASPAN and the
approval of additional products for marketing, the Company plans to expand
substantially its direct sales force to enable it to adequately detail such
products to the specialists in both the cardiovascular and respiratory
markets as appropriate. In particular, the Company intends to leverage its
initial NIASPAN sales force by marketing future cardiovascular products, as
they are approved, simultaneously with NIASPAN.
Following the introduction of NIASPAN, the Company expects to increase its
detailing efforts to a larger group of cardiovascular specialists and other
frequent prescribers of lipid-altering medications through the use of a
contract detail force. The Company will also consider developing its own
specialized flex-time (or part-time) sales representatives either to
supplement or replace the contract detail force. It is expected that the use
of contract and flex-time field forces will be used, in combination or alone,
by the Company in the future as other products are added to assist with new
product launches and to supplement the ongoing detail efforts of the
specialized sales force. Although the Company has had no discussions with any
such contract detail organization nor has it commenced the development of its
own flex-time sales force, the Company's management has had substantial
experience with the use of such field sales organizations to supplement
internal sales forces. See "--Cardiovascular Products--Controlled-Release
NIASPAN--Marketing Strategy for NIASPAN."
Following the launch of NIASPAN in the United States, the Company plans to
license marketing rights to an established marketing partner in major
international markets. Ultimately, the Company will consider establishing its
own sales organization in selected foreign markets. To date, the Company has
had no material discussions concerning such possible arrangements with other
companies.
MANUFACTURING
In order to maximize the quality of developed products, assure compliance
with regulatory requirements, and minimize costs, the Company intends to
manufacture all of its products internally. The Company currently has
solid-dose production capability in both its Hollywood, Florida and Edison,
New Jersey facilities.The Company's Edison facility is currently configured,
and largely equipped, to manufacture aerosol inhalation products using both
CFC and non-CFC propellants. Although the Company believes that both of these
facilities currently operate using current good manufacturing practices as
required by the FDA for the manufacture of product to be used in clinical
trials, both facilities will require inspection and approval by the FDA
before production for commercial sale can commence. The Company estimates
that it has sufficient capacity, with limited additional capital outlays, to
accommodate sales volume for both solid-dose and aerosol products through the
year 2000.
The Company intends initially to contract the packaging of its solid-dose
and aerosol products to third parties. The Company intends to begin in-house
packaging operations once product sales volumes justify the capital
expenditures required to establish such capabilities. Certain of the
Company's raw materials, including the active ingredient in NIASPAN, are
currently obtained from single sources of supply. The Company does not have a
contractual arrangement with the sole supplier of the active ingredient in
NIASPAN pursuant to which the Company obtains such incredient. The Company
intends, to the extent possible, to identify multiple sources for all of its
key raw materials, including the active ingredient in NIASPAN, although an
alternate source for at least one such material will not be available because
of the supplier's patent rights.
35
<PAGE>
COMPETITION
The Company's products will be competing with currently existing or future
prescription pharmaceuticals and vitamins in the United States, Europe and
elsewhere. Competition among these products will be based on, among other
things, efficacy, safety, reliability, availability, price and patent
position. In addition, academic institutions, government agencies and other
public and private organizations conducting research may seek patent
protection, discover new drugs or establish collaborative arrangements for
drug research. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the
Company and may be better equipped to develop, manufacture and market
products.
The Company's cardiovascular and respiratory products, when developed and
marketed, will compete in most cases with well established products
containing the same active ingredient already being marketed by medium-sized
and large pharmaceutical companies in the United States. For example, the
Company's captopril formulation will compete with several other ACE
inhibitors that are currently available, all of which have approval for
treatment of certain indications using once-a-day administration. Kos is
aware of one other company that is developing a once-a-day formulation of
captropril. Further, the Company's triamcinolone and flunisolide formulations
each will compete with another triamcinolone and flunisolide product,
respectively, already being marketed in the United States. Although such
competing products are sold only in a CFC version, the Company believes that
the originators are developing non-CFC versions.
Moreover, there are numerous manufacturers of niacin preparations
indicated for use as vitamin supplements or, in IR form, for treatment of
hyperlipidemia. The Company is not aware that any such manufacturer is
actively pursuing an NDA for the once-a-day use of niacin as a lipid-altering
agent. The Company believes, however, that a generic manufacturer has
performed an early-stage clinical study using niacin as a once-a-day
treatment for lipid-altering. Further, the Company's NIASPAN product will
compete with many existing lipid-altering medications, which currently
account for more than 90% of the lipid-altering market.
GOVERNMENT REGULATION
The development, manufacture and potential sales of prescription
pharmaceutical products is subject to extensive regulation by U.S. and
foreign governmental authorities. In particular, pharmaceutical products are
subject to rigorous preclinical and clinical testing and to other approval
requirements by the FDA in the United States under the Federal Food, Drug and
Cosmetic Act ("FFDCA") and the Public Health Service Act and by comparable
agencies in most foreign countries.
Before testing of any agents with potential therapeutic value in healthy
human test subjects or patients may begin, stringent government requirements
for preclinical data must be satisfied. The data, obtained from studies in
several animal species, as well as from laboratory studies, are submitted in
an IND application, or its equivalent in countries outside the United States,
where clinical studies are to be conducted. The preclinical data must provide
an adequate basis for evaluating both the safety and the scientific rationale
for the initiation of clinical trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
initial introduction of the compound into healthy human subjects prior to
introduction into patients, the product is tested for safety, adverse
affects, dosage, tolerance, absorption, metabolism, excretion and other
elements of clinical pharmacology. Phase II typically involves studies in a
small sample of the intended patient population to assess the efficacy of the
compound for a specific indication, to determine dose tolerance and the
optimal dose range as well as to gather additional information relating to
safety and potential adverse effects. Phase III trials are undertaken to
further evaluate clinical safety and efficacy in an expanded patient
population at geographically dispersed study sites, in order to determine the
overall risk-benefit ratio of the compound and to provide an adequate basis
for product labeling. Each trial is conducted in accordance
36
<PAGE>
with certain standards under protocols that detail the objectives of the
study, the parameters to be used to monitor safety and the efficacy criteria
to be evaluated. Each protocol must be submitted to the FDA as part of the
IND.
Data from preclinical and clinical trials are submitted to the FDA as a
NDA for marketing approval and to other health authorities as a marketing
authorization application. The process of completing clinical trials for a
new drug is likely to take a number of years and require the expenditure of
substantial resources. Preparing a NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense,
and there can be no assurance that approval from the FDA or any other health
authority will be granted on a timely basis, if at all. The approval process
is affected by a number of factors, primarily the risks and benefits
demonstrated in clinical trials as well as the severity of the disease and
the availability of alternative treatments. The FDA or other health
authorities may deny a NDA or marketing authorization application if the
regulatory criteria are not satisfied, or such authorities may require
additional testing or information.
Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety and will be required to gain
approval for the use of a product as a treatment for clinical indications
other than those for which the product was initially tested. Also, the FDA or
other regulatory authorities require post-marketing reporting to monitor the
adverse effects of the drug. Results of post-marketing programs may limit or
expand the further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process or labeling or a change in manufacturing facility, an application
seeking approval of such changes must be submitted to the FDA or other
regulatory authority.
The FFDCA also provides for NDA submissions that may rely in whole or in
part on preclinical and clinical safety and efficacy data that are publicly
available or are allowed to be referenced from another NDA. The Company may
be able to utilize existing publicly available safety and efficacy data in
filing NDAs for controlled-release products when such data exist for an
approved immediate-release version of the same chemical entity. The Company
intends to utilize all relevant available data for its products under
development, where appropriate, in order to reduce preclinical and clinical
testing and overall development time. There can be no assurance, however,
that the FDA will accept such data in the Company's applications, or that
such existing data will be available or useful.
Certain amendments to the FFDCA established abbreviated application
procedures for obtaining FDA approval for generic versions of brand name
prescription drugs that are off patent or whose marketing exclusivity has
expired. Approval to manufacture and market generic drugs is obtained by
filing ANDAs. As a substitute for clinical studies, the FDA requires, among
other items, data demonstrating that the ANDA drug formulation is
bioequivalent to the previously approved brand name formulation. The
advantage of the ANDA approval is that an ANDA applicant is not required to
conduct preclinical and clinical studies to demonstrate that the product is
safe and effective for its intended use.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals
vary widely from country to country, and the time required for approval may
be longer or shorter than that required for FDA approval. Although there are
some procedures for unified filings for certain European countries, in
general, each country at this time has its own procedures and requirements.
Further, the FDA regulates the export of products produced in the United
States and may prohibit the export even if such products are approved for
sale in other countries.
The Company's research and development involves the controlled use of
hazardous materials, chemicals, and various radioactive compounds. Although
the Company believes that its procedures for handling and disposing of those
materials comply with state and federal regulations, the risk of
contamination or injury from these materials cannot be eliminated. In the
event of such contamination
37
<PAGE>
or injury, the Company could be held liable for resulting damages, which
could be material to the Company's business, financial condition and results
of operations. The Company is also subject to numerous environmental, health
and workplace safety laws and regulations, including those governing
laboratory procedures, exposure to blood-borne pathogens, and the handling of
biohazardous materials. Additional federal, state and local laws and
regulations affecting the Company may be adopted in the future. Any violation
of, and the cost of compliance with, these laws and regulations could
materially and adversely affect the Company.
Completing the multitude of steps necessary prior to the commencement of
marketing requires the expenditure of considerable resources and a lengthy
period of time. Delay or failure in obtaining the required approvals,
clearances, permits or inclusions by the Company or its future corporate
partners or licensees, if any, would have a material adverse effect on the
ability of the Company to generate sales or royalty revenue. Further, the
passage and implementation of new or changed laws or regulations or the
potential impact on the Company of such actions cannot be anticipated.
One of the Company's products under development, albuterol (CFC), uses CFC
propellants. CFC propellants are ozone-depleting substances, the use of which
is restricted under the Federal Clean Air Act and the Montreal Protocol on
Substances that Deplete the Ozone Layer. The United Nations Technology and
Economic Assessment Panel (TEAP) reviews requests for specific essential use
allocations of CFCs under the Montreal Protocol and makes recommendations to
the parties, who determine the yearly bulk allocations for each country.
Recently, the Company's Essential Use Application for the use of CFCs during
1997 and 1998 was approved by TEAP and the parties to the Montreal Protocol.
Although the Company has received its requested allocation for 1997 and 1998
there can be no assurance that it will receive all or any part of its
allocation for 1999, or allocations for future years.
EMPLOYEES
The Company has approximately 105 permanent employees, of which 68 are
engaged in research and development and 19 in manufacturing. No employee is
represented by a union. The Company regularly employs the services of outside
consultants with respect to regulatory, scientific, and certain
administrative and commercial matters. The Company expects to continue to
require the services of such outside consultants. The Company believes its
employee relations are good.
FACILITIES
The Company leases approximately 3,400 square feet for its executive
offices pursuant to a lease that expires in 1997. The Company leases
approximately 14,500 square feet in adjacent buildings in Hollywood, Florida,
which are used for the research and development and solid-dose manufacturing
operations. These leases expire in November 2000, assuming the Company elects
to exercise certain renewal options. An additional 5,200 square feet of
office space at the same Hollywood site is leased through July 1997. The
Company also occupies approximately 21,500 square feet of space in Edison,
New Jersey under a lease that expires in October 2003, assuming the Company
elects to exercise a five-year renewal option. The Edison, New Jersey
facility is used for research and development, solid-dose manufacturing, and
aerosol manufacturing.
LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company or its
properties or to which the Company is a party.
38
<PAGE>
MANAGEMENT
The following table provides information regarding directors, director
nominees, executive officers and key personnel of the Company:
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------------------------------------
<S> <C> <C>
Michael Jaharis ......... 68 Chairman of the Board of Directors
Daniel M. Bell .......... 54 President, Chief Executive Officer and Director
Robert E. Baldini ....... 66 Vice Chairman of the Board of Directors
David J. Bova ........... 51 Senior Vice President, Product Development
John Brademas, Ph.D. ... 69 Director Nominee(1)
Steven Jaharis, M.D. ... 37 Director(1)(2)
Louis C. Lasagna, M.D. . 74 Director Nominee(1)
Mark Novitch, M.D. ...... 64 Director Nominee(2)
Frederick B. Whittemore 66 Director Nominee(2)
</TABLE>
OTHER KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Marvin F. Blanford, Pharm. D. 49 Vice President, Compliance
Eugenio A. Cefali, Ph.D. ..... 38 Vice President, Clinical Pharmacology
Anthony J. Cutie, Ph.D. ...... 53 Vice President, Aerosol Research & Development
David L. Heatherman ........... 50 Vice President, Sales & Marketing
Frederick A. Sexton ........... 37 Vice President, Technical Operations
Arthur W. Brinkmann ........... 62 Director of Human Resources
Christopher P. Kiritsy ........ 32 Director of Financial Analysis and Business Planning
Mukesh P. Patel ............... 39 Director of Licensing
Juan F. Rodriguez ............. 29 Controller
</TABLE>
- -----------------------------------------------------------------------------
(1) Proposed member of the Audit Committee
(2) Proposed member of the Compensation and Stock Option Committee
MICHAEL JAHARIS, a founder of the Company, has, since its inception,
funded the operations of the Company and served as Chairman of the Board. In
this position, Mr. Jaharis has been actively involved in the development of
the Company's business strategy and in critical implementation decisions.
From 1972 until its acquisition by Schering-Plough Corporation
("Schering-Plough") in 1986, Mr. Jaharis served as the President and Chief
Executive Officer of Key Pharmaceuticals, Inc. ("Key Pharmaceuticals"). Mr.
Jaharis also serves as Chairman of Kos Investments and Kos Holdings, as
Trustee of Tufts University, and as Chairman of the Board of Overseers of
Tufts University School of Medicine.
DANIEL M. BELL, a founder of the Company, has served as a Director and as
the President and Chief Executive Officer of the Company since its inception.
Mr. Bell also serves as a director of Kos Investments and Kos Holdings and as
a director of two private companies in which Kos Investments or Michael
Jaharis is the largest shareholder. From 1983 to 1986, Mr. Bell was employed
by Key Pharmaceuticals and was serving as its Executive Vice President and
Chief Operating Officer at the time of its acquisition by Schering-Plough in
June 1986.
ROBERT E. BALDINI has served as Vice Chairman of the Board since July 1996
and as a senior marketing consultant to the Company since April 1996. In
these positions, Mr. Baldini serves as an executive officer of the Company.
In addition to performing services for the Company, Mr. Baldini serves as a
consultant to, and director of, several private pharmaceutical and medical
device companies. Mr. Baldini served Key Pharmaceuticals from 1982 to 1986 as
Senior Vice President of Sales and Marketing. Following its acquisition by
Schering-Plough, he continued with the Key Pharmaceuticals Division of
Schering-Plough until 1995, last serving as its President.
39
<PAGE>
DAVID J. BOVA, a founder of the Company, has directed the Company's
product development efforts since inception and now serves as Senior Vice
President, Product Development. Prior to the founding of Kos, Mr. Bova was at
Key Pharmaceuticals from 1981 until its acquisition by Schering-Plough; he
continued with Schering-Plough until the founding of Kos in 1988. At Key
Pharmaceuticals, he last served as the Director of Product Development. Prior
to 1981, Mr. Bova was employed by the USV pharmaceutical operation of Revlon
Healthcare.
JOHN BRADEMAS, PH.D. has been nominated to become a Director of the
Company immediately following the closing of this offering. Dr. Brademas has
been President Emeritus of New York University since 1992. Prior to 1992, he
was President of New York University for eleven years and was the U.S.
Representative in Congress for Indiana's Third District for twenty-two years.
Dr. Brademas serves as a director of Texaco, Inc., NYNEX Corporation,
Scholastic, Inc., and Loews Corporation. He is a former Chairman of the
Federal Reserve Bank of New York and a former director of the New York Stock
Exchange.
STEVEN JAHARIS, M.D. has served as a Director of the Company since its
inception. Dr. Jaharis has been a practicing physician since 1990 and
currently serves as a family practitioner at Rush Prudential H.M.O. Dr.
Jaharis is the son of Michael Jaharis.
LOUIS C. LASAGNA, M.D. has been nominated to become a Director of the
Company immediately following the closing of this offering. Dr. Lasagna has
served as the Dean of the Sackler School of Graduate Biomedical Sciences at
Tufts University since 1984. Dr. Lasagna serves as a director of Astra U.S.A.
Inc., a subsidiary of Astra AB.
MARK NOVITCH, M.D. has been nominated to become a Director of the Company
immediately following the closing of this offering. Dr. Novitch has served as
Professor of Health Care Sciences at George Washington University since 1994.
Dr. Novitch was with The Upjohn Company from 1985 to 1993, last serving as
its Vice Chairman. From 1971 to 1985, Dr. Novitch was with the FDA, serving
as Deputy Commissioner from 1981 to 1985. Dr. Novitch serves as a director of
Alteon, Inc., Guidant Corporation, Neurogen Corporation, and Calypte
Biomedical, Inc.
FREDERICK B. WHITTEMORE has been nominated to become a Director of the
Company immediately following the closing of this offering. Mr. Whittemore
has been with Morgan Stanley Group since 1958 and presently serves as
Advisory Director. Mr. Whittemore is a director of various mutual funds
organized under Morgan Stanley Asset Management, Inc. Mr. Whittemore also
serves as a director of Chesapeake Energy Corporation, PartnerRe Holdings,
Ltd., and Integon, Inc.
MARVIN F. BLANFORD, PHARM. D. joined Kos in 1996 and serves as Vice
President, Compliance. Dr. Blanford was the Director of Clinical Research for
Noven Pharmaceuticals, Inc. from 1992 to 1995. Previously joining Noven, Dr.
Blanford was vice president of a major independent clinical research
organization. Dr. Blanford also worked for Key Pharmaceuticals as a research
manager from 1981 through 1984.
EUGENIO A. CEFALI, PH.D. joined the Company in January 1994 and serves as
Vice President, Clinical Pharmacology. Dr. Cefali was responsible for
clinical pharmacology and Phase IV clinical research at Whitby
Pharmaceuticals from 1991 to 1994. Prior to 1991, Dr. Cefali was at Key
Pharmaceuticals and Schering-Plough where he was responsible for in-vivo
evaluation of certain oral sustained release and transdermal dosage forms.
ANTHONY J. CUTIE, PH.D. serves as Vice President, Aerosol Research and
Development; he has been the Chief Scientific Officer of the Company's
aerosol subsidiary since its founding in 1993. For more than 25 years, Dr.
Cutie has been an industry consultant in pharmaceutical aerosols and he has
worked with over 50 pharmaceutical companies ranging from large
multinationals to small generic companies. He has served as a consultant for
the FDA, and he has been an active member of various United States
Pharmacopia committees and two aerosol committees of the American Association
of Pharmaceutical Scientists. Dr. Cutie also serves as Professor of
Industrial Pharmacy at Long Island University.
40
<PAGE>
DAVID L. HEATHERMAN has served as Vice President, Sales and Marketing
since July 1996. Mr. Heatherman worked for Schering-Plough from 1972 to 1996
in several capacities including Senior Product Promotion Director, Regional
Sales Director, last serving as Managed Care Director.
FREDERICK A. SEXTON joined the Company in January 1996 and serves as Vice
President, Technical Operations. Prior to joining the Company, Mr. Sexton was
employed by Boehringer Ingelheim Pharmaceuticals from 1984 through 1995 in
various production and quality assurance positions involving solid-dose and
aerosol products. Prior to 1984, Mr. Sexton was employed by Ayerst
Laboratories in research and production positions.
ARTHUR W. BRINKMANN has served as Director, Human Resources since
September, 1991. Mr. Brinkmann was Director of Human Resources at Key
Pharmaceuticals and Schering-Plough from 1984 to 1989. Prior to Key
Pharmaceuticals, Mr. Brinkmann worked in human resources at Johnson & Johnson
for twenty-one years.
CHRISTOPHER P. KIRITSY joined the Company in June 1995 and serves as
Director, Financial Analysis and Business Planning. Prior to joining the
Company, Mr. Kiritsy was with Institute of Molecular Biology, Inc., a
development stage biotechnology concern, from 1988 to 1995, where he last
served as Associate Director of Product Development.
MUKESH P. PATEL has served as Director, Licensing since July 1991. Mr.
Patel was employed by Glaxo in London, England for eleven years prior to
joining the Company, last serving as an International Licensing Executive for
Glaxo Holdings.
JUAN F. RODRIGUEZ, a certified public accountant, joined the Company in
November 1995 and serves as Controller. Prior to joining Kos, Mr. Rodriguez
was employed by the accounting firms of Rosen and Co. from 1994 to 1995 and
Arthur Andersen LLP from 1991 to 1994.
ELECTION, COMMITTEES AND COMPENSATION OF DIRECTORS
Prior to the consummation of this offering, the Company intends to
establish a Compensation and Stock Option Committee and an Audit Committee.
The Compensation and Stock Option Committee will administer the Company's
1996 Stock Option Plan (the "Option Plan") including, among other things,
determining the amount, exercise price and vesting schedule of stock options
awarded under the Option Plan. The Compensation and Stock Option Committee
will administer the Company's other compensation programs and perform such
other duties as may from time to time be determined by the Board of
Directors. The Compensation and Stock Option Committee is expected to be
comprised of Dr. Jaharis, Dr. Novitch, and Mr. Whittemore.
The Audit Committee will review the scope and results of the annual audit
of the Company's consolidated financial statements conducted by the Company's
independent accountants, the scope of other services provided by the
Company's independent accountants, proposed changes in the Company's
financial and accounting standards and principles, and the Company's policies
and procedures with respect to its internal accounting, auditing and
financing controls. The Audit Committee will also examine and consider other
matters relating to the financial affairs and accounting methods of the
Company, including selection and retention of the Company's independent
accountants. The Audit Committee is currently expected to be comprised of Dr.
Brademas, Dr. Jaharis, and Dr. Lasagna.
Each non-employee and non-consultant director of the Company, is entitled
to receive a fee of $1,000 for attendance at each meeting of the Board of
Directors. In addition, each non-employee and non-consultant director is
entitled to receive $500 for attendance at each meeting of a committee of the
Board of Directors. All directors are reimbursed for travel expenses incurred
in connection with the performance of their duties as directors.
41
<PAGE>
Each non-employee and non-consultant director is entitled to receive an
option to purchase 5,000 shares of Common Stock upon their appointment to the
Board of Directors and is entitled to receive an option to purchase 3,000
shares of Common Stock annually thereafter, so long as they continue to serve
on the Board of Directors. See "Management--Stock Option Plan."
Michael Jaharis has elected not to receive fees or stock options in
connection with his serving as Chairman of the Board. Although Mr. Jaharis
has been actively involved in the development of the Company's business
strategy and in critical implementation decisions, he has never been paid
compensation by the Company for acting in such capacity. Since July 1, 1996,
however, the Company has leased an automobile for Mr. Jaharis' use.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 1996, Michael Jaharis, the Company's
Chairman of the Board, and Daniel M. Bell, the Company's President and Chief
Executive Officer, participated in deliberations of the Company's Board of
Directors concerning executive officer compensation. Prior to this offering,
the Company did not have a stock option or compensation committee.
EXECUTIVE COMPENSATION
The following table summarizes the compensation during the fiscal years
ended June 30, 1996, 1995 and 1994, paid to or earned by the Company's Chief
Executive Officer and to the other executive officers of the Company whose
annual salary and bonuses exceeded $100,000 during the fiscal year ended June
30, 1996 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ------------------------------ ----------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)(1)
- ------------------ ---- ------ - ----- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Daniel M. Bell 1996 246,000 -- -- -- 750,000(2) -- 4,928
President and 1995 246,000 10,000 -- -- -- -- 1,814
Chief Executive Officer 1994 246,000 -- -- -- -- -- 890
David J. Bova 1996 185,000 25,000 -- -- -- -- 1,091
Senior Vice President, 1995 185,000 -- -- -- -- -- 726
Product Development 1994 164,167 -- -- -- -- -- 605
</TABLE>
- -----------------------------------------------------------------------------
(1) Consists of life insurance premiums paid by the Company.
(2) The options originally were granted to Mr. Bell in August 1988. The
option terms were amended on June 20, 1996, to extend the expiration date
of the options from December 1996 to June 20, 2006. Other material terms
of the options, including the exercise price, were not changed. The
options are currently exercisable.
42
<PAGE>
The following table contains information about stock option grants to
Named Executive Officers during the fiscal year ended June 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------------------------- ANNUAL RATE OF
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE OR STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION FOR OPTION TERM(1)
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE 0%($) 5%($) 10%($)
- ---------------- --------------------- --------------------- ---------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
DANIEL M. BELL 750,000(2) 41% $0.60 6/20/06 $4,800,000 $7,818,694 $12,449,964
DAVID J. BOVA . -- -- -- -- -- -- --
</TABLE>
- -----------------------------------------------------------------------------
(1) Amounts reflect hypothetical gains that could be achieved for the options
if they are exercised at the end of the option term. Those gains are
based on assumed rates of stock appreciation of 0%, 5% and 10% compounded
annually from the date the option was modified through the expiration
date. The Board of Directors estimated the fair market value of Common
Stock to be $7.00 per share on the date of such modification.
(2) The options originally were granted to Mr. Bell in August 1988. The
option terms were amended on June 20, 1996, to extend the expiration date
of the options from December 1996 to June 20, 2006. Other material terms
of the options, including the exercise price, were not changed. The
options are currently exercisable.
The following table provides information about the number and value of
options held by the Named Executive Officers at June 30, 1996:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(#) AT FY-END($)(1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Daniel M. Bell 750,000 -- $4,800,000 --
David J. Bova . 275,000 -- $1,718,750 --
</TABLE>
- -----------------------------------------------------------------------------
(1) For purposes of determining the values of the options held by Named
Executive Officers, the Company has assumed that Common Stock had a value
of $7.00 per share on June 30, 1996, which is the estimated fair market
value the Board of Directors had attributed to the Common Stock on June
20, 1996, in connection with certain grants of options under the
Company's stock option plan. The option value is based on the difference
between the fair market value of the shares on June 30, 1996 and the
option exercise price per share, multiplied by the number of shares of
Common Stock subject to the option.
CONFIDENTIALITY AND INTELLECTUAL PROPERTY AGREEMENTS
Each employee of the Company has entered into a Confidentiality Agreement
that (i) prohibits the employee from disclosing confidential information
relating to the Company and (ii) provides that intellectual property
conceived by the employee during the term of employment and relating to the
business of the Company remains the exclusive property of the Company.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Daniel M. Bell dated
as of July 1, 1996. Under the agreement, Mr. Bell serves as President and
Chief Executive Officer of the Company for a term expiring on June 30, 2002,
unless earlier terminated for cause, upon the death or disability of Mr.
Bell, or, at the election of Mr. Bell, upon a change in control of the
Company. In the event that Mr. Bell is terminated without cause or upon a
change in control of the Company, Mr. Bell is entitled to receive as
severance compensation his base salary, bonus compensation and annual stock
options until the later to occur of the date thirty-six months after such
termination and June 30, 2002. The agreement provides that Mr. Bell receive
base annual compensation of $250,000 for each year during the term of the
agreement, subject to an annual increase in an amount to be determined by the
Board of Directors. Under the agreement, Mr. Bell also receives an annual
bonus and an annual stock option grant in amounts to be determined by the
Board of Directors based upon Mr. Bell's and the Company's
43
<PAGE>
performance. Mr. Bell was paid a bonus of $150,000 in December 1996. The
agreement also provides that the Company will provide Mr. Bell with the use
of an automobile. Mr. Bell is prohibited from competing with the Company
during the term of the agreement and for two years after termination thereof.
The Company entered into an employment agreement with David Bova dated as
of June 15, 1996, pursuant to which Mr. Bova serves as Senior Vice President
of the Company. This agreement constitutes an amendment and restatement of a
previous employment agreement with Mr. Bova, dated December 18, 1992. Under
the agreement, the term of Mr. Bova's employment terminates on December 31,
1997 unless earlier terminated for cause, upon the death or disability of Mr.
Bova, or, at the election of Mr. Bova, upon a change in control of the
Company. Notwithstanding the foregoing, the Company may exercise an option to
extend the term of the agreement for up to twenty-four additional months. The
agreement provides that Mr. Bova receive a base salary of $195,000 per year,
which amount may be increased by the Company. In December 1996, the Company's
Board of Directors determined to award a $25,000 bonus to Mr. Bova, payable
to Mr. Bova in 1997. In the event that Mr. Bova is terminated without cause
or upon a change in control of the Company, Mr. Bova is entitled to receive
as severance compensation his base salary until December 31, 1997. In
addition, the agreement provides that Mr. Bova receive royalties in an amount
equal to one percent of the net sales of the Company's NIASPAN product and
its combination product through December 31, 2003, up to a cap of $4,000,000.
The agreement provides that, under certain enumerated circumstances, the
royalty amount may be reduced to 0.5% of net sales. The agreement also
provides that under certain specific circumstances, the Company's obligation
to pay royalties may cease upon Mr. Bova's termination with the Company. The
agreement prohibits Mr. Bova from competing with the Company during the term
of the agreement and for a period of two years after the termination thereof.
The Company entered into a consulting agreement with Robert Baldini
effective as of April 1, 1996, pursuant to which Mr. Baldini serves as Vice
Chairman of the Board and as senior marketing consultant to the Company,
advising the Company with respect to its establishment of a sales force and
its marketing efforts. Mr. Baldini will receive $75,000 per year under the
agreement and is obligated to devote fifty days per year to Company matters.
The term of the agreement continues for five years. The agreement is
automatically renewable for successive two year periods unless either party
provides thirty days prior written notice of its desire not to renew. The
agreement is terminable by either party upon 120 days prior written notice.
The agreement prohibits Mr. Baldini from competing with the Company during
the term of the Agreement.
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The Option Plan provides for the grant of both nonstatutory stock options
and stock options intended to be treated as incentive stock options within
the meaning of Section 422 of the Internal Revenue Code. The Option Plan is
intended to provide incentives to, and rewards for, certain eligible
employees, consultants and outside directors of the Company who have
contributed and will continue to contribute to the success of the Company.
The Option Plan was adopted by the Board of Directors and the shareholder of
the Company in June 1996. An aggregate of 3,675,000 shares of Common Stock
have been reserved for issuance under the Option Plan. The Company has
granted options to purchase an aggregate of 2,005,500 shares of Common Stock
under the Option Plan to employees and consultants at exercise prices ranging
from $0.60 to the initial public offering price per share, including stock
options covering an aggregate of 750,000 shares of Common Stock granted to
one of the Company's Named Executive Officers. The Company has also granted
options to purchase an aggregate of 325,000 shares of Common Stock outside of
the Option Plan to an employee and a consultant, including stock options
covering an aggregate of 275,000 shares of Common Stock granted to one of the
Company's Named Executive Officers.
Under the Option Plan, the Compensation and Stock Option Committee of the
Board of Directors of the Company (the "Stock Option Committee") is
authorized to administer the Option Plan,
44
<PAGE>
including the selection of employees and consultants of the Company to whom
options may be granted. The Stock Option Committee also determines the number
of shares, the exercise price, the term, any conditions on exercise and other
terms of each option granted to an employee or consultant. Options granted to
employees or consultants under the Option Plan become vested over a period of
four years or such shorter or longer period as may be determined by the Stock
Option Committee at the time of grant. The duration of an option granted to
an employee or consultant under the Option Plan is ten years from the date of
grant, or such shorter or longer period as may be determined by the Stock
Option Committee at the time of grant or as may result from the death,
disability, or termination of the employment of the employee or consultant to
whom the option is granted.
The Option Plan prescribes a formula for determining the amount, price and
timing of awards of stock options to the eligible outside directors. Upon his
or her election to the Board of Directors of the Company, an eligible outside
director will receive an option to purchase 5,000 shares of the Company's
common stock. On each anniversary of his or her appointment to the Board of
Directors of the Company, an eligible outside director will receive an option
to purchase 3,000 shares of the Company's common stock. The exercise price of
each share subject to an option granted to an outside director will be the
fair market value of the Company's common stock on the later of (a) the
earlier of the date of an initial public offering of the Company's common
stock or December 31, 1996, or (b) the date the option is granted. Each
option granted to an outside director under the Option Plan becomes vested on
the first anniversary of its date of grant. The duration of an option granted
to an outside director under the Option Plan is the lesser of ten years from
the date of grant or one year from the date of the outside director's death.
The options are non-transferable other than by will or by the laws of
descent and distribution. The Option Plan may be amended at any time by the
Board of Directors, although certain amendments require shareholder approval.
The Option Plan terminates in June 2006.
401(K) PLAN
The Company's Internal Revenue Code Section 401(k) Plan, known as the Kos
Savings Plan, became effective on January 1, 1994. Each employee who has
completed at least one year of service with the Company and has attained age
21 is eligible to make pre-tax elective deferral contributions each year not
exceeding the greater of a specified statutory amount or 15 percent of the
employee's compensation for the year. An employee is always 100 percent
vested in the employee's elective deferral contributions. The Company makes
no contributions under this plan.
45
<PAGE>
CERTAIN TRANSACTIONS
During 1995 the Company acquired certain property including used
computers, laboratory equipment and supplies and certain other office
equipment and furnishings from the Institute of Molecular Biology, Inc.
("IMB"), a company controlled by Kos Investments. In the aggregate, such
purchases totaled approximately $83,500. Until June 1996, Daniel M. Bell, the
Company's President and Chief Executive Officer, also served as the Chairman
of the Board of Directors and Chief Executive Officer of IMB.
Michael Jaharis, the sole shareholder of Kos Investments, has personally
guaranteed the repayment of a loan to Kos Investments from certain financial
institutions. Prior to March 21, 1995, the Company was the primary borrower
under this loan, and therefore received the benefit of the personal guaranty
extended by Mr. Jaharis. As consideration for Mr. Jaharis's personal
guaranty, the Company agreed to pay Mr. Jaharis an annual fee of 0.25% of the
average amount outstanding under the loan during the Company's fiscal year.
The Company paid Mr. Jaharis $28,700 and $92,333 during the fiscal years
ended June 30, 1994 and 1995, respectively. In March 1995, the Company was
released as a borrower under the loan.
The Company executed the Convertible Note, dated as of July 1, 1996, the
proceeds of which will be used to fund the Company's operations until the
consummation of this offering, in connection with a loan to the Company from
Kos Investments in the aggregate principal amount of up to $15.0 million.
Under the terms of this note, interest accrues on the outstanding principal
amount at First Union National Bank of Florida's prime rate commencing July
1, 1996, escalating to a rate of 1% over such prime rate during calendar year
1997, 2% over such prime rate during calendar year 1998, and 3% over such
prime rate during calendar year 1999 until maturity. Principal and interest
under this note are due on June 30, 1999. From time to time, at Kos
Investments' option, principal and interest outstanding under this note may
be converted, in whole or in part, into Common Stock at a conversion price
per share equal to the initial public offering price per share. As of
March 7, 1997, the Company had borrowed $13,395,000 under this note.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of February 7, 1997 and as adjusted at
that date to reflect the sale of Common Stock offered by the Company hereby,
information with respect to the beneficial ownership of the Company's Common
Stock by: (i) each person known by the Company to beneficially own more than
five percent (5%) of the outstanding shares of the Company's Common Stock;
(ii) each director and director nominee of the Company; (iii) the Company's
Named Executive Officers; and (iv) all directors and executive officers as a
group. Unless otherwise indicated, each of the shareholders named in this
table: (a) has sole voting and investment power with respect to all shares of
Common Stock beneficially owned; and (b) has the same address as the Company.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED(1)
-----------------------------------------
SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED(1) BEFORE THE OFFERING AFTER THE OFFERING
- --------------------------- --------------------------- -------------------- -------------------
<S> <C> <C> <C>
Michael Jaharis(2) ........ 10,000,000 100.0% 70.7%
Daniel M. Bell(3) ......... 750,000 7.0% 5.0%
David J. Bova(4) .......... 275,000 2.7% 1.9%
Robert E. Baldini(5) ...... 50,000 * *
John Brademas, Ph.D. ..... -- -- --
Steven Jaharis, M.D. ..... -- -- --
Louis C. Lasagna, M.D. ... -- -- --
Mark Novitch, M.D. ........ -- -- --
Frederick B. Whittemore .. -- -- --
All Officers and Directors
as a group (9 persons)(6) 11,075,000 100.0% 72.7%
</TABLE>
- -----------------------------------------------------------------------------
* less than 1 percent
(1) Shares beneficially owned and percentage of ownership are based on
10,000,000 shares of Common Stock outstanding before this offering and
14,150,000 shares of Common Stock outstanding after the closing.
Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting and disposition power with respect to
securities.
(2) All shares are held by Kos Holdings, Inc., which is wholly owned by Kos
Investments, Inc., of which Mr. Jaharis is the sole shareholder, and with
respect to such shares Mr. Jaharis has sole voting and investment power.
Excludes, at March 7, 1997, 893,000 shares of Common Stock issuable to Kos
Investments upon the conversion, if any, of the Convertible Note.
(3) Consists of 750,000 shares of Common Stock that may be purchased by Mr.
Bell pursuant to an option, which is currently exercisable.
(4) Consists of 275,000 shares of Common Stock that may be purchased by Mr.
Bova pursuant to an option, which is currently exercisable.
(5) Consists of 50,000 shares of Common Stock that may be purchased by Mr.
Baldini pursuant to an option, which is exercisable within 60 days.
(6) Includes an aggregate of 1,075,000 shares underlying options to purchase
Common Stock that are currently exercisable or are exercisable within 60
days.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock having a par value of $.01 per share and 10,000,000 shares of
Preferred Stock having a par value of $.01 per share ("Preferred Stock"). As
of March 7, 1997, 10,000,000 shares of Common Stock and no shares of
Preferred Stock were outstanding. An additional 2,330,500 shares of Common
Stock may be issued upon the exercise of outstanding stock options and an
additional 893,000 shares of Common Stock issuable upon conversion, if any, of
the Convertible Note.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Shareholders do not have the right to cumulate their votes in elections of
directors. Accordingly, holders of a majority of the issued and outstanding
Common Stock will have the right to elect all the Company's directors and
otherwise control the affairs of the Company.
Holders of Common Stock are entitled to dividends on a pro rata basis upon
declaration of dividends by the Board of Directors. Dividends are payable
only out of funds legally available for the payment of dividends. The Board
of Directors is not required to declare dividends, and it currently expects
to retain earnings to finance the development of the Company's business. See
"Dividend Policy."
Upon a liquidation of the Company, holders of the Common Stock will be
entitled to a pro rata distribution of the assets of the Company, after
payment of all amounts owed to the Company's creditors, and subject to any
preferential amount payable to holders of Preferred Stock of the Company, if
any. Holders of Common Stock have no preemptive, subscription, conversion,
redemption or sinking fund rights.
PREFERRED STOCK
The Articles permit the Company's Board of Directors to issue shares of
Preferred Stock in one or more series and to fix the relative rights,
preferences and limitations of each series. Among such rights, preferences
and limitations are dividend rates, provisions of redemption, rights upon
liquidation, conversion privileges and voting powers. Should the Board of
Directors elect to exercise this authority, the rights and privileges of
holders of Common Stock could be made subject to the rights and privileges of
any such series of Preferred Stock. The Board of Directors of the Company
currently has no plans to issue any shares of Preferred Stock. The issuance
of Preferred Stock could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company.
CERTAIN ANTI-TAKEOVER PROVISIONS INCLUDED IN THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
The Articles permit removal of directors only for cause by the
shareholders of the Company at a meeting by the affirmative vote of at least
60% of the outstanding shares entitled to vote for the election of directors
(the "Voting Stock"). The Articles provide that any vacancy on the Board of
Directors may be filled only by the remaining directors then in office.
The Articles also contain provisions which require: (i) the affirmative
vote of 60% of the Voting Stock to amend the Articles of Incorporation or
Bylaws of the Company; and (ii) the demand of not less than 50% of all votes
entitled to be cast on any issue to be considered at a proposed special
meeting to call a special meeting of shareholders. In addition, the Articles
require that all shareholder action, including the election of directors, be
taken by means of a vote at a duly convened shareholders meeting and not by
use of written consents.
The Company's Bylaws establish an advance notice procedure for the
nomination of candidates for election as directors by shareholders as well as
for shareholder proposals to be considered at shareholders' meetings.
48
<PAGE>
The above-described provisions may have certain anti-takeover effects.
Such provisions, in addition to the provisions described below, may make it
more difficult for persons, without the approval of the Company's Board of
Directors, to make a tender offer or acquire substantial amounts of the
Common Stock or launch other takeover attempts that a shareholder might
consider in such shareholder's best interests, including attempts that might
result in the payment of a premium over the market price for the Common Stock
held by such shareholder.
CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to several anti-takeover provisions under Florida
law that apply to a public corporation organized under Florida law, unless
the corporation has elected to opt out of those provisions in its articles of
incorporation or bylaws. The Company has not elected to opt out of certain of
those provisions. The Florida Business Corporation Act (the "FBCA") prohibits
the voting of shares in a publicly-held Florida corporation that are acquired
in a "control share acquisition" unless the holders of a majority of the
corporation's voting shares (exclusive of shares held by officers of the
corporation, inside directors or the acquiring party) approve the granting of
voting rights as to the shares acquired in the control share acquisition or
unless the acquisition is approved by the corporation's board of directors. A
"control share acquisition" is defined as an acquisition that immediately
thereafter entitles the acquiring party to vote in the election of directors
within each of the following ranges of voting power: (i) one-fifth or more
but less than one-third of such voting power (ii) one-third or more but less
than a majority of such voting power; and (iii) more than a majority of such
voting power.
The FBCA also contains an "affiliated transaction" provision that
prohibits a publicly-held Florida corporation from engaging in a broad range
of business combinations or other extraordinary corporate transactions with
an "interested shareholder" unless (i) the transaction is approved by a
majority of disinterested directors before the person becomes an interested
shareholder, (ii) the interested shareholder has owned at least 80% of the
corporation's outstanding voting shares for at least five years or (iii) the
transaction is approved by the holders of two-thirds of the corporation's
voting shares other than those owned by the interested shareholder. An
interested shareholder is defined as a person who together with affiliates
and associates beneficially owns more than 10% of the corporation's
outstanding voting shares. The Company's Articles provide that the FBCA's
affiliated transaction voting requirements will not apply to the Company.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed the transfer
agent and registrar for the Common Stock. Its address is 40 Wall Street, 46th
Floor, New York, New York 10005.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 14,150,000 shares
of Common Stock outstanding. Of these shares, the 4,150,000 shares offered
hereby will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate"
of the Company (in general, a person who has a control relationship with the
Company), which shares will be subject to the resale limitations, described
below, of Rule 144 promulgated under the Securities Act. The remaining
10,000,000 shares are deemed to be "restricted securities," as that term is
defined under Rule 144, in that such shares were issued and sold by the
Company in private transactions not involving a public offering and, as such,
may only be sold pursuant to an effective registration under the Securities
Act, in compliance with the exemption provisions of Rule 144 or pursuant to
another exemption under the Securities Act (the "Restricted Shares"). The
Restricted Shares are eligible for sale under Rule 144 (subject to certain
recurring three-month volume limitations prescribed therein). The Company has
granted certain registration rights to its sole shareholder and to Kos
Investments, the holder of the note representing the Investments Loan. These
entities have "piggyback" registration rights to request that the Company
register any of their shares in the event that the Company proposes to
register any of its securities under the Securities Act. Additionally, these
entities have "demand" registration rights to have the Company prepare and
file, on three occassions, a registration statement so as to permit a public
offering and sale of their shares of Common Stock.
The existing shareholder of the Company, which will beneficially hold an
aggregate of 10,000,000 shares of Common Stock upon consummation of this
offering, holders of options to purchase an aggregate of 2,330,500 shares of
Common Stock, and Kos Investments, Inc., the holder of the Convertible Note,
which may be converted into 893,000 shares of Common Stock have agreed with the
Underwriters not to sell or otherwise dispose of any of those shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
written consent of Cowen & Company, a Representative of the Underwriters. Cowen
& Company may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to these lock-up restrictions.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who
has owned restricted shares of Common Stock beneficially for at least two
years is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the total number of outstanding
shares of the same class or, if the common stock is quoted on Nasdaq National
Market, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned shares of Common Stock for at least three years is entitled to sell
such shares under Rule 144 without regard to any of the limitations described
above. The Securities and Exchange Commission is currently considering a
proposal to reduce the Rule 144 holding period for restricted securities to
one year.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under the Option
Plan, thereby permitting the resale of such shares by non-affiliates in the
public market without restriction under the Securities Act. As of December
31, 1996, options to purchase 2,005,500 shares of Common Stock were
outstanding under the Option Plan.
Prior to this offering, there has been no public market for the securities
of the Company. No prediction can be made as to the effect, if any, that
public sales of shares of Common Stock or the availability of such shares for
sale will have on the market prices of the Common Stock prevailing from time
to time. Nevertheless, sales of a substantial number of shares by the
existing shareholder or by shareholders purchasing Common Stock in this
offering could have a negative effect on the market price of Common Stock and
could impair the Company's ability in the future to raise additional capital
through the sale of its equity securities.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company, Dillon, Read & Co. Inc. and Salomon Brothers Inc have
severally agreed to purchase from the Company the following respective number
of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ----------------------------- ----------------
<S> <C>
Cowen & Company ....................................... 856,000
Dillon, Read & Co. Inc................................. 856,000
Salomon Brothers Inc .................................. 856,000
Bear, Stearns & Co. Inc................................ 83,000
Alex. Brown & Sons Incorporated........................ 83,000
Credit Suisse First Boston Corporation................. 83,000
Donaldson, Lufkin & Jenrette Securities Corporation.... 83,000
Hambrecht & Quist LLC.................................. 83,000
Lazard Freres & Co. LLC................................ 83,000
Lehman Brothers Inc.................................... 83,000
Morgan Stanley & Co., Incorporated..................... 83,000
Oppenheimer & Co., Inc................................. 83,000
Paine Webber Incorporated.............................. 83,000
Prudential Securities Incorporated..................... 83,000
Schroder Wertheim & Co. Incorporated................... 83,000
UBS Securities LLC..................................... 83,000
Invemed Associates, Inc................................ 83,000
Allen & Company Incorporated........................... 42,000
Brean Murray & Co., Inc................................ 42,000
Furman Selz LLC........................................ 42,000
Genesis Merchant Group Securities...................... 42,000
Gruntal & Co., Incorporated............................ 42,000
Nesbitt Burns Securities Inc........................... 42,000
Raymond James & Associates, Inc........................ 42,000
Scott & Stringfellow, Inc.............................. 42,000
Vector Securities International, Inc................... 42,000
Volpe, Welty & Company LLC............................. 42,000
---------
Total ............................................... 4,150,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the
absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company and
its counsel and independent auditors. The nature of the Underwriter's
obligation is such that they are committed to purchase all shares of Common
Stock offered hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not
is excess of $0.59 per share. The Underwriters may allow and such dealers may
re-allow a concession not in excess of $0.10 per share to certain other
dealers. The Underwriters have informed the Company that they do not intend
to confirm sales to any accounts over which they exercise discretionary
authority. After the initial public offering of the shares, the offering
price and other selling terms may from time to time be varied by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable no
later than 30 days after the date of this Prospectus, to purchase up to
622,500 additional shares of Common Stock at the initial public offering
price, less the underwriting discount, set forth on the cover page of this
Prospectus, to cover over-allotments, if any. If the Underwriters exercise
their over-allotment option, the Underwriters have severally agreed, subject
to certain conditions, to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by each of them
shown in the foregoing table bears to the total number of shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of share of Common Stock
offered hereby.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot. In addition, the Underwriters may
bid for, and purchase, shares of Common Stock in the open market to cover
syndicate short positions created in connection with the offering or to
stabilize the price of the Common Stock. Finally, the underwriting syndicate may
reclaim selling concessions allowed for distributing the Common Stock in this
offering, if the syndicate repurchases previously distributed Common Stock in
syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriters are not required
to engage in these activities, and may end any of these activities at anytime.
Each of the Company, its sole shareholder and the Company's directors,
officers and key personnel who hold options to purchase shares of Common
Stock, holding in the aggregate 12,330,500 shares or options to purchase
shares of Common Stock, and the holder of the Convertible Note have agreed
that they will not during the period commenced on the date hereof and ending
180 days after the date of this Prospectus, without the prior written consent
of Cowen & Company, (i) directly or indirectly, offer, sell, assign,
transfer, encumber, pledge, contract to sell, grant an option to purchase or
otherwise dispose of, other than by operation of law, any shares of Common
Stock (other than the shares offered hereby and, in the case of the Company,
in certain limited circumstances), options, rights or warrants to acquire
shares of Common Stock, or securities convertible into or exercisable or
exchangeable for shares of Common Stock (whether such shares or any such
securities are now owned or hereafter acquired) or (ii) enter into any swap
or other arrangement that transfers to another, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (i)
51
<PAGE>
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing lockup would prohibit,
without the prior written consent of Cowen & Company, the sale by Mr. Jaharis
of any direct or indirect interest in Kos Investments, or by Kos Investments
of any direct or indirect interest in Kos Holdings.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.
Prior to this offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock was determined by
negotiation among the Company and the Representatives. The factors considered in
determining the initial public offering price were prevailing market and
economic conditions, the revenues and earnings of the Company, market valuations
of other companies engaged in activities similar to the Company, estimates of
the business potential and prospects of the Company, the present state of the
Company's business operations and the Company's management.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Holland & Knight LLP, One East Broward Boulevard, Suite
1300, Fort Lauderdale, Florida 33301. Holland & Knight LLP has also provided
advice to the Company with respect to certain intellectual property matters.
Certain matters are being passed upon for the Underwriters by Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017.
EXPERTS
The consolidated financial statements included in this prospectus and this
registration statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm,
as experts in giving said report.
52
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants ........................................... F-2
Financial Statements:
Consolidated Balance Sheets at June 30, 1995 and 1996 and December 31, 1996 (unaudited) ..... F-3
Consolidated Statements of Operations for the year ended June 30, 1994, 1995 and 1996 and the
period July 1, 1988 (inception) to June 30, 1996 and for the six months ended December 31,
1995 and 1996 (unaudited) and for the period from July 1, 1988 (inception) to December 31,
1996 (unaudited) ........................................................................... F-4
Consolidated Statements of Shareholder's Equity (Deficit) for the period July 1, 1988 (incep-
tion) to June 30, 1996 and for the six months ended December 31, 1996 (unaudited) .......... F-5
Consolidated Statements of Cash Flows for the year ended June 30, 1994, 1995 and 1996 and for
the period ended July 1, 1988 (inception) to June 30, 1996 and for the six months ended De-
cember 31, 1995 and 1996 (unaudited) and for the period from July 1, 1988 (inception) to De-
cember 31, 1996 (unaudited) ................................................................ F-6
Notes to Consolidated Financial Statements ................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Kos Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Kos
Pharmaceuticals, Inc. (a development stage corporation and wholly-owned
subsidiary of Kos Holdings, Inc.) and subsidiary as of June 30, 1995 and
1996, and the related consolidated statements of operations, shareholder's
equity (deficit) and cash flows for each of the three years in the period
ended June 30, 1996 and for the cumulative period from inception (July 1,
1988) to June 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Kos Pharmaceuticals, Inc. and subsidiary as of June 30, 1995 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996, and for the cumulative period from
inception (July 1, 1988) to June 30, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
July 15, 1996, (except with respect to the
matters discussed in Note 7, as to which
the date is February 7, 1997).
F-2
<PAGE>
<TABLE>
<CAPTION>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY OF KOS HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
-------------------------------- ---------------
1995 1996 1996
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................... $ 40,973 $ 193,484 $ 357,520
Prepaid expenses and other current assets .. 78,205 165,392 233,841
--------------- --------------- ---------------
Total current assets ....................... 119,178 358,876 591,361
Fixed Assets, net ............................ 2,235,456 1,921,943 2,605,404
--------------- --------------- ---------------
Total assets ............................... $ 2,354,634 $ 2,280,819 $ 3,196,765
=============== =============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIT)
Current Liabilities:
Accounts payable .......................... $ 751,352 $ 195,299 $ 515,595
Accrued expenses ............................ 496,790 171,371 536,409
Loan from Kos Investments, Inc. ............. -- -- 8,355,000
--------------- --------------- ---------------
Total current liabilities .................. 1,248,142 366,670 9,407,004
--------------- --------------- ---------------
Minority Interest ............................ 163,869 -- --
--------------- --------------- ---------------
Commitments and Contingencies (Note 5)
Shareholder's Equity (Deficit):
Common stock, $.01 par value, 50,000,000
shares authorized, 10,000,000 shares issued
and outstanding ........................... 100,000 100,000 100,000
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued and
outstanding ............................... -- -- --
Additional paid-in capital .................. 36,507,000 58,472,323 58,472,323
Deficit accumulated in the development stage (35,664,377) (56,658,174) (64,782,562)
--------------- --------------- ---------------
Total shareholder's equity (deficit) ...... 942,623 1,914,149 (6,210,239)
--------------- --------------- ---------------
Total liabilities and shareholder's
equity (deficit) ......................... $ 2,354,634 $ 2,280,819 $ 3,196,765
=============== =============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY OF KOS HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------
1994 1995 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues ........................... $ 22,461 $ 14,300 $ --
--------------- ---------------- ----------------
Expenses:
Research and development .......... 6,662,626 8,386,872 13,815,776
General and administrative ....... 1,619,038 1,613,832 1,772,060
Expense recognized on
modification of stock option
grants (Note 6) ................. -- -- 5,436,000
--------------- ---------------- ----------------
8,281,664 10,000,704 21,023,836
--------------- ---------------- ----------------
Other (Income) Expense:
Other income ...................... (1,687) -- --
Interest (income) expense, net ... 1,058,029 1,025,559 (13,860)
Interest expense-related parties . 50,010 26,898 --
--------------- ---------------- ----------------
Total other (income) expense .... 1,106,352 1,052,457 (13,860)
--------------- ---------------- ----------------
Loss before minority interest ... (9,365,555) (11,038,861) (21,009,976)
Minority Interest .................. (164,401) 532 16,179
--------------- ---------------- ----------------
Net loss ......................... $(9,529,956) $(11,038,329) $(20,993,797)
=============== ================ ================
Net loss per Share ................. $ (0.84) $ (0.97) $ (1.85)
=============== ================ ================
Weighted Average Shares of Common
Stock Outstanding ................ 11,340,000 11,340,000 11,340,000
=============== ================ ================
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD SIX MONTHS
FROM INCEPTION ENDED JULY 1, 1988
(JULY 1, 1988) DECEMBER 31, (INCEPTION) TO
TO JUNE 30, -------------------------------- DECEMBER 31,
1996 1995 1996 1996
--------------- -------------------------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues ........................... $ 36,761 $ -- $ -- $ 36,761
--------------- --------------- --------------- ----------------
Expenses:
Research and development .......... 38,705,510 6,426,071 6,056,677 44,762,187
General and administrative ....... 8,871,358 788,842 1,936,611 10,807,969
Expense recognized on
modification of stock option
grants (Note 6) ................. 5,436,000 -- -- 5,436,000
--------------- --------------- --------------- ----------------
53,012,868 7,214,913 7,993,288 61,006,156
--------------- --------------- --------------- ----------------
Other (Income) Expense:
Other income ...................... (10,103) -- -- (10,103)
Interest (income) expense, net ... 3,413,997 (7,718) (5,182) 3,408,815
Interest expense-related parties . 130,483 -- 136,282 266,765
--------------- --------------- --------------- ----------------
Total other (income) expense .... 3,534,377 (7,718) 131,100 3,665,477
--------------- --------------- --------------- ----------------
Loss before minority interest ... (56,510,484) (7,207,195) (8,124,388) (64,634,872)
Minority Interest .................. (147,690) 837 -- (147,690)
--------------- --------------- --------------- ----------------
Net loss ......................... $ (56,658,174) $(7,206,358) $(8,124,388) $(64,782,562)
=============== =============== =============== ================
Net loss per Share ................. $ (5.00) $ (0.64) $ (0.72) $ (5.71)
=============== =============== =============== ================
Weighted Average Shares of Common
Stock Outstanding ................ 11,340,000 11,340,000 11,340,000 11,340,000
=============== =============== =============== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY OF KOS HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
DEFICIT
ACCUMULATED
ADDITIONAL IN THE
COMMON PAID-IN DEVELOPMENT
STOCK CAPITAL STAGE TOTAL
----------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Issuance of common stock .............. $100,000 $ -- $ -- $ 100,000
Capital contributions from Parent .... -- 390,000 -- 390,000
Net loss .............................. -- -- (621,814) (621,814)
----------- -------------- ---------------- ---------------
Balance at June 30, 1989 .............. 100,000 390,000 (621,814) (131,814)
Net loss .............................. -- -- (1,389,932) (1,389,932)
----------- -------------- ---------------- ---------------
Balance at June 30, 1990 .............. 100,000 390,000 (2,011,746) (1,521,746)
Net loss .............................. -- -- (2,445,506) (2,445,506)
----------- -------------- ---------------- ---------------
Balance at June 30, 1991 .............. 100,000 390,000 (4,457,252) (3,967,252)
Net loss .............................. -- -- (3,893,185) (3,893,185)
----------- -------------- ---------------- ---------------
Balance at June 30, 1992 .............. 100,000 390,000 (8,350,437) (7,860,437)
Net loss .............................. -- -- (6,745,655) (6,745,655)
----------- -------------- ---------------- ---------------
Balance at June 30, 1993 .............. 100,000 390,000 (15,096,092) (14,606,092)
Net loss .............................. -- -- (9,529,956) (9,529,956)
----------- -------------- ---------------- ---------------
Balance at June 30, 1994 .............. 100,000 390,000 (24,626,048) (24,136,048)
Capital contributions from Parent .... -- 5,745,000 -- 5,745,000
Assumption of note payable by Parent . -- 30,372,000 -- 30,372,000
Net loss .............................. -- -- (11,038,329) (11,038,329)
----------- -------------- ---------------- ---------------
Balance at June 30, 1995 .............. 100,000 36,507,000 (35,664,377) 942,623
Capital contributions from Parent .... -- 16,381,633 -- 16,381,633
Modification of options (Note 6) ..... -- 5,436,000 -- 5,436,000
Contribution of minority interest .... -- 147,690 -- 147,690
Net loss .............................. -- -- (20,993,797) (20,993,797)
----------- -------------- ---------------- ---------------
Balance at June 30, 1996 .............. 100,000 58,472,323 (56,658,174) 1,914,149
Net loss (unaudited) .................. -- -- (8,124,388) (8,124,388)
----------- -------------- ---------------- ---------------
Balance at December 31, 1996
(unaudited) ........................... $100,000 $58,472,323 $(64,782,562) $ (6,210,239)
=========== ============== ================ ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY OF KOS HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows from
Operating Activities:
Net loss .......................... $(9,529,956) $(11,038,329) $(20,993,797)
Adjustments to reconcile net loss to
net cash used in operating
activities--
Depreciation and amortization ... 260,053 409,528 522,288
Minority interest .................. 164,401 (532) (16,179)
Compensation recognized on
modification of stock option
grants ........................... -- -- 5,436,000
Changes in operating assets and
liabilities:
Prepaid expenses and other
current assets .................. (92,203) 55,729 (87,187)
Accounts payable .................. (310,472) 130,011 (556,053)
Accrued expenses .................. 514,469 362,359 (325,419)
------------- -------------- --------------
Net cash used in operating
activities ..................... (8,993,708) (10,081,234) (16,020,347)
------------- -------------- --------------
Cash Flows from
Investing Activities:
Capital expenditures .............. (1,051,152) (1,223,221) (208,775)
------------- -------------- --------------
Cash Flows from
Financing Activities:
Proceeds from issuance of common
stock ........................... -- -- --
Capital contributions received from
Parent ............................ -- 5,745,000 16,381,633
Borrowings under note payable ...... 10,050,000 5,582,000 --
Borrowings under loan from Kos
Investments, Inc. ................. -- -- --
------------- -------------- --------------
Net cash provided by financing
activities ..................... 10,050,000 11,327,000 16,381,633
------------- -------------- --------------
Net increase (decrease) in cash . 5,140 22,545 152,511
Cash and Cash Equivalents, beginning
of period .......................... 13,288 18,428 40,973
------------- -------------- --------------
Cash and Cash Equivalents,
end of period ...................... $ 18,428 $ 40,973 $ 193,484
============= ============== ==============
Supplemental Disclosure of
Cash Flow Information:
Interest paid ..................... $ 728,537 $ 1,387,377 $ --
============= ============== ==============
Supplemental Disclosure of Noncash
Information:
Transfer of note payable to Parent $ -- $ 30,372,000 $ --
============= ============== ==============
Contribution of minority interest
to paid-in capital ................ $ -- $ -- $ 147,690
============= ============== ==============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD SIX MONTHS JULY 1, 1988
FROM INCEPTION ENDED (INCEPTION) TO
(JULY 1, 1988) DECEMBER 31, DECEMBER 31,
TO JUNE 30, ----------------------------- ---------------
1996 1995 1996 1996
--------------- ------------- ------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net loss .......................... $(56,658,174) $(7,206,358) $(8,124,388) $(64,782,562)
Adjustments to reconcile net loss to
net cash used in operating
activities--
Depreciation and amortization ... 1,589,747 261,907 279,280 1,869,027
Minority interest .................. 147,690 (838) -- 147,690
Compensation recognized on
modification of stock option
grants ........................... 5,436,000 -- -- 5,436,000
Changes in operating assets and
liabilities:
Prepaid expenses and other
current assets .............. (165,392) (75,201) (68,449) (233,841)
Accounts payable .................. 195,299 (385,996) 320,296 515,595
Accrued expenses .................. 171,371 (381,703) 365,038 536,409
-------------- ------------- ------------- -------------
Net cash used in operating
activities ..................... (49,283,459) (7,788,189) (7,228,223) (56,511,682)
-------------- ------------- ------------- -------------
Cash Flows from
Investing Activities:
Capital expenditures .............. (3,511,690) (23,353) (962,741) (4,474,431)
-------------- ----------- ------------ -------------
Cash Flows from
Financing Activities:
Proceeds from issuance of common
stock ........................... 490,000 -- -- 490,000
Capital contributions received from
Parent ............................ 22,126,633 8,000,000 -- 22,126,633
Borrowings under note payable ...... 30,372,000 -- -- 30,372,000
Borrowings under loan from Kos
Investments, Inc. ................. -- -- 8,355,000 8,355,000
-------------- ------------ ------------ -------------
Net cash provided by financing
activities ..................... 52,988,633 8,000,000 8,355,000 61,343,633
--------------- ------------ ------------ -------------
Net increase (decrease) in cash . 193,484 188,458 164,036 357,520
Cash and Cash Equivalents, beginning
of period .......................... -- 40,973 193,484 --
-------------- ------------ ------------ -------------
Cash and Cash Equivalents,
end of period ...................... $ 193,484 $ 229,431 $ 357,520 $ 357,520
============== ============ ============ =============
Supplemental Disclosure of
Cash Flow Information:
Interest paid ..................... $ 3,476,267 $ -- $ -- $ 3,476,267
============== ============ ============= =============
Supplemental Disclosure of Noncash
Information:
Transfer of note payable to Parent $ 30,372,000 $ -- $ -- $ 30,372,000
============== ============ ============ =============
Contribution of minority interest
to paid-in capital ................ $ 147,690 $ -- $ -- $ 147,690
============== ============ ============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY
OF KOS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The predecessor to Kos Pharmaceutical's, Inc. (the "Company"), Kos
Holdings, Inc. ("Holdings") was incorporated in Florida on July 1, 1988 to
develop prescription pharmaceutical products principally for the
cardiovascular and respiratory markets. On June 25, 1996, the Company was
incorporated in Florida as the successor to the business of Holdings. On June
30, 1996, all of the assets and all of the liabilities of Holdings, other
than its net operating loss carryforwards, were transferred to the Company in
exchange for shares of common stock of the Company (the "Reorganization").
The Reorganization was accomplished in order to transfer the assets and
operations of Holdings to the Company while preserving Holdings' net
operating losses and related federal tax benefits for Holdings and its sole
shareholder and one of its founders. Kos Investments, Inc. ("Investments") is
the sole shareholder of Holdings. As this transaction was between entities
under common control, the transaction was accounted for on a historical cost
basis, in a manner similar to a pooling of interests.
On June 22, 1993, Holdings and Aeropharm Technology, Inc. ("Aeropharm")
entered into a letter of intent for the purchase of a controlling interest in
Aeropharm. On February 14, 1995, the transaction was completed through a stock
purchase agreement that gave control (80% ownership) of Aeropharm to Holdings.
Holdings accounted for its investment in Aeropharm as a consolidated subsidiary
from June 22, 1993. On June 20, 1996, Holdings acquired the minority interest in
Aeropharm, held by an employee of Aeropharm, in exchange for options to purchase
50,000 shares of common stock, at $7.00 per share, the estimated fair value of
the underlying shares at the date of grant. The acquisition of the minority
interest in Aeropharm was accounted for under the purchase method and the fair
value of the options granted approximated the carrying value ($147,690) of the
minority interest.
On May 6, 1996, the Company submitted a New Drug Application ("NDA") to
the U.S. Food and Drug Administration ("FDA") for, NIASPAN, its first
cardiovascular product. NIASPAN is a once-a-day, oral, solid dose
controlled-release formulation of niacin for the treatment of hyperlipidemia,
a multiple lipid disorder that is a primary risk factor for coronary heart
disease. Niacin is a water soluble vitamin that has long been recognized as
an effective pharmacological agent for the treatment of multiple lipid
disorders including elevated LDL and low HDL. The Company has conducted
extensive pharmacokinetic studies and three double-blinded, placebo
controlled pivotal trials in support of the NDA filing.
The Company expects to incur substantial additional losses in the near
term primarily due to research and development activities and the
commencement of sales and marketing efforts associated with NIASPAN. To date,
the Company has not marketed any products. Future revenues, if any, are
expected to be generated from sales of products. No assurance can be given
that the Company's product development efforts will be successfully
completed, that required regulatory approvals will be obtained, that products
under development can be manufactured at acceptable cost and with appropriate
quality or that any products can be successfully marketed. The Company is
subject to a number of other risks including, but not limited to,
uncertainties related to FDA approval of NIASPAN, uncertainties related to
market acceptance, uncertainties related to patents and trademarks,
interference and risk of infringement, uncertainties related to limited sales
and marketing experience, uncertainties related to competition and
technological changes, government regulation and no assurances of regulatory
approval, dependence on Fuisz Technologies Ltd. and other collaborations,
limited manufacturing experience and risk of scale-up, future capital needs
and uncertainty of additional funding, dependence on single sources of
supply, and no assurances of adequate third party reimbursement.
Management is actively pursuing an initial public offering of its common
stock to finance operations of the Company. In addition, the Company
continuously evaluates licensing agreements, joint development agreements and
other transactions that may result in fees or revenues to the
F-7
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY
OF KOS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. GENERAL--(CONTINUED)
Company. The likelihood of the success of the Company must be considered in
light of the uncertainty caused by problems, expenses, complications and
delays frequently encountered in connection with the development of new
business ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The consolidated financial statements include the results of Holdings
(prior to July 1, 1996), the Company and its subsidiary, Aeropharm. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS:
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less at the time of purchase to be cash and cash equivalents. As of
June 30, 1995 and 1996, and December 31, 1996, the Company had no cash
equivalents.
MINORITY INTEREST:
Minority interest represents the minority shareholder's interest in the
shareholders' equity and net loss of Aeropharm. As of June 30, 1996, the
Company owned 100% of Aeropharm, therefore, no minority interest is
reflected.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
As of June 30, 1995 and 1996, and December 31, 1996, the carrying amount
of cash and cash equivalents, prepaid expenses and other current assets,
accounts payable and accrued expenses approximates fair value due to the
short term nature of these accounts.
CONCENTRATION OF CREDIT RISK:
The Company has no significant off balance sheet concentrations of credit
risk.
DEPRECIATION AND AMORTIZATION:
Fixed assets are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets or lease
term, if shorter, as follows:
YEARS
-------------------
Furniture and equipment .................... 3-7
Computer software and hardware ............. 3-5
Laboratory and manufacturing equipment .... 3-5
Leasehold improvements ..................... Life of lease
RESEARCH AND DEVELOPMENT EXPENSES:
All research and development expenses are reflected in the Company's
consolidated statements of operations as incurred.
LOSS PER SHARE:
Loss per share is determined by dividing the net loss attributable to
holders of the Company's common stock by the weighted average number of
shares of common stock and dilutive common stock
F-8
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY
OF KOS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
equivalents outstanding after applying the treasury stock method. Common
stock equivalents include the impact of the issuance of options (see Note 6)
issued within one year prior to the date of the Company's initial public
offering (see Note 7) at exercise prices less than the assumed initial
offering price, whether or not the effects are antidilutive.
INTERIM FINANCIAL DATA:
In the opinion of the management of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of December 31, 1996, and the
results of operations for the six month periods ended December 31, 1995 and
1996. The results of operations and cash flows for the six month period ended
December 31, 1996 are not necessarily indicative of the results of operations
or cash flows which may be reported for the remainder of fiscal 1997.
INCOME TAXES:
The Company follows the Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," which requires, among other things,
recognition of future tax benefits measured at enacted rates attributable to
deductible temporary differences between financial statement and income tax
bases of assets and liabilities and to tax net operating loss carryforwards
to the extent that realization of said benefits is more likely than not. As
the net operating loss carryforwards, amounting to approximately $51,000,000,
as of the Reorganization were not transferred to the Company, the Company has
no deferred tax assets or liabilities as of June 30, 1996. Any operating
losses generated by the Company after June 30, 1996 will be available to
offset future net income, if any.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"). SFAS No. 121 will apply to the Company for the fiscal year ending June
30, 1997. The Company does not believe that SFAS No. 121 would have had a
material effect on its financial position or the results of its operations
had it been applied in the fiscal year ended June 30, 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123
applies to transactions with non-employees after December 15, 1995. The
compensation expense recognized for stock option modifications for options
held by consultants in fiscal 1996, as more fully described in Note 6, was
reflected under the provisions of SFAS 123. SFAS No. 123 will apply to
transactions with employees in fiscal 1997. As the Company intends to
continue applying the provision of APB 25 for transactions with employees, as
permitted by SFAS No. 123, the Company does not believe that SFAS No. 123
will have a material effect on its financial position or the results of its
operations.
F-9
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY
OF KOS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------ --------------
1995 1996 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment ....................... $ 246,510 $ 297,131 $ 310,284
Computer software and hardware ................ 323,094 399,847 469,105
Laboratory and manufacturing equipment ....... 1,979,922 2,055,423 2,376,250
Leasehold improvements ........................ 753,389 759,289 1,318,792
-------------- -------------- --------------
3,302,915 3,511,690 4,474,431
Less-Accumulated depreciation and amortization (1,067,459) (1,589,747) (1,869,027)
-------------- -------------- --------------
Fixed assets, net ........................... $ 2,235,456 $ 1,921,943 $ 2,605,404
============== ============== ==============
</TABLE>
4. NOTE PAYABLE
Michael Jaharis, the sole shareholder of Investments, has personally
guaranteed the repayment of a loan to Investments from certain financial
institutions. Prior to March 21, 1995, the Company was the primary borrower
under this loan, and therefore received the benefit of the personal guaranty
extended by Mr. Jaharis. As consideration for Mr. Jaharis' personal guaranty,
the Company agreed to pay Mr. Jaharis an annual fee of 0.25% of the average
amount outstanding under the loan during the Company's fiscal year. The
Company paid Mr. Jaharis $28,700 and $92,333 during the fiscal years ended
June 30, 1994 and 1995, respectively. In March 1995, the Company was released
as a borrower under the loan. The assumption of the note payable to bank has
been accounted for as a transfer to Investments and is reflected as an
increase in "Additional paid-in capital" in the accompanying 1995
consolidated balance sheet. As more fully discussed in Note 7, Investments
will continue to fund the operations of the Company through a promissory
note.
5. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has entered into three employment agreements that require
future minimum payments as follows:
YEAR ENDING JUNE 30, AMOUNT
- --------------------- -------------
1997 ................ $ 595,000
1998 ................ 430,000
1999 ................ 250,000
2000 ................ 250,000
2001 ................ 250,000
Thereafter .......... 250,000
-------------
$ 2,025,000
=============
Salary expense recorded under two of the agreements totaled approximately
$244,000, $302,000 and $355,000 during the years ended June 30, 1994, 1995
and 1996, respectively. In addition to the minimum salaries described above,
certain of the employment agreements entitle certain officers to royalties on
future sales, the aggregate amounts of which may not exceed $5,500,000. The
third employment agreement, which is for the President and Chief Executive
Officer, was not entered into
F-10
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY
OF KOS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
until July 1, 1996. Salary expense recorded under these agreements totaled
approximately $297,500 (unaudited) for the six months ended December 31,
1996.
LEASE COMMITMENTS
The Company has entered into various operating leases for the rental of
office space and laboratory facilities which expire through fiscal 1999.
Future minimum commitments under these agreements as of June 30, 1996 are as
follows:
YEAR ENDING JUNE 30, AMOUNT
- --------------------- ------------
1997 ................ $322,304
1998 ................ 267,133
1999 ................ 71,557
------------
$660,994
============
As of June 30, 1995 and 1996, standby letters of credit of $157,050 and
$65,050, respectively, were issued by a bank on the Company's behalf in favor
of the lessors as collateral for the leases which the lessors have agreed to
provide to the Company.
Rent expense under operating leases during the years ended June 30, 1994,
1995 and 1996 and for the six months ended December 31, 1996 was $388,687,
$450,890, $578,122 and $272,127 (unaudited), respectively.
CONSULTING AGREEMENT
On April 1, 1996, the Company entered into a consulting agreement with the
Vice Chairman of the Board of Directors for the formulation and evaluation of
product development strategies, negotiations for product licenses and other
responsibilities. The consulting agreement provides for an initial five-year
term and will automatically renew for each successive two-year period unless
notification by either party is given. The consultant receives $75,000 as
annual compensation and is also eligible to receive stock options.
LICENSING AND JOINT VENTURE AGREEMENTS
The Company has entered into several license agreements (the "License
Agreements") with third parties (the "Licensees") for the development of
future products. Under the License Agreements, the Company is required to
make payments to the Licensees upon completion of various milestones of each
project in order to secure exclusive rights to develop, manufacture, sell
and/or sublicense future products developed through the License Agreements.
In connection with the License Agreements, the Company recorded licensing
fees expense of approximately $470,000, $449,000, $700,000 and $75,000
(unaudited) for the years ended June 30, 1994, 1995, 1996 and for the six
months ended December 31, 1996, respectively, which are reflected in
"Research and development" in the accompanying consolidated statements of
operations. In order to maintain its rights under the License Agreements,
the Company is required to pay certain future milestone payments and licensing
fees. In the event that no milestone event occurs, the Company generally would
not be required to make any milestone payment. The Company anticipates, based on
the development efforts that have been conducted to
F-11
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY
OF KOS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
date, that it will be required to make future milestone payments and pay
licensing fees under the License Agreements as follows:
MINIMUM ADDITIONAL
YEAR ENDING JUNE 30, PAYMENT PAYMENTS
- --------------------- -------------- ------------
1997 ................ $150,000 $ 859,000
1998 ................ -- 711,000
1999 ................ -- 125,000
-------------- ------------
$150,000 $1,695,000
============== ============
Additionally, upon FDA approval of certain products, the Company is
obligated to pay up to $4,500,000 to a licensee. Milestone payments are recorded
when the milestone event occurs.
The Company has also entered into a letter of intent to form a joint
venture agreement (the "Joint Venture") with a company related to the sale of
a certain product using technology provided by that company. The Company paid
$1,000,000 for the exclusive right to use the technology. Because of the
uncertainties surrounding the use of the technology, as well as the lack of
an existing technologically feasible product with commercial viability, such
amount has been expensed and is included in "Research and development" in the
accompanying 1996 consolidated statement of operations. Within 30 days
following the filing of a NDA to the FDA for a certain product developed by
the Joint Venture, or in the event management determines such NDA filing to
be infeasible, any party to the Joint Venture investing in excess of the
other party shall be entitled to consideration and a transfer to it from the
Joint Venture of an amount not to exceed $1,250,000.
SPONSORED RESEARCH
The Company has research agreements with two universities and a research
center. The Company is primarily responsible for funding the projects, and
the university or research center is responsible for providing personnel,
equipment and facilities to conduct the research activities. The aggregate
commitment at June 30, 1996 for future payments under these agreements is
approximately $200,000 for fiscal year 1997. Expenses recorded under these
agreements totaled approximately $249,000, $379,000, $373,000 and $162,000
(unaudited) during the years ended June 30, 1994, 1995 and 1996, and for the
six months ended December 31, 1996, respectively, and are reflected in
"Research and development" in the accompanying consolidated statements of
operations.
DEVELOPMENT AGREEMENTS
The Company entered into development agreements with various third parties
during 1996. As dictated by these development agreements, the Company is
responsible for funding all required development activities. The aggregate
commitment at June 30, 1996 for future payments under these agreements is
approximately $724,000 and $200,000 for fiscal years 1997 and 1998,
respectively. Expense recorded under these agreements totaled approximately
$665,000 and $496,000 (unaudited) during the year ended June 30, 1996, and
for the six months ended December 31, 1996, respectively, and are reflected
in "Research and development" in the accompanying consolidated statements of
operations.
401(K) PLAN
The Company's Internal Revenue Code Section 401(k) Plan, known as the Kos
Savings Plan, became effective on January 1, 1994. Each employee who has
completed at least one year of service
F-12
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY
OF KOS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
with the Company and has attained age 21 is eligible to make pre-tax elective
deferral contributions each year not exceeding the greater of a specified
statutory amount or 15 percent of the employee's compensation for the year. An
employee is always 100 percent vested in the employee's elective deferral
contributions. The Company makes no contributions under this plan.
6. STOCK OPTION PLAN
During 1996, the Board of Directors of the Company adopted the Kos
Pharmaceuticals, Inc. 1996 Stock Option Plan (the "Plan"). As of June 30,
1996, a maximum aggregate total of 4,000,000 shares of Common Stock may be
subject to stock options granted or to be granted under the Plan. All
directors, officers, employees and certain related parties of the Company
designated by the Board are eligible to receive options under the Plan. The
Plan is administered by a Committee appointed by the Board of Directors of
the Company.
Each outside director of the Company will be granted an option to purchase
5,000 shares of common stock and automatically will receive an option to
purchase an additional 3,000 shares effective on each director's anniversary
date. The exercise price of such options will be the fair market value on the
later of (a) the date of an initial public offering or December 31, 1996, or (b)
the date the option is granted. As of June 30, 1996, one director had been
granted an option to purchase 5,000 shares at an established exercise price of
$7.00 per share, which is the estimated fair market value the Board of Directors
had attributed to the common stock, as determined by an appraiser. The Company
considered the provisions of SFAS No. 123 using the Black Scholes method and an
expected volatility rate of 57.6%, a risk-free interest rate of 6.11%, expected
dividends of $0 and an expected term of 4 years to approximate the related
charge to expense.
The maximum term of any option is ten years from the date of grant. All
options expire within 30 days of termination of employment.
The Company has granted options to purchase an aggregate of 2,158,000
shares to employees, consultants, management and directors, including options
granted prior to the issuance of the Plan, as follows:
OPTIONS GRANTED DATE OF GRANT DATE OF EXPIRATION EXERCISE PRICE
- ---------------- ----------------- ------------------- ---------------
750,000 August 1988(a) June 2006 $0.60
35,000 January 1989(a) July 2001 1.90
75,000 February 1990(a) June 2006 0.90
275,000 December 1992 December 2002 0.75
50,000 July 1994 July 2003 3.33
973,000 June 1996 June 2006 7.00
- -----------------------------------------------------------------------------
(a) During June 1996, the Company modified the terms of the original options
granted to an officer and two outside consultants. Included in the
accompanying consolidated statements of operations is $5,436,000 recorded
as compensation recognized as a result of this modification to the
existing option grants. For purposes of determining the values of the
options, the Company believes that the Common Stock had a value of $7.00
per share on June 30, 1996, which is the estimated fair market value the
Board of Directors had attributed to the Common Stock on June 20, 1996,
as determined by an appraiser. Compensation expense for the 750,000 options
issued to an officer was measured based on the excess of the estimated fair
market value of the Common Stock over the exercise price of the options. For
the 110,000 options issued to the two outside consultants, the Company
considered the provisions of SFAS No. 123 using the Black Scholes method and
an expected volatility rate of 57.6%, a risk-free interest rate of 6.11%,
expected dividends of $0 and an expected term of 4 years to approximate the
charge to expense for such non-employees, which amounted to approximately
$636,000.
Exercise prices of options granted were at their estimated fair market
value as of the date of grant. No options outstanding under the Plan had been
exercised as of June 30, 1996.
F-13
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION AND WHOLLY-OWNED SUBSIDIARY
OF KOS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SUBSEQUENT EVENTS
The Company has filed a Registration Statement with the Securities and
Exchange Commission relating to an initial public offering of its common
stock. The Company will utilize the net proceeds of the offering to primarily
fund research and development programs, the initial recruitment of sales
force for the anticipated commercial launch of NIASPAN, repayment of the
short-term bridge loan, and other general corporate purposes.
On July 1, 1996, the Company executed a promissory note (the "Note") in
favor of Investments in the aggregate principal amount of up to $15.0 million,
the proceeds of which will be used to fund the Company's operations until the
consummation of this offering. Under the terms of the Note, interest accrues on
the outstanding principal amount at First Union National Bank of Florida's prime
rate commencing July 1, 1996, escalating to a rate of 1% over such prime rate
during calendar year 1997, 2% over such prime rate during calendar year 1998,
and 3% over such prime rate during calendar year 1999 until maturity. As of
December 31, 1996, the Note accrued interest at a rate of 7.25% per year.
Principal and interest under the Note is due on June 30, 1999, however, the
Company may repay the Note in whole or in part prior to such date. From time to
time, at Investments' option, principal and interest outstanding under the Note
may be converted into Common Stock at a conversion price per share equal to the
initial public offering price per share. As of February 7, 1997, the Company had
borrowed $11,355,000 under this Note. Assuming the issuance only of sufficient
shares to repay the indebtedness outstanding as of December 31, 1996,
supplementary pro forma net loss per share of Common Stock would be $(0.67) for
the six month period ended December 31, 1996.
On February 7, 1997, the Company entered into an agreement with an
unaffiliated generic drug manufacturer pursuant to which the parties agreed to
resolve the effects, as between themselves, of a potential interference
proceeding by the United States Patent and Trademark Office by granting cross
licenses under their respective patent applications and patents, regardless of
whether such licenses would be required. As consideration for entering into the
agreement, the Company agreed to pay the generic manufacturer certain license
fees and royalties on the net sales of NIASPAN subject to a cap on such royalty
payments in the United States and a separate cap on such payments outside the
United States.
8. RELATED PARTY TRANSACTION
During 1995 the Company acquired certain property including used
computers, laboratory equipment, laboratory supplies and certain other office
equipment and furnishings from the Institute of Molecular Biology, Inc.
("IMB"), a company controlled by Investments. In the aggregate, such
purchases totaled approximately $83,500. Until June 1996, Daniel M. Bell, the
Company's President and Chief Executive Officer, also served as the Chairman
of the Board of Directors and Chief Executive Officer of IMB.
F-14
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
and, if give or made, such information or representations must not be relied
upon as having been authorized by the Company or any of the Underwriters or
by any other person. This Prospectus does not constitute an offer to sell or
a solicitation of any offer to buy a security other than the shares of Common
Stock offered hereby, nor does it constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which it is unlawful to make such offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ......................... 3
Risk Factors ............................... 6
The Company ................................ 15
Use of Proceeds ............................ 15
Dividend Policy ............................ 15
Capitalization ............................. 16
Dilution ................................... 17
Selected Consolidated Financial Data ...... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 19
Business ................................... 22
Management ................................. 39
Certain Transactions ....................... 46
Principal Shareholders ..................... 47
Description of Capital Stock ............... 48
Shares Eligible for Future Sale ............ 50
Underwriting ............................... 51
Legal Matters .............................. 52
Experts .................................... 52
Index to Financial Statements .............. F-1
</TABLE>
- -----------------------------------------------------------------------------
Until April 1, 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the shares of Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
4,150,000 Shares
KOS PHARMACEUTICALS, INC.
Common Stock
- -----------------------------------------------------------------------------
PROSPECTUS
- -----------------------------------------------------------------------------
COWEN & COMPANY
DILLON, READ & CO. INC.
SALOMON BROTHERS INC
March 7, 1997
