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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________
COMMISSION FILE NO. 0-23641
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 33-0-779207
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2525 DUPONT DRIVE
IRVINE, CALIFORNIA 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 246-4500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 12, 1999 was $18,241,733.*
The number of shares outstanding of the Registrant's Class A Common Stock
was 3,272,690 as of March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A in connection
with the 1999 Annual Meeting of Stockholders to be held on April 23, 1999 (the
"1999 Annual Meeting") is incorporated herein by reference into Part III of this
Report.
TRADEMARK CLAIMS
Zorac(R) and Tazorac(TM) (tazarotene) are trademarks of Allergan, Inc.
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* Excludes the Common Stock held by executive officers, directors and
stockholders whose beneficial ownership exceeds 10% of the Class A Common
Stock outstanding at December 31, 1998. Exclusion of such shares should not be
construed to indicate that any such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant or that such person is controlled by or under common control
with the Registrant.
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This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. The actual future results for Allergan
Specialty Therapeutics, Inc. ("ASTI" or the "Company") may differ materially
from those discussed here. Additional information concerning factors that could
cause or contribute to such differences can be found in this Annual Report on
Form 10-K in Part II, Item 7 entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Certain Risk Factors Related to
the Company's Business" and elsewhere throughout this Annual Report.
PART I
ITEM 1. BUSINESS
BACKGROUND
ASTI was formed by Allergan, Inc. ("Allergan") in November 1997 to research
and develop pharmaceutical products based on retinoid and neuroprotective
technologies, including the Allergan compound Memantine and other glutamate and
ion channel blockers ("Retinoid and Neuroprotective Technologies"). In March
1998, Allergan distributed all of the ASTI Class A Common Stock to holders of
Allergan's Common Stock, with such holders receiving one share of Class A Common
Stock for each 20 shares of Allergan Common Stock held (the "Distribution").
Prior to the Distribution, Allergan contributed $200 million and licensed
certain Allergan technology to ASTI, and ASTI issued to Allergan 1,000 shares of
its Class B Common Stock. As the sole holder of ASTI's outstanding Class B
Common Stock, Allergan has the option to repurchase all of the outstanding ASTI
Class A Common Stock (the "ASTI Shares") under specified conditions. In
addition, Allergan and ASTI entered into a Technology License Agreement, a
Research and Development Agreement, a License Option Agreement, a Distribution
Agreement and a Services Agreement (the "Allergan/ASTI Agreements"), each of
which is described below. To date, ASTI has not performed, and does not intend
to perform, any research, development or other activities on its own behalf, as
it pays Allergan to perform all such activities pursuant to the terms of the
Research and Development Agreement. The ASTI products currently being researched
and developed under the Research and Development Agreement are (i) Tazarotene
(oral), (ii) Memantine (in the United States), (iii) AGN 4310, and (iv) a
compound to be selected from the RAR alpha-selective agonist class of compounds
(these products and any products that may hereafter be designated as ASTI
products under the Allergan/ASTI Agreements shall be collectively referred to as
"ASTI Products"). In addition to researching and developing the ASTI Products,
ASTI is also funding Pre-Selection Work (i.e., research and pre-clinical
development projects to determine suitability as an ASTI Product) on certain
other technologies licensed to ASTI by Allergan prior to the Distribution, and,
in July 1998, Allergan proposed and ASTI accepted two additional Pre-Selection
Work projects: (i) Androgen Tears, and (ii) a retinal disease project. The Board
of Directors of ASTI has the right, with the consent of Allergan, to expand the
indications for the ASTI Products and to select additional products for research
and development. However, ASTI has no rights with respect to any topical
formulation of Tazarotene. Allergan is currently marketing a topical formulation
of Tazarotene for the treatment of psoriasis and acne in the United States under
the brand name "Tazorac" and outside of the United States under the brand name
"Zorac."
ASTI's belief in the potential efficacy of the ASTI Products is based upon
preclinical studies performed by Allergan or other third parties. ASTI has
received FDA approval to begin clinical trials on the following ASTI Products:
Memantine, AGN 4310, and Androgen Tears. Neither ASTI nor Allergan has received
FDA approval for the marketing of any of the ASTI Products. Consequently, there
can be no assurance that the ASTI Products, Pre-Selection Work projects or any
other products selected for research and development will receive necessary FDA
approvals, that either ASTI or Allergan will commence manufacturing or marketing
of any of the ASTI Products or as to when manufacturing and marketing of the
ASTI Products will commence.
In order to conduct its business, ASTI depends substantially on Allergan
and Allergan's licensors for rights to use certain Allergan technology, for
research and development activities, for administrative services and, if
Allergan exercises any license option pursuant to the License Option Agreement
between ASTI and Allergan (a "License Option"), for the commercialization of
ASTI Products. ASTI may, in the future, also perform directly, or engage other
third parties to perform on its behalf, some of these activities. However, it is
likely that Allergan will be responsible for executing substantially all of the
operational activities necessary for ASTI's business through completion of the
development stage of the ASTI Products, and that ASTI's funds
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will be used primarily to fund these activities under the Research and
Development Agreement and the Services Agreement and to pay the technology
license fee required by the Technology License Agreement (the "Technology Fee").
ASTI's Board of Directors is responsible for determining which products ASTI
will pursue, and for approving the work plans and cost estimates therefor.
ASTI's Chief Executive Officer is responsible for supervising and reviewing
Allergan's ongoing activities on behalf of ASTI. See "Risk Factors -- Dependence
on Allergan for Personnel and Facilities."
Allergan has also granted certain technology licenses and agreed to make
specified payments on sales of certain products in exchange for the payment by
ASTI of the Technology Fee and the option to independently develop certain
compounds funded by ASTI prior to the filing of an Investigational New Drug
application ("IND") with respect thereto and to license any products and
technology developed by ASTI. In the early years, ASTI's only revenues are
expected to be from investment income and fees obtained pursuant to the
Warner-Lambert collaboration agreement (discussed below). If Allergan were to
exercise its License Option for any ASTI Product, or if an ASTI Product were
commercialized by ASTI itself or by a third party on behalf of ASTI, ASTI would
derive revenues from sales of the ASTI Product or from fees paid to ASTI by
third parties for the rights to commercialize the ASTI Product.
ALLERGAN TECHNOLOGY OVERVIEW
ASTI is entitled to use certain Allergan technology (the "Allergan
Technology") in connection with research and development relating to the ASTI
Products. Allergan Technology includes all technology owned, licensed to or
controlled by Allergan relating to Retinoid and Neuroprotective Technologies,
excluding topical formulations of Tazarotene and non-U.S. rights to Memantine.
The Allergan Technology licensed to ASTI includes existing Allergan Technology
and will also include new technology developed or licensed by Allergan. The
following is a description of certain Allergan Technology that may be
incorporated in ASTI Products.
OVERVIEW OF RETINOID TECHNOLOGY
Retinoids, which include naturally occurring hormones derived from Vitamin
A and synthetic analogs, regulate a very broad range of important biological
activities including cell proliferation and differentiation, programmed cell
death, lipid metabolism and immune function. Retinoids have been shown to be of
potential therapeutic benefit in a variety of diseases including psoriasis,
acne, cancer, diabetes, emphysema and arthritis. Despite their major therapeutic
applications, the use of retinoids in clinical medicine has been limited by
unacceptable toxicities that are associated with most of the currently marketed
retinoids. However, recent advances in the understanding of retinoid mechanism
of action have provided rational approaches to the design and research and
development of new retinoid drugs with superior therapeutic indices.
Retinoids elicit their myriad biological effects by regulating gene
transcription through multiple, specific nuclear receptors termed retinoid
receptors. There are six known retinoid receptors belonging to two families, the
Retinoid Acid Receptors ("RARs") and the Retinoid X Receptors ("RXRs"), each
with three distinct subtypes (alpha, beta and gamma). These individual receptors
appear to have distinct biological functions because of different tissue
distribution patterns and target gene specificities.
Non-selective retinoid compounds that indiscriminately activate all of the
retinoid receptors cause many toxic side effects along with the therapeutic
effect in a given disease. Receptor-selective retinoids, on the other hand,
would be expected to be of therapeutic benefit in a narrower range of diseases
but also to be associated with far fewer side-effects. Thus, a
receptor-selective retinoid which will be targeted to specific diseases should
have a much better therapeutic index than the current drugs.
The fundamental technology underlying retinoids licensed to ASTI is also
cross-licensed to Ligand Pharmaceuticals Incorporated ("Ligand"), and therefore
competition from similar activities by Ligand or its collaborators in retinoids
is likely. In addition, pursuant to the agreement between Allergan and Ligand,
each party has been granted non-exclusive rights to use certain technology of
Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") with respect to any
unsynthesized ALRT compounds, provided that such license will become exclusive
with respect to any compound with respect to which an IND is filed with and
accepted by the FDA. Accordingly, no assurance can be given that Ligand will not
be the first party to file an IND with
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respect to any ALRT retinoid compound under research by ASTI, thereby preventing
ASTI and Allergan from undertaking any further research, development or
commercialization with respect to such compound.
OVERVIEW OF NEUROPROTECTIVE TECHNOLOGY AND GLAUCOMA
Vision loss in glaucoma results from damage to retinal ganglion cells, the
cells that connect the retina to the brain. Currently, the clinical management
of glaucoma is limited to surgical or pharmaceutical reduction of intraocular
pressure. In many patients, however, reduction of intraocular pressure does not
prevent progression of visual loss associated with glaucoma. Furthermore, a
significant fraction of the clinical glaucoma population has intraocular
pressure within the normal range. For this reason, efforts to develop more
effective glaucoma therapies are focused on the preservation of retinal ganglion
cells and, thereby, the prevention of blindness. The prevention of blindness in
glaucoma patients would represent a medical breakthrough. With an estimated 6 to
7 million glaucoma patients by the year 2000 worldwide, glaucoma represents a
large market opportunity.
Allergan has undertaken a rigorous study of the mechanisms which may be
responsible for glaucomatous damage to retinal ganglion cells. Allergan is
focused on two specific targets, the NMDA-type glutamate receptor and the
voltage-gated sodium channel or combination ion channel blockers, which are
physiologically well characterized and which, according to existing evidence,
may contribute to glaucomatous damage of retinal ganglion cells. Allergan
believes that these two mechanisms currently represent the best opportunities
for protection of retinal ganglion cells and, accordingly, obtained worldwide
exclusive rights to develop products containing Memantine for ophthalmic uses
from Merz in February 1997. Memantine is currently in use in Germany for the
treatment of other clinical indications and can be expected to reach
biologically active levels in the retina following oral administration. New
clinical methods that are more sensitive in detecting vision loss are important
areas of current clinical investigation. Thus, Memantine may allow a rapid path
into a clinical efficacy trial using current and novel approaches to document
vision sparing in humans. In parallel, Allergan will be developing new
neuroprotection compounds from Allergan research or in collaboration with
Cambridge NeuroSciences, Inc. ("CNSI").
THE ASTI PRODUCTS AND PRE-SELECTION WORK
ASTI Products are products recommended by Allergan, and accepted by ASTI,
for research and development under the Research and Development Agreement. Four
ASTI Products are currently under research and development by Allergan. ASTI is
also funding Pre-Selection Work on certain other technologies licensed to ASTI
by Allergan prior to the Distribution, and, in July 1998, Allergan proposed and
ASTI accepted two additional Pre-Selection Work projects: (i) Androgen Tears,
and (ii) a retinal disease project. Under the Research and Development
Agreement, ASTI reimbursed Allergan for all research and development costs of
the four ASTI Products from October 23, 1997, the date on which ALRT ceased
funding their research and development, through March 10, 1998, the date of
commencement of ASTI operations. This arrangement was intended to ensure that
research and development of the ASTI Products continued uninterrupted through
and beyond the Distribution. Commencing March 10, 1998, in order for ASTI to
continue research and development of any ASTI Product or Pre-Selection Work
project, Allergan must propose an additional work plan and cost estimate, which
work plan and estimate are subject to the approval of ASTI's independent Board
of Directors. To date, ASTI's Board has approved work plans and cost estimates
for each of the initial and two additional projects through calendar year-end
1999. ASTI's Board considers and approves work plans and budgets on a yearly
basis and monitors their progress on a quarterly basis. Under the Allergan/ASTI
Agreements, ASTI owns the ASTI Products. The Pre-Selection Work project research
and pre-clinical development work to determine the suitability of other lead
compounds and product candidates for research and development also requires
proposal and acceptance of a plan and cost estimate. See "Risk Factors -- No
Assurance of Continued Research or Development of ASTI Products."
RETINOID PRODUCTS
Allergan has already identified many classes of retinoid compounds which
are selective for receptor families (for example, RAR vs. RXR) as well as for
individual receptor subtypes (for example, RAR alpha selective and RAR beta
selective receptor subtypes). As a further advance, Allergan has identified new
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function-selective compounds such as RAR neutral antagonists and inverse
agonists. Allergan has also been successful in combining the structural features
separately required for receptor subtype and for function selectivity to produce
subtype/function selective compounds such as RAR alpha specific antagonists. As
these novel compounds become available, research is initiated in order to
identify specific therapeutic applications for the different classes of
selective compounds. Allergan evaluates these selective compounds in a variety
of pre-clinical models for efficacy in dermatology, oncology and metabolic
disease. The scope of the search for potential therapeutic applications is
further expanded by collaborations with academic laboratories in which the
compounds are evaluated in pre-clinical models in a variety of other areas
including ophthalmology (proliferative vitreoretinopathy and age-related macular
degeneration), human papilloma virus-related diseases (cervical displasia),
emphysema and restenosis. Several lead compounds and therapeutic targets have
already been identified and these are in various stages of development as
detailed below. It is also expected that ongoing research will identify newer
classes of retinoid compounds and exciting applications in human disease.
Tazarotene (oral)
Tazarotene is a potent RAR beta gamma selective agonist which was recently
introduced into the market as a topical treatment for psoriasis and acne.
Tazarotene is the first retinoid to be approved for the topical treatment of
psoriasis, and Allergan is currently marketing topical Tazarotene for the
treatment of psoriasis and acne in the United States under the brand name
"Tazorac" and outside of the United States under the brand name "Zorac."
Allergan Technology excludes, and ASTI will have no rights with respect to, any
topical formulation of Tazarotene.
Given the clear demonstration of the clinical efficacy of topical
Tazarotene in plaque psoriasis, oral Tazarotene may also be effective in the
treatment of psoriasis. It is also possible that oral Tazarotene may be an
effective agent in severe psoriasis involving extended body areas. If this were
the case and depending on its side-effect profile, it is possible that oral
Tazarotene may effectively replace acitretin and etretinate as the preferred
oral retinoid for psoriasis. Thus, if oral Tazarotene is an effective agent
which provides prolonged remission, oral Tazarotene may expand the current
limited market for oral retinoids in psoriasis.
Topical Tazarotene is also effective in treatment of mild to moderate acne,
presumably by a keratolytic mechanism similar to other topical retinoids. The
systemic retinoid, Accutane, is a very effective agent in severe acne and it is
believed to work by a sebosuppressive mechanism. Oral Tazarotene may also be
sebosuppressive in humans, which will be evaluated in a phase II study. If
effective, oral Tazarotene could be a competitor in the large market of oral
retinoids for acne. In late 1998, ASTI commenced clinical trials in acne and
psoriasis.
Oral retinoids have been shown to be of benefit in a variety of human
cancers including acute promyeloctyic leukemia and squamous cell carcinomas of
the cervix and the head and neck. After phase I/IIA studies to determine a
maximum tolerated dose, oral Tazarotene will be investigated in phase IIB
studies in several tumors, both as monotherapy and in combination with other
modalities.
AGN 4310
RAR antagonists/inverse agonists represent a completely novel class of
retinoid compounds which have a unique biology distinct from that observed for
retinoid agonists. ASTI filed an IND in late 1998 for AGN 4310, an optimized
compound from the RAR antagonists/inverse agonists for two indications (topical
antidote to systemic retinoid-induced mucocutaneous toxicity and topical
treatment of psoriasis). Mucocutaneous toxicity is an almost universally
observed and bothersome side-effect associated with the use of systemic
retinoids such as Accutane. As a consequence, an effective agent for the
treatment and prevention of this adverse effect is likely to be a well-accepted
adjunct to systemic retinoid therapy. It is well-established that mucocutaneous
toxicity induced by systemic retinoids results from activation of RARs,
particularly RAR gamma. AGN 4310 is a very potent and effective antagonist of
retinoid agonist activity at all three RARs. Also, topical AGN 4310 used at very
low doses can effectively prevent or treat the skin irritation produced by
systemic retinoids in clinically relevant animal models. Animal models have
shown that this blockage of
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topical irritation can be achieved without compromising the systemic efficacy of
retinoid agonist. Thus, AGN 4310 may be effective in human clinical studies as a
topical antidote to systemic retinoid-induced mucocutaneous toxicity. It would
be the first product introduced for this therapeutic application.
In addition to its efficacy as an antagonist of retinoid agonist action,
AGN 4310 may have pharmacological actions by itself by acting as an inverse
agonist. Inverse agonists are compounds that can actually repress the basal gene
transcriptional activity associated with unliganded nuclear receptors. Recent
studies have shown that RAR inverse agonists such as AGN 4310 function by
binding to RAR and increasing interaction between RARs and co-repressor proteins
such as NCoR. However, the subsequent molecular events have not been identified
and the pharmacology associated with these novel compounds remains largely
unexplored. Studies conducted by Allergan scientists have indicated that RAR
inverse agonists can suppress psoriasis-associated markers in human
keratinocytes induced to differentiate along a psoriasiform pathway.
Given the possibility that psoriasis is associated with defective
keratinocyte function, these data suggest that an RAR inverse agonists such as
AGN 4310 may be an effective agent for the topical treatment of psoriasis. Other
studies have suggested that AGN 4310 will function in psoriasis by a mechanism
quite distinct from that of a retinoid agonist such as Tazarotene. Since AGN
4310 is also expected to be less-irritating, it is possible that it could be an
important product for the topical treatment of psoriasis. It is also possible
that ongoing research will identify other therapeutic applications for RAR
inverse agonists.
Since endogenous retinoid signaling pathways are intimately involved in the
control of several fundamental biological processes such as cell differentiation
and proliferation, it is likely that there are pathological conditions which are
dependent on endogenous retinoids for their maintenance. Such diseases are
likely to be appropriate therapeutic targets for an RAR inverse agonists such as
AGN 4310.
RAR alpha Selective Retinoids
Allergan has also identified several series of RAR alpha subtype-specific
agonists, the first known examples of receptor subtype-specific retinoids.
Studies in pre-clinical models suggest that RAR alpha-specific agonists may be
of potential use in breast cancer and leukemia. RAR alpha-specific agonists also
inhibit the proliferation of some estrogen receptor (ER)-negative breast cancer
cell lines suggesting that they may be effective in treating ER-negative breast
cancers as well. This is of particular therapeutic significance since the
prognosis for ER-negative breast cancer patients is particularly poor. Studies
conducted in various animal models of retinoid toxicity suggest that RAR
alpha-specific retinoid agonists have significantly reduced mucocutaneous, bone
and some other general toxicities associated with non-specific retinoids.
However, RAR alpha-specific compounds still retain the hypertriglyceridmic
toxicity associated with their non-selective counterparts. This type of data
indicate that the RAR alpha-specifics may have a much improved therapeutic index
in their target diseases relative to the non-selective retinoids currently in
use. Our findings in the RAR alpha area appears to validate our fundamental
hypothesis that receptor and function selectivity can lead to compounds of
improved therapeutic ratios.
Treatment of leukemias and breast cancer is the immediate therapeutic goal
in the RAR alpha area and it is anticipated a development candidate will be
selected and development activities will commence in 1999. However, it is likely
that further research in the area and clinical studies with the development
candidate will identify other therapeutic applications for RAR alpha agonists.
In addition, the relative clean side-effect profile of RAR alpha-specific
agonists may make them useful as potential chemopreventive agents.
Other Retinoids
Research programs are also underway to identify better retinoids for the
oral treatment of acne and the oral and topical treatment of psoriasis. Allergan
scientists have also shown that it is possible to make compounds that do not
themselves activate gene transcription through RARs but can antagonize the gene
transcriptional effects of other pathogenic nuclear transcription factors such
as AP1. Such anti-AP1 function selective retinoids may be effective
anti-inflammatory agents and the development of pure anti-AP1 compounds is also
being pursued.
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RXR Agonists
RXRs function in vivo as heterodimeric partners with other nuclear
receptors including RARs. Recent research has suggested that RXRs
heterodimerized with the Peroxisome-Proliferator Activated Receptor gamma
("PPAR") may be a molecular target in functions of potential benefit in
metabolic disease. Thiazolidinediones ("TZDs") are a class of compounds of
demonstrated clinical efficacy in the treatment of Type II or non-insulin
dependent diabetes mellitus. It has recently been shown that TZDs function by
binding to the PPAR half of RXR-PPAR heterodimers and activating these
heterodimers. Allergan's research has shown that RXR ligands can also activate
RXR-PPAR heterodimers and that they are effective in well-characterized animal
models of Type II diabetes. Thus, RXR agonists effectively lower the
hyperglycemia and hyperinsulinemia observed in rodent models of diabetes
associated with disorders of leptin signaling. Moreover, the RXR agonists, like
TZD's, appear to function in these models by restoring insulin sensitivity.
Thus, RXR agonists may be a new class of anti-diabetic agents that function as
insulin sensitizers. Also, the RXR agonists give additive or synergistic effects
when used in combination with TZDs and insulin in these animal models. These
data suggest that the maximum therapeutic benefits in diabetes might be derived
by combination therapies may prevent progression to insulin dependence and may
reduce insulin requirement in Type I diabetes. Allergan has entered into a
multi-year research and development collaboration with the Parke-Davis
Pharmaceutical Research Division of Warner-Lambert Company ("Parke-Davis") to
identify, develop and commercialize up to two RXR subtype selective retinoid
compounds for the treatment of metabolic diseases, including adult onset
diabetes, insulin resistant syndromes and dyslipidemias and may develop other
RXR agonists with a collaboration partner. See "-- The Warner-Lambert
Collaboration Agreement."
Memantine
Memantine is a glutamate receptor blocker, which has been shown to protect
nerve cells from injury and death in a number of in vitro and in vivo studies.
This neuroprotective activity has been shown to be useful both for acute injury
(ischemia, trauma) and for chronic, neurodegenerative processes (dementia)
involving neurons in the central nervous system.
Glaucoma is a blinding disease characterized by death of neurons
(specifically, retinal ganglion cells) that connect the eye to the brain. This
neuronal cell death is the ultimate cause of visual loss associated with the
disease. Currently, therapy is directed toward lowering of intraocular pressure
("IOP"), one of the major risk factors for vision loss. Memantine, as a drug
directed toward preserving nerves important for vision, would directly target
the loss of visual function. As such, the drug represents a novel therapeutic
approach which is applicable to various forms of glaucoma regardless of their
etiology.
The excitatory neurotransmitter glutamate is normally involved in
interneuronal signal transmission, but in excess can be toxic to neurons. This
concept of "excitotoxicity" is widely recognized and has served as a basis for
the design of a number of novel therapeutic agents. Increased levels of
glutamate have been found, in fact, in the vitreous (the material filling the
interior of the eye) of glaucoma patients. This has led to the hypothesis that
an excessive release of glutamate in the retina is associated with glaucoma, and
may contribute significantly to retinal ganglion cell loss. Previous studies
have demonstrated that glutamate toxicity is mediated by activation of a subset
of glutamate receptors (NMDA) and the subsequent influx of calcium ions into the
nerve cells. Memantine has been shown to bind to NMDA receptors and lead to
blocking of receptor channel function. Recently, it has been determined that
Memantine is able to block NMDA receptors in the presence of increasing levels
of glutamate. By this mechanism, Memantine has been shown to protect against
glutamate toxicity both in cell culture and in animal models, while having
minimal effects on normal synaptic transmission. These studies support the use
of Memantine in glaucoma patients, where inhibition of NMDA receptors would be
expected to slow or prevent glutamate-induced excitotoxicity and the associated
loss of visual function.
Memantine has been marketed in Germany by Merz since 1983 and is registered
in 14 other countries around the world. Its licensed uses are dementia/organic
brain syndrome, Parkinson's disease and cerebral and spinal spasticity. Allergan
completed an agreement with Merz in February 1997 to purchase the clinical,
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toxicological, pharmacokinetic and chemistry data supporting the safety and
efficacy of this drug, together with the right to cross-reference Merz's U.S.
IND, for Allergan's filing purposes. Allergan filed its own U.S. IND in
September 1997. A Phase I/II safety study in glaucoma patients was begun in
October 1997. A Phase III Study is planned to begin in 1999. Given the
pioneering nature of this work, the exact duration of the trial cannot be
determined at this time. Once sufficient data is obtained from the first trial,
a decision will be made to initiate a second study to support registration. Many
NMDA antagonists have been tested in human clinical trials and have been
disappointing. Side effects are the principal reason for failure. The unique
pharmacological profile and current use in humans suggests Memantine may be
different from most NMDA antagonists; however, there can be no assurance of this
fact.
The use of Memantine in glaucoma is covered by a patent application filed
by Children's Hospital, Boston, Massachusetts ("Children's Hospital") in
December 1992. Allergan obtained exclusive rights to this technology through a
license agreement with Children's Hospital in August 1995. Memantine is
currently undergoing clinical trials in the U.S. for AIDS, dementia and
neuropathic pain.
Allergan, Allergan Pharmaceuticals (Ireland) Ltd., Inc., an affiliate of
Allergan ("Allergan-Ireland"), and certain other Allergan affiliates have
entered into a cross license agreement (the "Cross License Agreement") whereby
rights to commercialize Memantine and any improvements to the Memantine
technology in the United States have been exclusively licensed to Allergan, and
rights to commercialize Memantine and any improvements to the Memantine
technology in the rest of the world other than the United States have been
exclusively licensed to Allergan-Ireland. Pursuant to the Technology License
Agreement, Allergan has licensed to ASTI its rights under the Cross License
Agreement and Memantine has been designated an ASTI Product.
VOLTAGE-ACTIVATED SODIUM CHANNELS AND NMDA ANTAGONISTS AND OTHER ION CHANNEL
BLOCKERS
Another class of ion channels that Allergan has targeted for research are
voltage-activated sodium channels. These channels are expressed on the axons of
retinal ganglion cells. Allergan scientists speculate that this is an important
site of injury in glaucoma. Drugs which can shut down the operation of sodium
channels and/or NMDA channels may prevent or limit the extent of
neurodegeneration in animals.
Ion Channel Blockers
Research by Allergan scientists has indicated that excessive activation of
ion channels other than the NMDA-type in the ischemic retina and optic nerve may
lead to cellular calcium overload and neurodegeneration.
Allergan has entered into a collaborative relationship with CNSI to
discover, develop and commercialize compounds for use in the field of ion
channel blockers for the treatment of ophthalmic diseases and disorders.
Compounds selected by Allergan from CNSI are at a much earlier phase of the drug
discovery/development process than Memantine. CNSI compounds are currently
undergoing ocular pharmacology testing. Included in the CNSI technology licensed
to Allergan are patent rights covered by 19 granted U.S. patents and numerous
U.S. and foreign corresponding pending patent applications.
In addition, further research by Allergan scientists and universities
regarding the molecular biology, structure and function of NMDA and sodium
channels may lead to the identification of additional drug discovery targets.
These advances may facilitate the development of novel, differentiated
neuroprotective drugs.
ANDROGEN TEARS
Dry eye, or Keratoconjunctivitis Sicca (KCS), is a potentially debilitating
disease, which affects more than 30 million people worldwide. This disease
ranges in symptoms from a feeling of dryness and foreign body sensation, in its
milder forms, to extreme chronic ocular surface pain and photophobia in its more
severe forms. Patients with moderate to severe KCS quite often are unable to
watch television, drive at night or maintain their chosen profession.
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Recently, Allergan's Ocular Disease Program led a group of academic
collaborators in publishing a new hypothesis on the etiology and pathophysiology
of KCS, which relates this disease to an immune-based inflammation of the
lacrimal glands and ocular surface. Evidence suggests that a decrease in
circulating androgen levels seen with age, as in the peri-menopausal woman,
represent a loss of the hormonally imparted anti-inflammatory environment within
the lacrimal glands. Chronic irritation of the ocular surface can then initiate
the dry eye disease process through a neurogenic inflammation. This allows
proliferation of immune/inflammatory cells within the ocular surface as well as
initiation of apoptosis (programmed cell death) within the tear secreting acinar
epithelial cells in the lacrimal glands. Topical androgens have been shown to
suppress this abnormal cell death and allow for the elimination of extraneous
inflammatory cells. Topical androgens may be able to re-establish the normal
anti-inflammatory environment within the tissues of the ocular surface and
lacrimal glands and allow for resolution of patient's symptoms.
Allergan has licensed a patent in this area from Dr. David Sullivan of the
Schepen's Eye Research Institute of Harvard University which was issued in 1997.
A topical androgen is currently in early clinical trials and has been accepted
as a Pre-Selection Work project by ASTI.
RETINAL DISEASE PROJECT
A major contributor to vision loss in patients with retinal diseases, such
as age-related macular degeneration (ARMD) and diabetic retinopathy, is the
unwanted growth of new blood vessels in the retina, or sub-retinal space. To
date, no good therapy has been developed for ARMD and treatment of proliferative
diabetic retinopathy relies on laser photocoagulation, which is associated with
loss of peripheral retinal function. The overall goal of the retinal disease
project, therefore, is to identify and develop pharmacological inhibitors of
these neovascular responses.
Current research supports the concept that neovascularization depends on
the stimulation of existing vessels by factors released into the surrounding
extracellular environment. Key among these are growth factors, including VEGF,
bFGF and PDGF, which mediate their effects by activation of receptors on target
cells. Characteristic of these receptors is the presence of intrinsic tyrosine
kinase activity, which appears to be essential for these signaling pathways. A
primary therapeutic strategy, therefore, is to develop small molecule inhibitors
of receptor associated tyrosine kinase activity.
This strategy is being implemented, in part, by a collaboration with SUGEN,
Inc. ("SUGEN"). SUGEN has provided a PCR-based technology to identify key
receptors in animal models and human disease tissues and primary screens to
select and optimize lead compounds. Allergan has established models of ocular
neovascularization, both in vitro and in vivo, to test for efficacy and safety
of selected drugs. Allergan also has put in place a strong chemistry effort to
synthesize compounds based both on SUGEN leads and on external sources. These
efforts have led to the identification and validation of key pharmacological
targets and the synthesis of compounds with improved potency and selectivity for
these targets.
Neovascularization is a complex process dependent on the interaction of
numerous cellular responses. In addition to the development of receptor tyrosine
kinase inhibitors, therefore, Allergan has established a parallel research
effort focused on the role(s) of cell adhesion molecules. This preliminary phase
of pre-clinical development is centered on the identification of cell adhesion
targets in in vitro and in vivo models of ocular neovascularization, and their
interaction with the extracellular matrix. Validation of targets will be based
on pharmacological and molecular biology techniques.
ASTI has accepted the retinal disease project as a Pre-Selection Work
project.
THE WARNER-LAMBERT COLLABORATION AGREEMENT
In July 1998, Allergan entered into a multi-year research and development
collaboration with the Parke-Davis Pharmaceutical Research Division of
Warner-Lambert Company ("Warner-Lambert") to identify, develop and commercialize
up to two RXR subtype selective retinoid compounds for the treatment of
metabolic diseases, including adult-onset diabetes, insulin resistant syndromes
and dyslipidemias (the "Collaboration Agreement"). The technologies involved in
the collaboration were previously licensed by ASTI from Allergan, pursuant to
the Technology License Agreement. Pursuant to a letter agreement between
Allergan and ASTI dated October 23, 1998 (the "Collaboration Letter Agreement"),
ASTI is entitled to
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receive Pre-Selection Product Payments representing a portion of up to $104
million in technology access fees and development milestones to be received by
Allergan pursuant to the Collaboration Agreement. In addition, ASTI is entitled
to royalties on net sales of developed products, depending on actual lead
compound selection and sales results. In 1998, ASTI received $500,000 pursuant
to the Collaboration Letter Agreement, representing ASTI's portion of certain
milestone payments made by Warner-Lambert.
PRE-SELECTION WORK
Much of the Allergan Technology consists of product candidates for which
substantial additional research must be conducted before a conclusion can be
reached as to whether it is worthwhile to attempt to develop the candidate as a
therapeutic product. Such research would include such matters as determining the
molecular make-up of the candidate, determining whether and how it can be
manufactured and determining how strongly it binds to a desired receptor or
otherwise exhibits in-vitro and in-vivo effects. ASTI will spend a portion of
its funds conducting this type of broad research to identify viable product
candidates. ASTI will pay for this research in the same manner as other research
and development under the Research and Development Agreement. If a product which
is subject to Pre-Selection Work is the subject of an IND and has not been
proposed and accepted as an ASTI Product, Allergan will be free to exploit such
product (a "Pre-Selection Product") in any way it deems beneficial, including
through potential corporate partners and/or sublicensing to third parties,
subject only to its obligations to make payments to ASTI. It is currently
expected that approximately $7 million to $10 million will be spent on candidate
identification, feasibility evaluation and research relating to Pre-Selection
Product candidates each year by ASTI. See "Business of ASTI -- Potential
Research and Development Expenditures."
POTENTIAL RESEARCH AND DEVELOPMENT EXPENDITURES
Product development activity includes costs of pre-clinical studies; costs
of Phase I, Phase II and Phase III human clinical trials; and costs of
preparation and filing with the U.S. FDA (or similar governmental bodies in
other countries) to register drugs for sale. It is anticipated that if ASTI were
to fund the continued research and development of the current ASTI Products
through FDA review for marketing clearance, the funding of these activities,
together with the Pre-Selection Work expected to be undertaken by Allergan and
funded by ASTI, would require substantially all of the "Available Funds" (the
$200 million contributed to ASTI by Allergan in connection with the
Distribution, plus any investment income earned thereon, less certain research
and development costs, ASTI's administrative expenses and the Technology Fee).
Any estimates regarding costs and the use of Available Funds will change as ASTI
Products are researched and developed and as projects are added or removed as
ASTI Products. Because of the long-range nature of any pharmaceutical product
research and development plan, research and development of a particular product
or products could accelerate, slow down or be discontinued, research and
development with respect to additional ASTI Products could be commenced,
technology or products could be purchased or licensed, and other unforeseen
events could occur, all of which would significantly affect the timing and
amount of expenditures. See "Risk Factors -- No Assurance of Continued Research
or Development of ASTI Products."
RELATIONSHIP BETWEEN ASTI AND ALLERGAN
Technology License Agreement. ASTI and Allergan have entered into a
Technology License Agreement pursuant to which Allergan granted to ASTI an
exclusive (subject to certain pre-existing rights), perpetual license to use
Allergan Technology solely to conduct research and development with respect to
ASTI Products and to conduct related activities, and to commercialize such
products in the U.S. with respect to Memantine and worldwide with respect to
other ASTI Products. Until a product candidate becomes an ASTI Product, Allergan
will have full rights to exploit such product, subject only to its obligations
to pay royalties on net sales of products (other than ASTI Products) covered by
technology developed or otherwise obtained by ASTI pursuant to the Research and
Development Agreement ("Developed Technology Products") and Pre-Selection
Products.
In exchange for the license to use the existing Allergan Technology
relating to the ASTI Products and Allergan's commitment to make specified
payments on sales of certain products, ASTI will pay the
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Technology Fee to Allergan and has granted Allergan the License Option and the
option to independently develop Pre-Selection Products. The Technology Fee is
payable monthly over a period of four years and is $833,333 per month for the
first 12 months following October 23, 1997, $558,333 per month for the following
12 months, $275,000 per month for the following 12 months and $166,667 per month
for the following 12 months; provided that the Technology Fee will no longer be
payable at such time as fewer than two of the ASTI Products are being developed
by ASTI and/or have been licensed by Allergan pursuant to Allergan's exercise of
the License Option.
Either Allergan or ASTI may terminate the Technology License Agreement upon
the occurrence of a material breach of the Technology License Agreement or the
License Option Agreement by the other party which continues for 60 days after
written notice. The Technology License Agreement will automatically terminate
(a) upon termination by ASTI of the Research and Development Agreement other
than due to a breach thereof by Allergan or (b) upon termination by Allergan of
the Research and Development Agreement due to a breach thereof by ASTI.
Pursuant to the Technology License Agreement, Allergan has licensed to ASTI
rights to research and develop Memantine for commercialization in the United
States only. Commercialization rights to Memantine for the rest of the world
other than the United States have been licensed to Allergan-Ireland.
Allergan-Ireland and ASTI have entered into a cross-license agreement whereby
each has exclusively licensed to the other rights to commercialize in each
party's respective territory any improvements to the Memantine technology
developed by the licensing party.
Allergan Technology excludes, and ASTI will have no rights with respect to,
any topical formulation of Tazarotene. Allergan is currently marketing a topical
formulation of Tazarotene for the treatment of psoriasis and acne in the United
States under the brand name "Tazorac" and outside of the United States under the
brand name "Zorac."
Research and Development Agreement. Under the Research and Development
Agreement, Allergan has agreed to perform diligently all work necessary to
conduct the activities agreed upon by Allergan and ASTI. Allergan is not
required to devote any specific amount of time or resources to research and
development activities under the Research and Development Agreement, and
Allergan expects to devote a substantial amount of its time and resources to
activities for its own account. Activities under the Research and Development
Agreement are undertaken pursuant to work plans and cost estimates proposed by
Allergan and accepted by ASTI. ASTI may approve all or any portion of a proposed
work plan and cost estimate or may determine not to approve any proposed work
plan and cost estimate. ASTI is not obligated to fund research and development
of ASTI Products or Pre-Selection Work in excess of amounts reflected in
approved work plans and cost estimates. Allergan is not required to undertake
activities that would result in research and development costs exceeding those
in approved work plans and cost estimates.
Under the Research and Development Agreement, ASTI is expected to utilize
substantially all of the Available Funds to reimburse Allergan for its
fully-burdened cost of activities undertaken pursuant to such agreement and
Pre-Selection Work (the "Research and Development Costs"). Research and
Development Costs are determined on the same basis as charged by Allergan to its
pharmaceutical company clients, and Allergan will recognize reimbursement of
such amounts as research and development revenue. The corresponding research and
development expenses of Allergan will offset this revenue. Under the Research
and Development Agreement, ASTI also may use Available Funds for licensing
technology, products or therapeutic agents from third parties and for the
research and development of ASTI Products with third parties; provided, however,
that Allergan's consent will be required if such activities involve Allergan
Technology or could affect Allergan's rights under any of the Allergan/ASTI
Agreements or Allergan's rights as a holder of the ASTI Class B Common Stock.
Any agreements between ASTI and third parties relating to ASTI Products or
Developed Technology must include appropriate provisions for the protection of
Allergan Technology and Developed Technology and Allergan's rights under the
Allergan/ASTI Agreements. Subject to the foregoing, the amount and nature of the
work to be performed by third parties will be determined by ASTI.
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ASTI has agreed to use diligent efforts to research and develop ASTI
Products in accordance with approved work plans and cost estimates under the
Research and Development Agreement, most likely by paying Allergan or third
parties to perform research and development services. ASTI is required to spend
all Available Funds under the Research and Development Agreement. Prior to
expenditure, ASTI will invest Available Funds in certain types of high quality
marketable securities. ASTI may not encumber, pledge or otherwise take any
action with respect to Available Funds that could prevent the full expenditure
of such funds under the Research and Development Agreement.
Unless ASTI agrees otherwise, all ASTI Products will be owned by ASTI or,
in the case of a product licensed from a third party (or a product incorporating
a therapeutic agent licensed from a third party), exclusively licensed to ASTI,
in each case subject to the License Option. Any such exclusive license will be
worldwide, will include the right to sublicense and will grant rights to ASTI
that are substantially similar to those rights ASTI would have as the owner of
such product. As between Allergan and ASTI, Allergan will own all Developed
Technology, including patents, subject to ASTI's exclusive license to use
Developed Technology to select and develop ASTI Products and to conduct related
activities, and to commercialize ASTI Products. Allergan will determine whether
and to what extent to seek patent protection for Developed Technology. If
Allergan declines to seek patent protection for any technology, ASTI will not
have the right to do so. The costs of obtaining and maintaining patents covering
Developed Technology during the term of the Research and Development Agreement
are to be included as Research and Development Costs under the Research and
Development Agreement.
Allergan will make payments with respect to Developed Technology Products
("Developed Technology Royalties") to ASTI, on a country-by-country basis, equal
to the sum of (i) 1% of Net Sales of such Developed Technology Product, plus
(ii) 10% of any Sublicensing Revenues with respect to such Developed Technology
Product. Subject to Allergan's payment buy-out option, Developed Technology
Royalties will be payable with respect to a Developed Technology Product in any
country until expiration of the last to expire of the relevant patent or
patents.
Allergan will make payments with respect to Pre-Selection Products
("Pre-Selection Product Payments") to ASTI equal to the sum of (i) 1% of Net
Sales of such Pre-Selection Product, plus (ii) 10% of any Sublicensing Revenues
with respect to such Pre-Selection Product. Subject to Allergan's payment
buy-out option, Pre-Selection Product Payments will be payable with respect to a
Pre-Selection Product until seven years after the first commercial sale of such
Pre-Selection Product in the first Major Market Country in which such product is
commercially sold.
In the case where Allergan is required to make payments with respect to a
product that is both a Pre-Selection Product (by virtue of ASTI having funded
Pre-Selection Work therefor) and a Developed Technology Product (by virtue of
the issuance of a patent covering such product which claims Developed
Technology) in any country, the payment due for any period with respect to such
product will be limited to the sum of (i) 1% of Net Sales, plus (ii) 10% of
Sublicensing Revenues.
In determining the Developed Technology Royalties and Pre-Selection Product
Payments due to ASTI, Net Sales by Allergan will be reduced by the amount of any
license payments or similar payments due to third parties from Allergan with
respect to such Developed Technology Product or Pre-Selection Product. It is
possible that, to develop certain products using Developed Technology or
Pre-Selection Products, licenses or other arrangements with third parties may be
necessary or appropriate. Such arrangements could require payments by Allergan
that would reduce payments owed to ASTI.
Allergan has the option to buy out the right of ASTI to receive Developed
Technology Royalties and Pre-Selection Product Payments with respect to any
Developed Technology Product or Pre-Selection Product, in each case, on either a
country-by-country or worldwide basis.
A country-by-country buy-out option may be exercised for any Developed
Technology Product or Pre-Selection Product in any country at any time after the
end of the twelfth calendar quarter during which the product was commercially
sold in such country. The buy-out price will be 15 times the payments made by or
due from Allergan to ASTI with respect to sales of such product in such country
for the four calendar
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quarters immediately preceding the quarter in which the buy-out option is
exercised. The global buy-out option may be exercised for any Developed
Technology Product or Pre-Selection Product at any time after the end of the
twelfth calendar quarter during which the product was commercially sold in
either the United States or two other Major Market Countries. The global buy-out
price will be (i) 20 times (a) the payments made by or due from Allergan to ASTI
for the relevant product, plus (b) such payments as would have been made by or
due from Allergan to ASTI if Allergan had not exercised any country-specific
buy-out option with respect to such product, in each case, for the four calendar
quarters immediately preceding the quarter in which the global buy-out option is
exercised, less (ii) any amounts previously paid to exercise any country-
specific buy-out option with respect to such product.
The Research and Development Agreement will terminate upon the exercise or
expiration of the Purchase Option; provided, however, that Allergan's obligation
to pay Developed Technology Royalties and Pre-Selection Product Payments will
continue if the Purchase Option expires unexercised. Either party may terminate
the Research and Development Agreement if the other party (i) breaches a
material obligation thereunder or under the Technology License Agreement, the
License Option Agreement or any license thereunder (if such breach continues for
60 days after written notice by the terminating party), or (ii) enters into any
proceeding, whether voluntary or involuntary, in bankruptcy, reorganization or
similar arrangement for the benefit of creditors. In addition, ASTI's
expenditures under the Research and Development Agreement relating to an ASTI
Product in any country will terminate after exercise of the License Option for
such ASTI Product in such country if the development of such ASTI Product is
being continued by Allergan, alone or with a third party, and if Allergan elects
not to include ASTI in the continuing development activities related to the ASTI
Product. If Allergan does include ASTI in such development activities, ASTI may
continue to fund all or a portion of Research and Development Costs, even after
any arrangement with the third party has been executed, subject to ASTI's
continued approval of the work plans and cost estimates for the ASTI Product.
License Option Agreement. Pursuant to the License Option Agreement, ASTI
has granted the License Option to Allergan pursuant to which Allergan may, on a
product-by-product and country-by-country basis, obtain from ASTI a perpetual,
exclusive license (with the right to sublicense) to research, develop, make,
have made and use an ASTI Product and to sell and have sold such product (a
"Licensed Product") in the country or countries as to which the License Option
is exercised (the "Territory"). Allergan may exercise the License Option with
respect to any ASTI Product on a country-by-country basis at any time until (i)
with respect to the United States, 30 days after FDA clearance to market such
ASTI Product in the United States and (ii) with respect to all other countries,
90 days after the earlier of (a) clearance by the appropriate regulatory agency
to market such ASTI Product in such country, or (b) clearance by the FDA to
market the ASTI Product in the United States. The License Option will expire, to
the extent not previously exercised, 30 days after the expiration of the
Purchase Option. Allergan must exercise the License Option for any country prior
to the date of the first commercial sale of the ASTI Product in such country.
Even if Allergan exercises its License Option with respect to an ASTI Product,
ASTI may continue to fund the development of such product to the extent proposed
by Allergan and accepted by ASTI's Board of Directors.
If Allergan exercises the License Option for an ASTI Product, ASTI and
Allergan will enter into a License Agreement with respect to such product
(thereafter a "Licensed Product"), and Allergan will be required to use diligent
efforts to complete the research and development of and to commercialize such
Licensed Product in each Major Market Country covered by the License Agreement.
Allergan will devote to its commercialization efforts the same resources as
other pharmaceutical companies of similar size devote to products with similar
market potential and similar relative importance in their product portfolios and
may use reasonable discretion in allocation of its resources in performing such
obligations.
Allergan will make payments (the "Product Payments") to ASTI with respect
to each Licensed Product as follows: (a) if the Licensed Product is sold by
Allergan, royalties of up to a maximum of 6% of Net Sales of the Licensed
Product determined as follows: (i) 1% of Net Sales of the Licensed Product, plus
(ii) an additional 0.1% of such Net Sales for each full $1 million of Research
and Development Costs of the Licensed Product paid by ASTI; and (b) if the
Licensed Product is sold by a third party, sublicensing fees of up to a maximum
of 50% of Sublicensing Revenues with respect to such Licensed Product determined
as follows:
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(i) 10% of such Sublicensing Revenues, plus (ii) an additional 1% of
Sublicensing Revenues for each full $1 million of Research and Development Costs
of the Licensed Product paid by ASTI. For purposes of determining the payments
due for any quarter, Research and Development Costs will be determined as of the
last day of the immediately preceding calendar quarter. Because the marketing
expenses associated with a newly introduced product during the first few years
after launch are generally significantly higher than those for an established
product, the Product Payments will not exceed 3% of Net Sales, on a quarterly
basis, for the first twelve calendar quarters during which the Licensed Product
is commercially sold in the first Major Market Country. As a result of this
provision, if a Licensed Product were to be cleared for marketing in a country
or countries that are not Major Market Countries prior to marketing clearance in
the first Major Market Country and Product Payments in such countries would
exceed 3% of Net Sales, the Product Payment rates in such countries will not
exceed 3% for the first twelve calendar quarters during which the Licensed
Product is commercially sold in the first Major Market Country.
In determining the payments due to ASTI with respect to any Licensed
Product, Net Sales by and Sublicensing Revenues of Allergan will be reduced by
the amount of any license or similar payments made by or due from Allergan to
third parties with respect to sales of such Licensed Product in the Territory.
It is possible that, to develop the ASTI Products, licenses or other
arrangements with third parties may be necessary or appropriate. Such
arrangements could also require payments by Allergan that would reduce the
Product Payments owed to ASTI.
Subject to Allergan's buy-out option described below, Product Payments will
commence on the date of the first commercial sale of such Licensed Product in
any country for which the License Option has been exercised. Allergan will make
such Product Payments, with respect to all countries for which the License
Option has been exercised, until 10 years after the first commercial sale of the
Licensed Product in the first Major Market Country in which such product is
commercially sold.
Allergan has the option to buy out ASTI's right to receive Product Payments
for any Licensed Product on either a country-by-country or global basis. A
country-specific buy-out option may be exercised for any Licensed Product at any
time after the end of the twelfth calendar quarter during which the product was
commercially sold in such country. The global buy-out option may be exercised
for any Licensed Product, for all countries for which Allergan has exercised the
License Option, at any time after the end of the twelfth calendar quarter during
which the product was commercially sold in either the United States or two other
Major Market Countries. The buy-out price in the case of a country-specific
buy-out will be 15 times the Product Payments made by or due from Allergan to
ASTI with respect to such Licensed Product in such country for the four calendar
quarters immediately preceding the quarter in which the buy-out option is
exercised. The buy-out price in the case of a global buy-out will be (i) 20
times (a) the Product Payments made by or due from Allergan to ASTI with respect
to the Licensed Product, plus (b) such Product Payments as would have been made
by or due from Allergan to ASTI if Allergan had not exercised any
country-specific buy-out option with respect to such Licensed Product, in each
case for the four calendar quarters immediately preceding the quarter in which
the global buy-out option is exercised, less (ii) any amounts previously paid to
exercise any country-specific buy-out option with respect to such Licensed
Product. In either case, the buy-out price will be computed as if Product
Payments were not limited to 3% of Net Sales during early marketing as described
above. At the time Allergan exercises the global buyout option for any Licensed
Product, the License Option for such product will expire for all countries for
which it has not been exercised.
If Allergan exercises the License Option for any ASTI Product, Allergan
will continue to own and have the right to use any clinical supplies, materials
and other assets purchased, manufactured or developed for use in the development
of such ASTI Product under approved work plans and cost estimates (the
"Development Assets"), without any additional payment to or reimbursement of
ASTI. To the extent Allergan does not exercise the License Option for any ASTI
Product prior to its expiration, or to the extent Allergan notifies ASTI that it
will not exercise its License Option for any ASTI Product, Allergan must make
Development Assets relating to such ASTI Product available to ASTI at no charge,
unless such Development Assets are being used under the Research and Development
Agreement.
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During the term of the License Agreement for a Licensed Product, Allergan
will provide quarterly reports to ASTI detailing payments due for such period
with respect to the Licensed Product. Such reports will be due 90 days after the
end of each calendar quarter and will indicate the quantity and dollar amount of
Net Sales of or Sublicensing Revenue relating to the Licensed Product, or other
consideration in respect of Net Sales, during the quarter covered by such
report. No more than once in each calendar year upon reasonable notice and
during regular business hours, at ASTI's expense, Allergan is required to make
available for inspection by an independent public accountant selected by ASTI
such records of Allergan as may be necessary to verify the accuracy of reports
and payments made under the License Agreement. Allergan must provide similar
reports and records with respect to all Developed Technology Products and
Pre-Selection Products.
A License Agreement may be terminated by ASTI in the event that Allergan
(i) breaches any material obligation under the License Agreement (which breach
continues for a period of 60 days after written notice by ASTI) or (ii) enters
into any proceeding, voluntary or involuntary, in bankruptcy, reorganization or
similar arrangement for the benefit of its creditors. Allergan may terminate a
License Agreement as to any country upon 30 days' written notice to ASTI.
To the extent Allergan does not exercise the License Option with respect to
any ASTI Product, ASTI will retain exclusive rights to develop and commercialize
such ASTI Product.
Purchase Option. Under ASTI's Restated Certificate of Incorporation,
Allergan has an exclusive, irrevocable option to purchase all, but not less than
all, of the issued and outstanding ASTI Class A Common Stock (the "Purchase
Option"). Allergan may exercise the Purchase Option by written notice to ASTI at
any time during the period beginning immediately after the Distribution and
ending on December 31, 2002; provided that such date will be extended for
successive six month periods if, as of any June 30 or December 31 beginning with
June 30, 2001, ASTI has not paid or accrued expenses for at least 95% of all
Available Funds pursuant to the Research and Development Agreement. The Purchase
Option will in any case terminate on the 90th day after the date (the "Statement
Date") on which Allergan receives notice that the amount of cash and marketable
securities held by ASTI is less than $15 million. If the Purchase Option is
exercised, the exercise price (the "Purchase Option Exercise Price") will be the
greatest of:
(a) (i) 25 times the aggregate of (a) all worldwide payments made by
and all worldwide payments due to be made by Allergan to ASTI with respect
to all Licensed Products, Developed Technology Products and Pre-Selection
Products for the four calendar quarters immediately preceding the quarter
in which the Purchase Option is exercised (the "Base Period") and (b) all
payments that would have been made and all payments due to be made by
Allergan to ASTI during the Base Period if Allergan had not previously
exercised its payment buy-out option with respect to any product; provided,
however, that, for the purposes of the foregoing calculation, for any
product which has not been commercially sold during each of the four
calendar quarters in the Base Period, Allergan will be deemed to have made
Product Payments, Developed Technology Royalties and Pre-Selection Product
Payments to ASTI for each such quarter equal to the average of the payments
made during each of such calendar quarters during which such product was
commercially sold, less (ii) any amounts previously paid to exercise any
payment buy-out option for any product;
(b) the fair market value of 500,000 shares of Allergan Common Stock
determined as of the date Allergan provides notice of its intention to
exercise its Purchase Option;
(c) $250 million less the aggregate amount of all Technology Fee
payments and Research and Development Costs paid or incurred by ASTI as of
the date the Purchase Option is exercised; or
(d) $60 million.
In each case, the amount payable as the Purchase Option Exercise Price will
be reduced to the extent, if any, that ASTI's liabilities at the time of
exercise (other than liabilities under the Research and Development Agreement,
the Services Agreement and the Technology License Agreement) exceed ASTI's cash
and cash equivalents and short-term and long-term investments (excluding the
amount of Available Funds remaining at such time). For this purpose, liabilities
will include, in addition to liabilities required to be reflected on ASTI's
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financial statements under generally accepted accounting principles, certain
contingent liabilities relating to guarantees and similar arrangements.
Allergan must pay the Purchase Option Exercise Price in cash. For the
purpose of determining the Purchase Option Exercise Price, the fair market value
of Allergan Common Stock shall be deemed to be the average of the closing sales
price of Allergan Common Stock on the New York Stock Exchange for the 20 trading
days ending with the trading day that is two trading days prior to the date of
determination.
The closing of the acquisition of the ASTI Class A Common Stock pursuant to
exercise of the Purchase Option will take place on a date selected by Allergan,
but no later than 60 days after the exercise of the Purchase Option unless, in
the judgment of Allergan, a later date is required to satisfy any applicable
legal requirements or to obtain required consents. Between the time of exercise
of the Purchase Option and the time of closing of the acquisition of the ASTI
Class A Common Stock, ASTI may not, without Allergan's consent, incur additional
debt, dispose of assets, pay or declare any dividends or operate its business
other than in the ordinary course.
At Allergan's election, ASTI may redeem on such closing date the ASTI Class
A Common Stock for an aggregate redemption price equal to the final Purchase
Option Exercise Price. Any such redemption would be in lieu of Allergan paying
the final Purchase Option Exercise price directly to holders of ASTI Class A
Common Stock, and would be subject to Allergan providing the final Purchase
Option Exercise Price to ASTI to allow ASTI to pay the redemption price.
In the event that prior to Allergan's exercise of the Purchase Option, the
number of outstanding shares of Allergan Common Stock is increased by virtue of
a stock split or a dividend payable in Allergan Common Stock or the number of
such shares is decreased by virtue of a combination or reclassification of such
shares, then the number of shares of Allergan Common Stock used to compute the
Purchase Option Exercise Price (if the Purchase Option Exercise Price is the
fair market value of 500,000 shares of Allergan Common Stock) shall be increased
or decreased, as the case may be, in proportion to such increase or decrease in
the number of outstanding shares of Allergan Common Stock.
Distribution Agreement. Under the Distribution Agreement, Allergan
contributed $200 million in cash to ASTI prior to the Distribution, and
distributed the ASTI Class A Common Stock to holders of Allergan Common Stock.
Under the Distribution Agreement, Allergan has agreed to indemnify ASTI's
officers and directors to the same extent such persons are entitled to
indemnification under ASTI's Restated Certificate of Incorporation if Allergan
exercises the Purchase Option.
Services Agreement. ASTI and Allergan have entered into a Services
Agreement pursuant to which Allergan has agreed to provide ASTI with
administrative services, including accounting and legal services, and other
services as mutually agreed on a fully-burdened cost reimbursement basis.
The initial term of the Services Agreement expired on December 31, 1998,
but such agreement was renewed and will continue to be renewed automatically for
successive one-year terms during the term of the Research and Development
Agreement, until six months after the expiration of the Purchase Option. ASTI
may terminate the Services Agreement at any time upon 60 days' written notice.
GOVERNMENTAL REGULATION
All ASTI Products, Developed Technology Products and Pre-Selection Products
will require clearance by the FDA and comparable agencies in other countries
before they can be marketed. During the research and development stage and as
required, INDs for all new products will be filed with the FDA prior to the
commencement of initial (Phase I) clinical testing in human subjects in the
United States. In some instances this process could result in substantial delay
and expense.
After Phase I/II testing, which is intended to demonstrate the safety and
functional characteristics of a product, extensive efficacy and safety studies
in patients must be conducted. After completion of Phase III clinical testing,
an NDA is submitted, and its clearance involves an extensive review process.
There can be no marketing in the United States of any product for which an NDA
has been submitted until that NDA has
16
<PAGE> 17
been accepted for filing and cleared by the FDA. It is impossible to determine
the amount of time that will be required to obtain clearance from the FDA to
market any product or the cost of obtaining such clearance.
Whether or not FDA clearance has been obtained, marketing clearance of a
product by the relevant regulatory authorities must be obtained in each foreign
country before the product may be marketed in that country. The clearance
procedures vary from country to country, and the time required may be longer or
shorter than that required for FDA clearance. In many foreign countries, pricing
and reimbursement approvals are also required. Although there are certain
procedures for unified filing in the European Community, in general each country
has its own procedures and requirements.
All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must conform with "current Good
Manufacturing Practices," the FDA regulations governing the production of
pharmaceutical products. These regulations govern a range of activities
including manufacturing, packaging, quality assurance and recordkeeping. Other
FDA regulations govern labeling and advertising materials. From time to time,
the FDA and other federal, state and local government agencies may adopt
regulations that affect the manufacturing and marketing of pharmaceutical
products. Environmental regulations will also affect the manufacture of such
products. Pharmaceutical products and their manufacture often use chemicals and
materials that may be classified as hazardous or toxic and/or require special
handling and disposal. Allergan undertakes to minimize releases into the
environment, and exposure of its employees and the public, to such materials.
The cost of these activities continues to increase. Some of the therapeutic
agents used in ASTI Products, Developed Technology Products and Pre-Selection
Products may also be regulated by the United States Drug Enforcement
Administration.
PATENTS
ASTI believes that Allergan's current patents, and patents that may be
obtained in the future, are important to ASTI's operations.
Patent protection generally has been important in the pharmaceutical
industry, and the commercial success of ASTI Products, Pre-Selection Products
and Developed Technology Products may depend, in part, upon Allergan's ability
to obtain patent protection. Although Allergan's existing patents, pending
patents, and any patents obtained in the future may be of importance to ASTI,
there can be no assurance that any additional patents will be issued or that any
patents now or hereafter issued will be of commercial benefit.
Although a patent has a statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to such validity or as to
the enforceable scope of the claims therein, and the validity and enforceability
of a patent after its issuance by the United States Patent Office can be
challenged in litigation. If the outcome of such litigation is adverse to the
owner of the patent, third parties may then be able to use the invention
pertaining to the patent, in some cases without payment. There can be no
assurance that patents covering ASTI Products, Developed Technology Products or
Pre-Selection Products, if and when issued, will not be infringed or
successfully avoided through design innovation.
It is also possible that third parties will obtain patents or other
proprietary rights that might be necessary or useful to Allergan or ASTI. In
cases where third parties are the first to invent a particular product or
technology, it is possible that those parties will obtain patents that will be
sufficiently broad so as to prevent Allergan or ASTI from using certain
Developed Technology or other Allergan Technology or from marketing certain
products. If licenses from third parties are necessary and cannot be obtained,
commercialization of such products could be delayed or prevented. Third parties
may claim that ASTI Products infringe their patents; in such event Allergan or
ASTI would need to defend against such claims. Defense of such claims could be
costly and time consuming. If licenses to the third party's patents are
available, the payments required by the third parties could be significant.
In addition, ASTI may use substantial unpatented technology. There can be
no assurance that others will not develop similar technology. Allergan licenses
certain intellectual property from third parties which it will sublicense to
ASTI pursuant to the Technology License Agreement. Specifically, Allergan has
licensed certain rights to its retinoid technology from ALRT and certain rights
to the technology underlying
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<PAGE> 18
Memantine from Children's Medical Center Corporation and Merz. In addition,
Allergan has licensed certain ion channel blocker technology from CNSI. Under
the terms of certain of its license agreements, Allergan may be obligated to
exercise diligence and make certain royalty and milestone payments as well as
incur costs related to filing and prosecuting the underlying patents. Each
agreement is terminable by either party upon notice if the other party defaults
in its obligations. Should Allergan default under any of its agreements,
Allergan and therefore ASTI may lose its right to market and sell products based
upon such licensed technology. In addition, there can be no assurance that
Allergan's licensors will meet their obligations to Allergan pursuant to such
licenses. In such event, ASTI's results of operations and business prospects
would be materially and adversely affected. See "Risk Factors -- Reliance on
Proprietary Technologies; Unpredictability of Patent Protection."
FACILITIES AND PERSONNEL
ASTI is not expected to hire a significant number of employees or to
acquire significant property or assets prior to completion of the development
stage of the ASTI Products. However, pursuant to the Research and Development
Agreement, Allergan has been engaged by ASTI to research and develop human
pharmaceutical products under work plans and cost estimates recommended by
Allergan and accepted by ASTI. Decisions as to whether and/or when to hire
employees, purchase property or assets, perform administrative functions, engage
Allergan to perform administrative services under the Services Agreement, engage
others to do so or engage third parties other than or in addition to Allergan to
perform research and development activities will be made by ASTI.
COMPETITION
Any ASTI Product successfully developed under the Research and Development
Agreement will face competition from other therapies for the same indications.
Competitors potentially include any of the world's pharmaceutical and
biotechnology companies. Allergan is also free to develop competitive products
for its own account. The fundamental technology underlying retinoids licensed to
ASTI is also cross-licensed to Ligand and therefore competition from similar
activities by Ligand in retinoids is likely. In addition, pursuant to the
agreement between Allergan and Ligand, each party has been granted non-exclusive
rights to use the ALRT technology with respect to any unsynthesized compounds,
provided that such license will become exclusive with respect to any compound
with respect to which an IND is filed with and accepted by the FDA. Accordingly,
no assurance can be given that Ligand will not be the first party to file an IND
with respect to any retinoid compound under research by ASTI, thereby preventing
ASTI and Allergan from undertaking any further research, development or
commercialization with respect to such compound. See "Risk Factors --
Competition."
EMPLOYEES
At December 31, 1998, ASTI had no full-time employees, and all of the
Company's executive officers are affiliated with Allergan, Inc. ("Allergan"),
the holder of all of the Company's outstanding Class B Common Stock.
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<PAGE> 19
EXECUTIVE OFFICERS
The executive officers of ASTI and their ages as of March 1, 1999 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William C. Shepherd..... 60 Chairman of the Board, President and
Chief Executive Officer
Douglas S. Ingram....... 36 General Counsel and Secretary
Dwight J. Yoder......... 53 Chief Financial Officer
</TABLE>
Officers are appointed by and hold office at the pleasure of the Board of
Directors.
Mr. Shepherd has been President and Chief Executive Officer and a Director
of the Company since March 1998. He also served as Chairman of the Board of
Allergan from January 1996, and as Allergan's President and Chief Executive
Officer from 1992, until his retirement effective January 1, 1998. Since his
retirement, Mr. Shepherd has served as a consultant to Allergan. Mr. Shepherd
first joined Allergan in 1966 and from 1984 to 1991, was its President and Chief
Operating Officer. He is a director of Furon Company, a leading designer,
developer and manufacturer of highly engineered products made primarily from
specially formulated high performance polymer materials, and serves on the Board
of Directors of the Orange County Performing Arts Center and the National
Children's Eye Care Foundation. Mr. Shepherd is also a member of the governing
Board of Pharmaceutical Partners for Better Health Care.
Mr. Ingram has been the Secretary and General Counsel of the Company since
October 1998. He also has been the Associate General Counsel of Allergan, Inc.
("Allergan") since August 1998, and its Assistant Secretary since November 1998.
Prior to that, Mr. Ingram was Allergan's Assistant General Counsel from January
1998 and Senior Attorney and Chief Litigation Counsel of Allergan from March
1996, when he first joined Allergan. Prior to joining Allergan, Mr. Ingram was,
from August 1988 to March 1996, an attorney with the Orange County office of the
law firm of Gibson, Dunn & Crutcher.
Mr. Yoder has been the Chief Financial Officer of the Company since its
formation in November 1997 and had been the Chief Financial Officer of Allergan
Ligand Retinoid Therapeutics, Inc. from July 1995 until November 1997. Mr. Yoder
has also been Senior Vice President and Controller of Allergan since July 1996
and was its Vice President and Controller from 1990, when he first joined
Allergan.
ITEM 2. PROPERTIES
ASTI's offices are located at Allergan's principal offices at 2525 Dupont
Drive, Irvine, California 92612. ASTI does not own or lease any properties.
ITEM 3. LEGAL PROCEEDINGS
From time to time, ASTI may be involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Annual Report on Form 10-K, the Company is not a party to any legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of Class A Common Stock are subject to the Purchase Option. See
"Relationship Between ASTI and Allergan -- Purchase Option" under Part I above.
The Class A Common Stock of ASTI is traded on the Nasdaq National Market
under the symbol "ASTI." The following table sets forth, for the period from
March 10, 1998, the date on which the Company's Class A Common Stock was first
traded on the Nasdaq National Market, through December 31, 1998, the high and
low sales prices for the Class A Common Stock, as reported on the Nasdaq
National Market. Such quotations represent inter-dealer prices without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ---- ---
<S> <C> <C>
Fourth Quarter.............................................. $ 9 7/8 $ 8 1/4
Third Quarter............................................... 10 5/8 9
Second Quarter.............................................. 12 1/2 10
First Quarter (from March 10, 1998)......................... 13 9
</TABLE>
The last sales price for the Company's Class A Common Stock, as reported by
the Nasdaq National Market on March 12, 1999, was $9 3/4.
At March 12, 1999, there were approximately 6,800 holders of record of the
Class A Common Stock. This number does not reflect persons or entities who hold
their Class A Common Stock in nominee or "street name" through various brokerage
firms.
The Company has not declared or paid any cash dividends on its Class A
Common Stock to date. ASTI is prohibited from using Available Funds to pay
dividends on the Class A Common Stock and, accordingly, does not expect to pay
any dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements of the Company and related notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
CUMULATIVE PERIOD
PERIOD FROM FROM
NOVEMBER 12, 1997 NOVEMBER 12, 1997
(DATE OF INCEPTION) YEAR ENDED (DATE OF INCEPTION)
IN THOUSANDS, EXCEPT SHARE DATA TO DECEMBER 31, 1997 DECEMBER 31, 1998 TO DECEMBER 31, 1998
------------------------------- -------------------- ----------------- --------------------
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues........................... $ -- $ 9,043 $ 9,043
Costs and expenses
Research and development......... -- 35,886 35,886
Technology fees.................. -- 6,520 6,520
General and administrative
expenses...................... -- 933 933
---- ---------- ----------
Total cost and
expenses............... -- 43,339 43,339
---- ---------- ----------
Net loss........................... $ -- $ (36,808) $ (36,808)
==== ========== ==========
Basic and diluted loss per share... $ -- $ (11.24) $ (11.24)
==== ========== ==========
Basic and diluted shares
outstanding...................... 100 3,273,690 3,273,690
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
IN THOUSANDS DECEMBER 31, 1997 DECEMBER 31, 1998
------------ ----------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash....................................... $ 1 $ --
Investments................................ -- 158,667
Total assets............................... 1 165,137
Payable to Allergan, Inc................... -- 4,509
Total liabilities.......................... -- 4,804
Total stockholders' equity................. 1 160,333
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
ASTI was formed in November 1997. Allergan contributed a total of $200
million in cash to ASTI in March 1998. Through December 31, 1998, ASTI's funds
were used primarily to fund activities conducted under the Research and
Development Agreement with Allergan and to reimburse Allergan for the Research
and Development Costs relating to the ASTI Products and Pre-Selection Work.
Remaining funds will be used primarily to continue the funding of activities
under the Research and Development Agreement with Allergan. At the time of its
formation, ASTI was projected to spend its funds over a five-year period. As
spending on research and development is subject to a number of factors
influencing the rate of spending, the actual time required to expend all funds
could vary significantly from the original plan. See also "No Assurance of
Continued Research or Development of ASTI Products" at page 23 for further
discussion of factors impacting the rate of ASTI spending on research and
development.
ASTI is not expected to require facilities or capital equipment of its own
during the term of the Research and Development Agreement. Pending the use of
ASTI's cash resources for the research and development activities described in
this Annual Report on Form 10-K, ASTI has invested such resources in investment
grade securities including money market funds, equity securities and debt
instruments of financial institutions and corporations with strong credit
ratings.
There can be no assurance, particularly given the existence of the
Allergan/ASTI Agreements, that ASTI will be able to raise any additional
capital. Such additional capital, if raised, would most likely reduce the per
share proceeds available to holders of ASTI Shares if the Purchase Option were
to be exercised. See "Relationship Between ASTI and Allergan -- Purchase
Option."
OPERATIONS
From ASTI's formation and continuing through completion of the development
stage of the ASTI Products or until Allergan exercises its Purchase Option,
ASTI's operations will be conducted largely pursuant to the Allergan/ASTI
Agreements. See "Relationship Between ASTI and Allergan."
ASTI's revenues consist primarily of interest and investment income (which
has been included in Available Funds). In later years, ASTI may receive revenues
through the commercialization of ASTI Products either from Allergan in the form
of Product Payments if Allergan were to exercise its License Option for any ASTI
Product, or otherwise if Allergan's License Option for any ASTI Product were to
expire unexercised and ASTI were to commercialize the product alone or with a
third party. ASTI also may receive revenues in the form of Developed Technology
Royalties or Pre-Selection Product Payments and has received, to date, $500,000
in Pre-Selection Product payments in connection with a collaboration agreement
between Allergan and Warner-Lambert (see note 4 to Financial Statements).
However, ASTI is not expected to earn substantial revenues, other than interest
and investment income, unless or until ASTI Products or, to a lesser extent,
Pre-Selection Products or Developed Technology Products are successfully
commercialized. As a result of the foregoing factors, it is anticipated that
ASTI will incur substantial losses which will likely be recurring.
21
<PAGE> 22
ASTI's expenses largely have been and will in the future be incurred under
the Allergan/ASTI Agreements. ASTI will have research and development expenses
as a result of (i) the payment of Research and Development Costs under the
Research and Development Agreement, most likely through reimbursements to
Allergan, and (ii) payment of the Technology Fee to Allergan under the
Technology License Agreement. The Technology License Agreement provides that the
Technology Fee will be payable monthly by ASTI over a period of four years and
will be $833,333 for each of the 12 months following October 23, 1997, $558,333
per month for the following 12 months, $275,000 per month for the following 12
months and $166,667 per month for the following 12 months; provided that the
Technology Fee will no longer be payable at such time as fewer than two ASTI
Products are being researched or developed by ASTI and/or have been licensed by
Allergan. The Technology Fee is for ASTI's use of Allergan Technology existing
as of the date of the Technology License Agreement or during the term of the
Research and Development Agreement. The Technology Fee payment amounts are based
upon the expected value of the originally transferred technology. The value of
the technology transferred is expected to decrease as ASTI further develops the
technology on its own. The Technology Fee will be expensed by ASTI on a
straight-line basis over 48 months.
Pursuant to the Research and Development Agreement, Allergan charges ASTI
for both "direct" and "indirect" Research and Development Costs based on
Allergan's internal R&D Project Accounting System, as well as an amount equal to
10% of such direct and indirect costs representing an allocation of Allergan
corporate overhead.
Direct costs include third party contract costs, such as those expenses
paid to outside vendors which can be directly identified to a specific research
and development program or project.
Indirect costs include the fully absorbed cost of labor which can be
specifically identified with or physically traced to a project using the
internal Allergan Project Accounting System. The fully absorbed cost of labor
included with indirect costs consists of actual labor hours charged to ASTI
projects plus research and development overhead costs of approximately 200% to
250% of such actual labor hours charged. The research and development overhead
allocations are based upon Allergan's historical overhead experience arising
from its research and development activities and include only overhead costs
incurred by Allergan's Research and Development department.
In addition, in order to fully and fairly allocate an appropriate portion
of Allergan's general corporate overhead to projects undertaken by Allergan on
behalf of ASTI, an amount equal to 10% of the fully absorbed cost of labor for
each ASTI project is added to the amount charged by Allergan to ASTI. Such costs
are separate and distinct from the direct and indirect costs charged to research
and development identified in the Research and Development Agreement. Such costs
are charged to ASTI by Allergan for the purpose of recovery of such costs
applicable to ASTI projects.
Items included in general corporate overhead include human resources,
accounting, treasury, payroll, accounts payable, legal, accounts receivable,
procurement, tax and common area maintenance costs. None of these services is
performed within Allergan's Research and Development department. As a result,
such costs are in addition to the costs incurred within research and development
as described in the Research and Development Agreement. A portion of the costs
of these services calculated to be attributable to Allergan's Research and
Development department comprises the 10% allocation of Allergan corporate
overhead. The 10% proportionate share is based on the number of Research and
Development department personnel relative to total personnel at Allergan's
corporate headquarters.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
The Company believes that certain statements made by the Company in this
report and in other reports and statements released by the Company constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as comments which express the Company's
opinions about trends and factors which may impact future operating results.
Disclosures which use words such as the Company "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to
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<PAGE> 23
differ materially from expectations. Any such forward-looking statements,
whether made in this report or elsewhere, should be considered in context with
the various disclosures made by the Company about its businesses including,
without limitation, the factors discussed below.
In addition to those risks identified elsewhere in this Annual Report on
Form 10-K, the Company's business and results of operations are subject to other
risks, including the following risk factors:
NEW COMPANY. ASTI is a newly formed company and is subject to the risks
inherent in the establishment of a new business enterprise in the biotechnology
industry. ASTI will incur substantial losses for several years due to the
long-term nature of the research and development of pharmaceutical products
through clinical testing and the regulatory process, which losses may never be
recovered.
NO ASSURANCE OF CONTINUED RESEARCH OR DEVELOPMENT OF ASTI PRODUCTS. There
can be no assurance that the ASTI Board of Directors will continue the funding
of the research and development of all of the current ASTI Products or
Pre-Selection Work, or that any ASTI Products can be successfully researched,
developed and/or commercialized within the anticipated cost estimates or time
frames, if at all. Certain of the ASTI Products are at critical stages of
research and development, and technical and clinical outcomes are impossible to
predict. Because of the long-range nature of any pharmaceutical product research
and development plan, research and development of a particular product or
project could accelerate, slow down or be discontinued, and other unforeseen
events could occur, all of which would significantly affect the timing and
amount of ASTI's expenditures on a particular product, or in total. As a result,
estimates of costs and timing of research and development programs and for the
use of Available Funds may not be accurate. There can be no assurance that
Allergan will recommend, or that ASTI will approve, additional products for
research and development as ASTI Products beyond the initial ASTI Products.
Although ASTI has received from Allergan a license to use Allergan
Technology for the purpose of researching, developing and commercializing ASTI
Products, some or all of the ASTI Products may require new technologies or
enhancements or modifications to existing Allergan Technology, and there can be
no assurance that such technology can or will be successfully developed or
acquired. Even if appropriate technology is available or developed, there can be
no assurance that such ASTI Products will be successfully researched or
developed (or be researched or developed in a timely fashion) or be proven to be
safe and efficacious in clinical trials.
NEED FOR REGULATORY CLEARANCE. All ASTI Products, Developed Technology
Products and Pre-Selection Products will require FDA clearance before such
products may be lawfully marketed in the United States. Applications for FDA
clearance must be based on costly and extensive clinical trials designed to
demonstrate safety and efficacy. Clearance to market such products will also be
required from corresponding regulatory authorities in foreign countries before
such products may be marketed in those countries. Such clearance often involves
pricing and reimbursement approvals in addition to clearance based on safety and
efficacy. Delay in obtaining FDA and/or foreign regulatory clearance or pricing
or reimbursement approvals for any such product may have a material adverse
effect on the commercial success of such product. There can be no assurance that
the necessary regulatory clearances and approvals will be obtained in a timely
fashion or, if obtained, that such clearances and approvals will not be revoked
or withdrawn.
NO ASSURANCE OF SUFFICIENCY OF FUNDS OR AVAILABILITY OF ADDITIONAL
FUNDS.Allergan has contributed $200 million in cash to ASTI. Allergan has no
obligation to contribute additional funds to ASTI, and, to the best of ASTI's
knowledge, has no present intention to do so. It is anticipated that if ASTI
were to fund the continued research and development of the ASTI Products through
FDA review for marketing clearance, the funding of these activities, together
with any Pre-Selection Work undertaken by Allergan and/or ASTI and funded by
ASTI, would require substantially all of the Available Funds. There can be no
assurance that ASTI will have sufficient funds to complete the research and
development of any or all of the ASTI Products.
Allergan's rights under the Allergan/ASTI Agreements may limit ASTI's
ability to raise funds, or may prevent ASTI from doing so, if ASTI needs
additional funds to continue or complete research and development of any ASTI
Product. If ASTI were to attempt to raise funds following the expiration of the
Purchase Option, ASTI would have very little cash, few assets and an
undeterminable number of products
23
<PAGE> 24
under research and development. Allergan would at that time have the unilateral
option to license any or all ASTI Products for such countries for which
Allergan's License Option had not previously expired. Third parties might
therefore be reluctant to lend money to ASTI, or to invest in ASTI.
NO ASSURANCE OF SUCCESSFUL MANUFACTURING OR MARKETING. Even if ASTI
Products are developed and receive necessary regulatory clearances and
approvals, there can be no assurance that the ASTI Products will be successfully
manufactured for clinical trials or successfully manufactured or marketed for
commercial sale. To be successfully marketed, any ASTI Product must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. Any significant delays in the completion of
validation and licensing of expanded or new facilities could have a material
adverse effect on the ability to continue clinical trials of and ultimately to
market ASTI Products on a timely and profitable basis. If Allergan does not
exercise its License Option for an ASTI Product (and does not exercise the
Purchase Option), ASTI will have to make alternative arrangements for
manufacturing that ASTI Product, and there can be no assurance that ASTI will be
able to do so.
If Allergan exercises its License Option for any ASTI Product, Allergan may
need to develop and/or expand its marketing capabilities to commercialize such
Licensed Product effectively. If Allergan exercises its License Option for any
ASTI Product, and does not at the time the product is to be commercialized have
a sales force in the relevant country or countries, Allergan will need to
arrange for marketing by third parties outside of the United States, and, if the
product is not within Allergan's target markets at such time, within the United
States. If Allergan does not exercise its License Option for an ASTI Product
(and does not exercise the Purchase Option), ASTI will need to find other means
to commercialize that ASTI Product not involving Allergan, and there can be no
assurance that ASTI will be able to do so.
At the present time, ASTI does not have, nor, through the development stage
of the ASTI Products, does it expect to develop, any manufacturing or marketing
capability. If ASTI decides to manufacture or market one or more ASTI Products
itself, ASTI will need substantial additional funds. There is no assurance that
additional funds will be available, or will be available on attractive terms,
and Allergan has no obligation to supply any additional funds to ASTI. In
addition, ASTI may not use Available Funds for this purpose without Allergan's
consent.
If either Allergan or ASTI seeks a third party to manufacture or market an
ASTI Product, there can be no assurance that satisfactory arrangements can be
successfully negotiated or that any such arrangements will be on commercial
terms acceptable to Allergan or ASTI. In addition, even if ASTI decides to
license any ASTI Product to a third party, agreements with that third party, if
available, may be on terms less favorable to ASTI than the terms of the
Allergan/ASTI Agreements.
Even if acceptable manufacturing and marketing resources are available,
there can be no assurance that any ASTI Products will be accepted in the
marketplace. There can be no assurance that there will be adequate reimbursement
by health insurance companies or other third party payors for any ASTI Products
that are marketed.
NO ASSURANCE OF EXERCISE OF ALLERGAN'S OPTIONS. Allergan is not obligated
to exercise the License Option for any ASTI Product or to exercise the Purchase
Option, and Allergan will exercise any such option only if it is in Allergan's
best interest to do so. The timing of the exercise of the Purchase Option is
within Allergan's sole discretion, and Allergan may choose to exercise the
Purchase Option at a time when the Purchase Option Exercise Price is as low as
possible. Because the contractual relationship between Allergan and ASTI
contemplates that Allergan will perform research and development activities on
behalf of ASTI, in the event of Allergan's failure to exercise the Purchase
Option, ASTI would be required to seek alternative research and development
facilities, either independently or with a third party. There can be no
assurance that ASTI would be able to obtain access to adequate research and
development facilities in such event on a timely basis, on acceptable terms, or
at all. The timing of the exercise of the License Option with respect to any
Licensed Product is also within Allergan's sole discretion and thereafter
research, development and funding of any such product will be controlled by
Allergan.
24
<PAGE> 25
RELIANCE ON PROPRIETARY TECHNOLOGIES; UNPREDICTABILITY OF PATENT
PROTECTION. Patent protection generally has been important in the pharmaceutical
industry. Therefore, ASTI's financial success may depend in part upon Allergan
obtaining patent protection for the technologies incorporated in ASTI Products.
Allergan will determine which patent applications to pursue, and the expense of
obtaining and maintaining patents covering Developed Technology will be paid by
ASTI during the term of the Research and Development Agreement.
However, there can be no assurance that patents will be issued covering any
products, or that any existing patents or patents issued in the future will be
of commercial benefit. In addition, it is impossible to anticipate the breadth
or degree of protection that any such patents will afford, and there can be no
assurance that any such patents will not be successfully challenged in the
future. If Allergan is unsuccessful in obtaining or preserving patent
protection, or if any products rely on unpatented proprietary technology, there
can be no assurance that others will not commercialize products substantially
identical to such products.
Patents have been issued to third parties covering various therapeutic
agents, products and technologies. There can be no assurance that any ASTI
Products, Developed Technology Products or Pre-Selection Products will not
infringe patents held by third parties. In such event, licenses from such third
parties would be required, or their patents would have to be designed around.
There can be no assurance that such licenses would be available or that they
would be available on commercially attractive terms, or that any necessary
redesign could be successfully completed.
Allergan licenses certain intellectual property from third parties which it
will sublicense to ASTI pursuant to the Technology License Agreement. Under the
terms of certain of its license agreements, Allergan may be obligated to
exercise diligence and make certain royalty and milestone payments as well as
incur costs related to filing and prosecuting the underlying patents. Each
agreement is terminable by either party upon notice if the other party defaults
in its obligations. Should Allergan default under any of its agreements,
Allergan and therefore ASTI may lose its right to market and sell products based
upon such licensed technology. In addition, there can be no assurance that
Allergan's licensors will meet their obligations to Allergan pursuant to such
licenses. In such event, ASTI's results of operations and business prospects
would be materially and adversely affected.
COMPETITION. ASTI Products, Developed Technology Products and Pre-Selection
Products are likely to face competition from other therapies for the same
indications. Competitors potentially include any of the world's pharmaceutical
and biotechnology companies. Many pharmaceutical companies have greater
financial resources, technical staffs and manufacturing and marketing
capabilities than Allergan or ASTI. A number of companies have developed and are
developing competing technologies and products. To the extent that ASTI
Products, Developed Technology Products and Pre-Selection Products incorporate
therapeutic agents that are off-patent or therapeutic agents marketed by
multiple companies, such products will face more competition than products
incorporating proprietary therapeutic agents.
The fundamental technology underlying retinoids licensed to ASTI is also
cross-licensed to Ligand Pharmaceuticals Incorporated (Ligand) and therefore
competition from similar activities by Ligand and its collaborators in retinoids
is likely. In addition, pursuant to an agreement between Allergan and Ligand,
each party has been granted non-exclusive rights to use any unsynthesized
compounds developed by ALRT provided that such license will become exclusive
with respect to any compound for which an IND is filed with and accepted by the
FDA. Accordingly, no assurance can be given that Ligand will not be the first
party to file an IND with respect to any retinoid compound under research by
ASTI, thereby preventing ASTI and Allergan from undertaking any further
research, development or commercialization with respect to such compound.
POTENTIAL CONFLICTS OF INTEREST BETWEEN ALLERGAN AND ASTI. Because Allergan
may develop and/or market products (including Developed Technology Products and
Pre-Selection Products) for its own account, independent of ASTI, that compete
directly with ASTI Products, Allergan and ASTI may have conflicting interests
with respect to certain products and/or certain markets. In addition, ASTI
Products, Developed Technology Products and Pre-Selection Products may compete
with one another. Allergan Technology excludes, and ASTI will have no rights
with respect to, any topical formulation of Tazarotene. Allergan is
25
<PAGE> 26
currently marketing a topical formulation of Tazarotene for the treatment of
psoriasis and acne in the United States under the brand name "Tazorac" and
outside of the United States under the brand name "Zorac."
DEPENDENCE ON ALLERGAN FOR PERSONNEL AND FACILITIES. ASTI will depend
substantially on Allergan for research and development activities to be
performed under the Research and Development Agreement. Although ASTI may
perform directly, or engage other third parties to perform on its behalf, some
of these activities, it is likely that Allergan will be responsible for
executing substantially all of ASTI's research and development activities. While
Allergan believes that its current and planned personnel and facilities will be
adequate for the performance of its duties under the R&D Agreement, such
personnel will perform services in the same facilities for Allergan itself.
Subject to Allergan's obligation to use diligent efforts under the R&D
Agreement, Allergan may allocate its personnel and facilities as it deems
appropriate. Allergan's own research and development activities may restrict the
resources that otherwise would be available for performing Allergan's duties
under the Research and Development Agreement.
RELATIONSHIP BETWEEN ASTI AND ALLERGAN MAY LIMIT ASTI'S ACTIVITIES AND
MARKET VALUE. The terms of the Allergan/ASTI Agreements and ASTI's Restated
Certificate of Incorporation were not determined on an arm's-length basis and
certain terms may limit ASTI's activities and its market value. ASTI's Restated
Certificate of Incorporation prohibits ASTI from taking or permitting any action
that might impair Allergan's rights under the Purchase Option. Prior to the
expiration of the Purchase Option, ASTI may not, without the consent of the
holders of ASTI Class B Common Stock, merge or liquidate, or sell, lease,
exchange, transfer or dispose of any substantial assets, or amend its Restated
Certificate of Incorporation to alter the Purchase Option, ASTI's authorized
capitalization, or the provisions of the Restated Certificate of Incorporation
governing ASTI's Board of Directors. Because Allergan owns all of the
outstanding Class B Common Stock, Allergan is able to influence significantly or
control the outcome of any of the foregoing actions requiring approval by the
Class B stockholders of ASTI. The ability of Allergan to significantly influence
or control such matters, together with the provisions of ASTI's Restated
Certificate of Incorporation eliminating the right of the ASTI stockholders to
call special meetings of stockholders, could affect the liquidity of the ASTI
Shares and have an adverse effect on the price of the ASTI Shares, and may have
the effect of delaying or preventing a change in control of ASTI, including
transactions in which stockholders might otherwise receive a premium for their
shares over the current market price. Neither the terms of the ASTI/Allergan
Agreements nor ASTI's Restated Certificate of Incorporation prohibit Allergan
from transferring its ASTI Class B Common Stock. The special rights accorded to
the holder or holders of the ASTI Class B Common Stock will expire upon
expiration of the Purchase Option.
So long as the Purchase Option is exercisable, the market value of the ASTI
Shares will be limited by the Purchase Option Exercise Price. The Purchase
Option Exercise Price was determined by Allergan, giving consideration to the
structure of the Distribution, ASTI's planned business, the Allergan/ASTI
Agreements, advice given by Merrill Lynch, Pierce, Fenner & Smith Incorporated,
and such other factors as Allergan deemed appropriate.
The Purchase Option Exercise Price was not determined on an arm's-length
basis.
The existence of the Purchase Option and Allergan's rights as holder of the
ASTI Class B Common Stock may inhibit ASTI's ability to raise capital.
Additional capital raised by ASTI, if any, would most likely reduce the per
share proceeds available to holders of ASTI Shares if the Purchase Option were
exercised. The existence of the Purchase Option and Allergan's rights as the
holder of the ASTI Class B Common Stock may inhibit a change of control and may
make an investment in ASTI Shares less attractive to certain potential
stockholders, which could adversely affect the liquidity and market value of
ASTI Shares.
If Allergan exercises its License Option for any ASTI Product, Allergan
will have the right to commercialize the product with third parties on such
terms as Allergan deems appropriate. In such event, payments from Allergan to
ASTI with respect to the ASTI Product will be based solely on Sublicensing
Revenues received from such third parties.
26
<PAGE> 27
COMMON MANAGEMENT. Each of the current executive officers of ASTI is
employed by or retained as a consultant to Allergan and receives compensation
solely from Allergan, which may further contribute to Allergan's ability to
influence significantly or control the outcome of actions taken by ASTI.
LIMITATION ON ASTI'S ABILITY TO LICENSE PRODUCTS TO THIRD PARTIES. ASTI has
granted Allergan the License Option, which is exercisable on a
product-by-product and country-by-country basis. During the term of the License
Option for each ASTI Product, ASTI will not be able to license such ASTI Product
to any party other than Allergan. Furthermore, ASTI may perform research with
respect to product candidates which become ASTI Products only if recommended by
Allergan and accepted by ASTI. In particular, it is expected that Allergan will
perform Pre-Selection Work with respect to various product candidates. If such
product candidates do not become ASTI Products, ASTI will have no rights with
respect thereto except the right to receive limited royalties from Allergan on
commercial sales of such products, if any.
POSSIBLE DILUTION; REDUCTION OF PER SHARE PURCHASE OPTION EXERCISE
PRICE. All ASTI Shares issued by ASTI after the Distribution will be subject to
the Purchase Option, and the Purchase Option Exercise Price will not increase as
a result of any such issuance. Accordingly, if additional ASTI Shares were to be
issued, the percentage of the Purchase Option Exercise Price payable with
respect to each ASTI Share in the event Allergan exercises the Purchase Option
would be reduced. Liabilities, including any debt issued by ASTI, but excluding
any accounts payable to Allergan, will reduce the Purchase Option Exercise Price
to the extent that such liabilities exceed ASTI's cash, cash equivalents, and
short-term and long-term investments (excluding Available Funds), unless repaid
or discharged by ASTI prior to exercise of the Purchase Option.
NO DIVIDENDS. ASTI's Restated Certificate of Incorporation prohibits the
payment of dividends from Available Funds.
THIRD PARTY REIMBURSEMENT AND HEALTH CARE REFORM. The commercial success of
any ASTI Products and Pre-Selection Products will be heavily dependent upon
whether the use of such products is reimbursable. There can be no assurance that
Medicare and third-party payors will authorize or otherwise budget reimbursement
for such usage at the current authorized levels. Furthermore, federal and state
regulations govern or influence the reimbursement to health care providers of
fees and capital equipment costs in connection with medical treatment of certain
patients. There can be no assurance that action taken by the federal government,
if any, with regard to health care reform will not have a material adverse
effect on ASTI. If any actions are taken by the federal government, such actions
could adversely affect the prospects for future sales of ASTI's products.
YEAR 2000 COMPLIANCE. Most businesses, including ASTI, are faced with a
potentially serious threat to their operations, known as the "year 2000 issue"
which has been widely publicized. The year 2000 issue is a general term used to
describe the various problems arising from the inability of computers to
properly identify the year associated with information. This problem could
potentially cause system interruptions or failures or result in systems
providing incorrect data. The effect of the year 2000 issue could impact the
performance of operations within the Company as well as the Company's
relationships with third parties, including vendors and customers who could also
experience year 2000 compliance issues.
ASTI understands the importance of identifying and addressing Year 2000
compliance issues and places a high priority on the project. However, inasmuch
as ASTI relies almost entirely upon Allergan's operating and accounting systems
to manage and track research and development activities, ASTI relies upon
Allergan's efforts to ensure that its systems will be Year 2000 compliant.
Allergan has formed a Year 2000 task force (the "Y2K Task Force") which ASTI
will monitor and from which an ASTI officer will obtain ongoing status reports.
The Y2K Task Force is assessing internal operations and the operations of
significant suppliers, vendors, and other providers of goods and services.
Although the certification process is not yet complete, it has begun and,
based on the findings to date, Allergan has indicated that its Y2K Task Force
currently believes Allergan's operating and accounting systems will be Year 2000
compliant without material impact on the financial position, results of
operations or cash flows of either Allergan or ASTI. However, given that
Allergan cannot control or thoroughly assess the compliance of its third party
suppliers, vendors, providers of goods and services, or governmental agencies
with
27
<PAGE> 28
which it interacts or upon which it relies, no assurance can be made that
Allergan, and in turn, ASTI, will not be affected by the inability of some
computer systems and programs to properly process the year 2000 and beyond.
ASTI has not incurred expenses to date to promote or ensure Year 2000
compliance. ASTI does not anticipate that any future expenses to remedy any Year
2000 issues will be material to ASTI's financial position, results of operations
or cash flows.
In the event that Allergan's operating and accounting systems are not Year
2000 compliant or if any of Allergan's significant suppliers, vendors, other
providers of goods or services, or governmental agencies with which it interacts
or upon which it relies, are not Year 2000 compliant, ASTI's financial condition
and/or results of operations could be materially adversely affected. ASTI has
not yet prepared any contingency plans in the event of a problem relating to the
Year 2000 issue. Once the Y2K Task Force completes its contingency plans, ASTI
will determine whether additional contingency plans are necessary.
PRODUCT LIABILITY AND INSURANCE. ASTI is subject to the potential product
liability risks which are inherent in the testing, manufacturing and marketing
of human therapeutic products. ASTI currently does not have product liability
insurance, but should ASTI directly market any products, it will acquire
appropriate product liability insurance. There can be no assurance that ASTI
will be able to obtain product liability insurance at commercially reasonable
rates, or that any insurance ASTI may obtain can be obtained on acceptable
terms, or that insurance will provide adequate coverage against potential
liabilities.
HAZARDOUS MATERIALS. ASTI's research and development activities are
conducted by Allergan on ASTI's behalf and involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although ASTI
believes that Allergan's safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of an accident, ASTI could be held liable
for any damages that result and any such liability could exceed the resources of
ASTI. ASTI may be required to reimburse Allergan for substantial costs it incurs
to comply with environmental regulations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASTI does not use derivative financial instruments in its non-trading
investment portfolio. The Company's primary investment objective is preservation
of capital in order to fund research and development of potential pharmaceutical
products incurred pursuant to the Company's agreement with Allergan, Inc. (See
note 4 to Financial Statements). As such, the Company invests its excess cash in
money market funds, equity securities and debt instruments of financial
institutions and corporations that have at least an "A" or equivalent credit
rating. Interest and investment income earned on the Company's investment
portfolio is most sensitive to fluctuations in the general level of U.S.
interest rates. The Company mitigates interest rate risk by a program of
diversification so that exposure to risks relating to a single security or
investment manager is minimal. Further, the Company invests in money market
funds and debt instruments with varying maturity dates to correspond to
anticipated research and development expenses. These securities typically bear
minimal credit risk and ASTI has not experienced any losses on its investments
to date due to credit risk.
At December 31, 1998, the Company had investments in equity securities with
a fair market value of $14,157,000 and such investments are subject to price
risk. The Company's equity securities are generally invested in companies that
have a history of paying dividends. The Company addresses price risk by a
program of diversification so that exposure to risks relating to a single
security is minimal.
28
<PAGE> 29
The following table provides information about the Company's investment
portfolio as of December 31, 1998.
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAIN LOSS VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Commercial paper and money market
funds............................. $ 5,709,000 $ 4,000 $ -- $ 5,713,000
Certificates of deposit............. 19,621,000 68,000 -- 19,689,000
U.S. government debt securities..... 57,706,000 457,000 -- 58,163,000
Corporate debt securities........... 60,800,000 145,000 -- 60,945,000
Equity securities................... 14,205,000 -- (48,000) 14,157,000
------------ -------- -------- ------------
$158,041,000 $674,000 $(48,000) $158,667,000
============ ======== ======== ============
</TABLE>
The amortized cost, estimated fair value of investments and range of rates
of return of debt securities at December 31, 1998, by contractual maturity, are
presented below. Investments in equity securities are classified as due after
three years. Actual maturities may differ from contractual maturities because
the issuers of the securities may have the right to prepay obligations without
prepayment penalties. Further, all of the Company's investments are classified
as available-for-sale, and the Company may instruct its professional investment
managers to liquidate any or all of its investments prior to their contractual
maturity dates.
<TABLE>
<CAPTION>
PERCENTAGE
AMORTIZED ESTIMATED RATES OF RETURN
COST FAIR VALUE (RANGE)
------------ ------------ ---------------
<S> <C> <C> <C>
Due in one year or less................... $ 70,454,000 $ 70,521,000 4.64%-13.25%
Due after one year through three years.... 59,978,000 60,459,000 5.38%-8.71%
Due after three years..................... 27,609,000 27,687,000 4.25%-6.13%
------------ ------------
$158,041,000 $158,667,000
============ ============
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required by
this item are listed under item 14(a)(1) and (2).
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
29
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the section entitled "Executive Officers" in Part I, Item 1 hereof for
information regarding executive officers.
The information required by this item with respect to directors is
incorporated by reference from the information under the caption of "Election of
Directors," contained in the Company's Definitive Proxy Statement to be filed
with the Commission pursuant to Regulation 14A in connection with the 1999
Annual Meeting (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption contained in "Certain Transactions" contained in
the Proxy Statement.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE
NUMBER
----------
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2
Balance Sheets at December 31, 1997 and 1998................ F-3
Statements of Operations for the period from November 12,
1997 (inception) to December 31, 1997 and the year ended
December 31, 1998 and the cumulative period from November
12, 1997 (inception) to December 31, 1998................. F-4
Statements of Stockholders' Equity for the period from
November 12, 1997 (inception) to December 31, 1997 and the
year ended December 31, 1998.............................. F-5
Statements of Cash Flows for the period from November 12,
1997 (inception) to December 31, 1997 and the year ended
December 31, 1998 and the cumulative period from November
12, 1997 (inception) to December 31, 1998................. F-6
Notes to Financial Statements............................... F-6 - F-12
</TABLE>
(a)(2) Index to Financial Statement Schedules
None.
(a)(3) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- -------- ------- -----------
<C> <C> <S>
3.1 Amended and Restated Certificate of Incorporation of ASTI.
(1) 3.2 Bylaws of ASTI.
(1) 4.1 Specimen Certificate of Class A Common Stock of ASTI.
(2) 10.1 Research and Development Agreement dated as of March 6, 1998
between the Company and Allergan, Inc. ("Allergan").
(2) 10.2 Technology License Agreement dated as of March 6, 1998
between the Company and Allergan.
(2) 10.3 Services Agreement dated as of March 6, 1998 between the
Company and Allergan.
(2) 10.4 License Option Agreement dated as of March 6, 1998 between
the Company and Allergan.
(2) 10.5 Distribution Agreement dated as of March 6, 1998 between the
Company and Allergan.
(3) 10.6 Letter agreement dated as of October 23, 1998 between the
Company and Allergan.
10.7 Waiver letter dated as of October 23, 1998 between the
Company and Allergan.
24.1 Power of Attorney. Reference is made to page 32.
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on From S-1
(No. 333-40503) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
The exhibits required by this item are listed under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedules required by this item are listed
under Item 14(a)(2).
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLERGAN SPECIALTY THERAPEUTICS, INC.
By: /s/ WILLIAM C. SHEPHERD
------------------------------------
William C. Shepherd
Chairman of the Board, President
and Chief Executive Officer
Date: March 18, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Douglas S. Ingram and Dwight J. Yoder,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM C. SHEPHERD Chairman of the Board, March 18, 1999
- ----------------------------------------------------- President and Chief Executive
William C. Shepherd Officer (Principal Executive
Officer)
/s/ DWIGHT J. YODER Chief Financial Officer March 18, 1999
- ----------------------------------------------------- (Principal Financial and
Dwight J. Yoder Accounting Officer)
/s/ LESTER J. KAPLAN, PH.D. Director March 18, 1999
- -----------------------------------------------------
Lester J. Kaplan, Ph.D.
/s/ ALAN J. LEWIS PH.D. Director March 18, 1999
- -----------------------------------------------------
Alan J. Lewis, Ph.D.
/s/ GARY L. NEIL, PH.D. Director March 18, 1999
- -----------------------------------------------------
Gary L. Neil, Ph.D.
/s/ MARVIN E. ROSENTHALE, PH.D. Director March 18, 1999
- -----------------------------------------------------
Marvin E. Rosenthale, Ph.D.
</TABLE>
32
<PAGE> 33
ALLERGAN SPECIALTY THERAPEUTICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
----------
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2
Balance Sheets at December 31, 1997 and 1998................ F-3
Statements of Operations for the period from November 12,
1997 (inception) to December 31, 1997 and the year ended
December 31, 1998 and the cumulative period from November
12, 1997 (inception) to December 31, 1998................. F-4
Statements of Stockholders' Equity for the period from
November 12, 1997 (inception) to December 31, 1997 and the
year ended December 31, 1998.............................. F-5
Statements of Cash Flows for the period from November 12,
1997 (inception) to December 31, 1997 and the year ended
December 31, 1998 and the cumulative period from November
12, 1997 (inception) to December 31, 1998................. F-6
Notes to Financial Statements............................... F-7 - F-12
</TABLE>
F-1
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Allergan Specialty Therapeutics, Inc.
We have audited the accompanying balance sheets of Allergan Specialty
Therapeutics, Inc. as of December 31, 1997 and 1998 and the related statements
of operations, stockholders' equity, and cash flows for the period from November
12, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998
and the cumulative period from November 12, 1997 (inception) to December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Allergan Specialty
Therapeutics, Inc. at December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period from November 12, 1997 (inception)
to December 31, 1997 and the year ended December 31, 1998 and the cumulative
period from November 12, 1997 (inception) to December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Costa Mesa, California
January 27, 1999
F-2
<PAGE> 35
ITEM 14. FINANCIAL STATEMENTS
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
---- --------
<S> <C> <C>
Cash........................................................ $1... $ --
Investments................................................. -- 158,667
Prepaid technology fees..................................... -- 4,723
Other assets................................................ -- 1,747
---- --------
$ 1 $165,137
==== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Allergan, Inc.................................. $ -- $ 4,509
Accounts payable and other liabilities.................... -- 295
---- --------
Total liabilities................................. -- 4,804
==== ========
Stockholders' equity:
Callable Class A Common stock, $.01 par value; 6,000,000
shares authorized, 3,272,690 issued and outstanding in
1998................................................... -- 33
Class B Common Stock, $1.00 par value; 1,000 shares
authorized, issued and outstanding in 1998............. -- 1
Additional paid-in capital................................ 1 196,753
Accumulated other comprehensive income.................... -- 354
Deficit accumulated during development stage.............. -- (36,808)
---- --------
Total stockholders' equity........................ $ 1 160,333
---- --------
$1... $165,137
==== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 36
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE PERIOD
FROM
PERIOD FROM NOVEMBER 12,
NOVEMBER 12, 1997 1997
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues...................................... $ -- $ 9,043 $ 9,043
Costs and expenses:
Research and development.................... -- 35,886 35,886
Technology fees............................. -- 6,520 6,520
General and administrative expenses......... -- 933 933
---- ---------- ----------
Total costs and expenses............ -- 43,339 43,339
---- ---------- ----------
Loss before income taxes...................... -- (34,296) (34,296)
Provision for taxes........................... -- 2,512 2,512
---- ---------- ----------
Net loss...................................... $ -- $ (36,808) $ (36,808)
==== ========== ==========
Basic and diluted loss per share.............. $ -- $ (11.24) $ (11.24)
==== ========== ==========
Basic and diluted shares outstanding.......... 100 3,273,690 3,273,690
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 37
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 12, 1997 (INCEPTION) TO
DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFICIT
CALLABLE ACCUMULATED ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER DURING
COMMON COMMON PAID-IN COMPREHENSIVE DEVELOPMENT COMPREHENSIVE
STOCK STOCK CAPITAL INCOME STAGE TOTAL LOSS
-------- ------- ---------- ------------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 100 shares of Common Stock
(par value $1.00 per share) on
November 12, 1997 (inception)........ $ -- $-- $ 1 $ -- $ -- $ 1 $ --
---- --- -------- ---- -------- -------- --------
Balance at December 31, 1997........... -- -- 1 -- -- 1 --
Conversion of Common Stock into 1,000
shares of Class B Common Stock in
March 1998........................... -- 1 (1) -- -- -- --
Issuance of 3,272,690 shares of
callable Class A Common Stock in
March 1998........................... 33 -- 196,753 -- -- 196,786 --
Net loss............................... -- -- -- -- (36,808) (36,808) (36,808)
Other comprehensive income consisting
of unrealized gain on available for
sale securities, net of tax.......... -- -- -- 354 -- 354 354
---- --- -------- ---- -------- -------- --------
Balance at December 31, 1998........... $ 33 $ 1 $196,753 $354 $(36,808) $160,333 $(36,454)
==== === ======== ==== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 38
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE PERIOD
PERIOD FROM FROM
NOVEMBER 12, 1997 NOVEMBER 12, 1997
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss..................................... $ -- $ (36,808) $ (36,808)
Non-cash item included in net loss
Deferred income tax.......................... -- (682) (682)
Changes in operating assets and liabilities:
Other assets.............................. -- (1,065) (1,065)
Prepaid technology fees................... -- (4,723) (4,723)
Payable to Allergan, Inc.................. -- 4,509 4,509
Accounts payable and other liabilities.... -- 23 23
---- --------- ---------
Net cash used in operating activities..... -- (38,746) (38,746)
INVESTING ACTIVITIES:
Purchases of investments..................... -- (185,175) (185,175)
Sales of investments......................... -- 27,134 27,134
---- --------- ---------
Net cash used in investing activities..... -- (158,041) (158,041)
FINANCING ACTIVITIES:
Issuance of common stock..................... 1 200,000 200,001
Offering costs............................... -- (3,214) (3,214)
---- --------- ---------
Net cash provided by financing
activities.............................. 1 196,786 196,787
---- --------- ---------
Net increase (decrease) in cash................ 1 (1) --
Cash -- beginning of period.................... -- 1 --
---- --------- ---------
Cash -- end of period.......................... $ 1 $ -- $ --
==== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 39
ALLERGAN SPECIALTY THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Allergan Specialty Therapeutics, Inc. ("ASTI" or "the Company") was
incorporated in Delaware on November 12, 1997 and commenced operations on March
10, 1998. ASTI was formed for the purpose of conducting research and development
of potential human pharmaceutical products, and to commercialize such products,
most likely through licensing to Allergan, Inc. (Allergan). In accordance with
generally accepted accounting principles, ASTI is considered a development stage
company.
All of the Company's efforts to date have been limited to obtaining capital
and conducting research and development and the Company does not yet generate
any revenues from product sales or royalties. Research and development is
performed by Allergan and the costs incurred are reimbursed by ASTI.
Accounting for revenues and expenses
ASTI's revenues consist of interest and investment income and Pre-Selection
Product Payments (see Note 4). In future years, ASTI may also derive revenues
from the sale or license of its products, most likely through the sale of
licensed products by Allergan. Royalty and other product revenue, if any, will
be recorded as earned.
ASTI incurs most of its expenses under its agreements with Allergan.
Research and development costs paid to Allergan under a Research and Development
Agreement (R&D Agreement) are recorded as research and development expenses when
incurred. Technology fees paid to Allergan under a Technology License Agreement
(Technology Agreement) are recorded as technology fees on a straight-line basis
over the life of the Technology Agreement. Amounts paid to Allergan under a
Services Agreement are recorded as administrative expenses as incurred. See Note
4 for a description of the agreements between ASTI and Allergan.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVESTMENTS
ASTI classifies investments as available-for-sale securities with net
unrealized gains or losses recorded as a component of accumulated other
comprehensive income. Amounts classified as investments are liquidated and used
to pay operating expenses as needed. The Company invests its excess cash in
money market funds, equity securities and debt instruments of financial
institutions and corporations that have at least an "A" or equivalent credit
rating. These securities typically bear minimal credit risk and ASTI has not
experienced any losses on its investments to date due to credit risk. At
December 31, 1998, the Company's investment portfolio consisted of the
following:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAIN LOSS VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Commercial paper and money market funds....... $ 5,709,000 $ 4,000 $ -- $ 5,713,000
Certificates of deposit....................... 19,621,000 68,000 -- 19,689,000
U.S. government debt securities............... 57,706,000 457,000 -- 58,163,000
Corporate debt securities..................... 60,800,000 145,000 -- 60,945,000
Equity securities............................. 14,205,000 -- (48,000) 14,157,000
------------ -------- -------- ------------
$158,041,000 $674,000 $(48,000) $158,667,000
============ ======== ======== ============
</TABLE>
F-7
<PAGE> 40
ALLERGAN SPECIALTY THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost, estimated fair value of investments and the range of
rates of return of debt securities at December 31, 1998, by contractual
maturity, are presented below. Investments in equity securities are classified
as due after three years. Actual maturities may differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties. Further, all of the Company's
investments are classified as available-for-sale, and the Company may instruct
its professional investment managers to liquidate any or all of its investments
prior to their contractual maturity dates.
<TABLE>
<CAPTION>
PERCENTAGE
AMORTIZED ESTIMATED RATES OF RETURN
COST FAIR VALUE (RANGE)
------------ ------------ ---------------
<S> <C> <C> <C>
Due in one year or less................. $ 70,454,000 $ 70,521,000 4.64%-13.25%
Due after one year through three
years................................. 59,978,000 60,459,000 5.38%-8.71%
Due after three years................... 27,609,000 27,687,000 4.25%-6.13%
------------ ------------
$158,041,000 $158,667,000
============ ============
</TABLE>
3. PER SHARE INFORMATION
The following sets forth the computation of basic and diluted loss per
share for the year ended December 31, 1998:
<TABLE>
<CAPTION>
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
----------- ------------- ---------
<S> <C> <C> <C>
Computation of basic and diluted EPS:........ (36,808,000) 3,273,690 $(11.24)
</TABLE>
4. ARRANGEMENTS WITH ALLERGAN, INC.
On March 10, 1998, 3,272,690 shares of callable Class A Common Stock of
ASTI, representing all of the issued and outstanding shares of such class, were
distributed by Allergan to the holders of record of Allergan common stock at the
close of business on February 17, 1998 (the Distribution"). Prior to the
Distribution, Allergan contributed $200,000,000 in cash to ASTI in exchange for
all of the shares of ASTI Common Stock.
On March 10, 1998, 1,000 shares of Class B Common Stock of ASTI,
representing all of the issued and outstanding shares of such class, were issued
to Allergan. As sole holder of all of the issued and outstanding shares of Class
B Common Stock, Allergan has the option to repurchase all of the outstanding
Class A Common Stock under specified conditions.
In connection with the Distribution, ASTI and Allergan entered into a
number of agreements, including the R&D Agreement, Technology Agreement,
Services Agreement and License Option Agreement (License Agreement).
Pursuant to the R&D Agreement, ASTI reimbursed Allergan for research and
development costs of $34,411,000 incurred during the period from commencement of
operations through December 31, 1998 which includes reimbursement to Allergan
for research and development services performed during the period from October
24, 1997 through March 9, 1998. From time to time, Allergan shall propose work
plans, subject to ASTI board approval, for the continued development of product
candidates. ASTI is required to utilize the cash initially contributed to ASTI
by Allergan plus interest and investment income thereon, less administrative
expenses and technology fees to conduct activities under the R&D Agreement. The
R&D Agreement specifies payment of Developed Technology Royalties and
Pre-Selection Product Payments by Allergan to ASTI under certain conditions.
Through December 31, 1998, no amounts have been earned by ASTI with respect to
Developed Technology Royalties.
In July 1998, Allergan entered into a multi-year research and development
collaboration with Parke-Davis Pharmaceutical Research Division of
Warner-Lambert Company (Warner-Lambert) to identify, develop and commercialize
up to two RXR subtype selective retinoid compounds for the treatment of
metabolic diseases, including adult onset diabetes, insulin resistant syndromes
and dyslipidemias (Collabora-
F-8
<PAGE> 41
ALLERGAN SPECIALTY THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
tion Agreement). The technologies involved in the collaboration were previously
licensed by ASTI from Allergan pursuant to the Technology Agreement. In
accordance with a letter agreement between Allergan and ASTI, ASTI is entitled
to receive Pre-Selection Product Payments representing ten percent of the
potential $104 million in technology access fees and development milestones to
be received by Allergan pursuant to Allergan's agreement with Warner-Lambert.
Through December 31, 1998, ASTI earned $500,000 of Pre-Selection Product
Payments in accordance with the letter agreement. In addition, ASTI is entitled
to royalties on net sales of developed products, depending on actual lead
compound selection and sales results. ASTI intends to use the funds received for
further research and development.
Subject to certain limitations, the Technology Agreement grants ASTI an
exclusive license to research and develop all of Allergan's proprietary and
contractual rights with respect to certain retinoid and neuroprotective
technologies. As consideration for the exclusive license, ASTI will pay a
technology fee of $10,000,000 in year one; $6,700,000 in year two; $3,300,000 in
year three; and $2,000,000 in year four commencing October 24, 1997. The
technology fee is charged to operations on a straight-line basis over the life
of the Technology Agreement. The technology fee is payable monthly in arrears
provided, however, that ASTI shall no longer be obligated to make such payments
beginning with any month following the date on which the total number of ASTI
Products either under development or licensed to Allergan pursuant to the
License Agreement is less than two. Through December 31, 1998, ASTI paid
$11,243,000 in technology fees, of which $4,723,000 is included in prepaid
technology fees in the accompanying balance sheet.
ASTI has granted Allergan an option to acquire a license to each product
developed under the R&D Agreement, including the Initial Products on a
country-by-country basis at any time until (a) with respect to the United
States, 30 days after clearance by the FDA to commercially market such ASTI
Product and (b) with respect to any other country, 90 days after the earlier of
(i) clearance by the appropriate regulatory agency to commercially market the
product and (ii) clearance by the FDA to market the product in the United
States.
Upon exercise of the license option, Allergan will make Product Payments to
ASTI as defined in the R&D Agreement. Through December 31, 1998, no license
option has been exercised. The license option will expire to the extent not
previously exercised, 30 days after the expiration of Allergan's option to
purchase all of the outstanding ASTI Shares, described below.
In accordance with ASTI's Restated Certificate of Incorporation, Allergan
has the right to purchase all (but not less than all) of the ASTI Class A Common
Stock (the "Purchase Option"). Allergan may exercise the Purchase Option by
written notice to ASTI at any time during the period beginning immediately after
the Distribution and ending on December 31, 2002; provided that such date will
be extended for successive six month periods if, as of June 30, 2001, ASTI has
not paid or accrued expenses for at least 95% of all Available Funds, as
defined, pursuant to the R&D Agreement. In any event, the Purchase Option will
expire 90 days after Allergan receives notice that the Available Funds (as
defined in the R&D Agreement) held by ASTI is less than $15 million. Through
December 31, 1998, Allergan has not exercised the Purchase Option.
If the Purchase Option is exercised, the exercise price will be the
greatest of:
(a) (i) 25 times the aggregate of (1) all worldwide payments with
respect to all Licensed Products, Developed Technology Products and
Pre-Selection Products for the four calendar quarters immediately preceding
the quarter in which the Purchase Option is exercised (Base Period) and (2)
all payments that would have been made and all payments due to be made by
Allergan to ASTI during the Base Period if Allergan had not previously
exercised its payment buy-out option with respect to any product; provided,
however, that, for the purposes of the foregoing calculation, for any
product which has not been commercially sold during each of the four
calendar quarters in the Base Period, Allergan will be deemed to have made
Product Payments, Developed Technology Royalties and Pre-Selection Product
Payments to ASTI for each such quarter equal to the average of the payments
made during each of such calendar
F-9
<PAGE> 42
ALLERGAN SPECIALTY THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
quarters during which such product was commercially sold, less (ii) any
amounts previously paid to exercise any payment buy-out option for any
product;
(b) the fair market value of 500,000 shares of Allergan Common Stock
determined as the average of the closing sales price of Allergan Common
Stock on the New York Stock Exchange for the 20 trading days ending with
the trading day that is two trading days prior to the date of
determination;
(c) $250 million less the aggregate amount of all technology fee
payments and research and development costs paid or incurred by ASTI as of
the date the Purchase Option is exercised; or
(d) $60 million.
In each case, the amount payable as the Purchase Option Exercise Price will
be reduced to the extent, if any, that ASTI's liabilities at the time of
exercise (other than liabilities under the R&D Agreement, Services Agreement and
the Technology Agreement) exceed ASTI's cash and cash equivalents and short-term
and long-term investments (excluding the amount of Available Funds remaining at
such time). Allergan must pay the Purchase Option Exercise Price in cash.
ASTI and Allergan have entered into a Services Agreement pursuant to which
Allergan has agreed to provide ASTI with administrative services, including
accounting and legal services on a fully-burdened cost reimbursement basis. The
Services Agreement expires on December 31, 1998 and will be renewed
automatically for successive one year periods during the term of the R&D
Agreement. ASTI may terminate the Services Agreement at any time upon 60 days
written notice. For the year ended December 31, 1998, ASTI incurred $121,000 of
costs pursuant to the Services Agreement.
5. INCOME TAXES
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss and credit carryforwards. The impact on deferred taxes of changes
in tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled and reflected in the financial statements
in the period of enactment.
The provision for income taxes for the year ended December 31, 1998
consists of the following:
<TABLE>
<S> <C>
Current
Federal................................................ $2,531,000
State.................................................. 663,000
----------
Total current.................................. 3,194,000
Deferred
Federal................................................ (609,000)
State.................................................. (73,000)
----------
Total deferred........................................... (682,000)
----------
Total.......................................... $2,512,000
==========
</TABLE>
F-10
<PAGE> 43
ALLERGAN SPECIALTY THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the federal statutory tax rate to the effective tax
rate for the year ended December 31, 1998 follows:
<TABLE>
<S> <C>
Statutory rate of tax benefit............................... (35.0)%
State taxes................................................. (8.4)%
Valuation allowance on capitalized
R&D and technology fees................................... 50.7%
-----
Effective tax rate.......................................... 7.3%
=====
</TABLE>
ASTI had taxable income for the year ended December 31, 1998 as a result of
the requirement to capitalize technology fees and its election to capitalize
research and development expenses for tax purposes. The amount paid for taxes
for the year ended December 31, 1998 was $3,246,000.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets
Capitalized technology fees.......................... $ 2,735,000
Capitalized R&D...................................... 15,575,000
------------
18,310,000
Less: valuation allowance............................ (17,628,000)
------------
Total deferred tax asset............................... 682,000
Deferred tax liabilities
Unrealized gain on available-for-sale securities....... 272,000
------------
Net deferred tax asset................................. $ 410,000
============
</TABLE>
The balance of net deferred tax assets and deferred tax liabilities of
$682,000 and $272,000, respectively, are included in other assets and accounts
payable and other liabilities in the accompanying balance sheet.
Based on the Company's taxable earnings, management believes it is more
likely than not that the Company will realize the benefit of the existing net
deferred tax asset at December 31, 1998. Management believes the existing net
deductible temporary differences will reverse during periods in which the
Company generates net taxable income, however, there can be no assurance that
the Company will generate any earnings or any specific level of continuing
earnings in future years.
6. COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Standards No.
130 -- "Reporting Comprehensive Income," (SFAS No. 130). SFAS No. 130
established standards for reporting comprehensive income and its components.
Accumulated other comprehensive income for the year ended December 31, 1998 is
comprised of unrealized gains on investments of $626,000, or $354,000 after tax.
Total comprehensive loss for the year ended December 31, 1998 was $36,454,000.
7. BUSINESS SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131 -- "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting financial and descriptive information regarding an enterprise's
operating segments.
ASTI's sole business segment involves conducting research and development
of potential human pharmaceutical products based on retinoid and neuroprotective
technologies. Of the $35,886,000 of R&D
F-11
<PAGE> 44
ALLERGAN SPECIALTY THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
incurred during the year ended December 31, 1998, $34,411,000 represented R&D
performed by Allergan, Inc. under the R&D Agreement, as more fully described in
Note 4. The remaining $1,475,000 of R&D incurred during the year ended December
31, 1998 represents amounts earned by third parties under R&D collaboration
agreements.
8. NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133 -- "Accounting for Derivative Instruments and
Hedging Activities" was issued and is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company is currently evaluating the impact that SFAS No. 133
will have on its financial statements, if any.
F-12
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- -------- ------- -----------
<C> <C> <S>
3.1 Amended and Restated Certificate of Incorporation of ASTI.
(1) 3.2 Bylaws of ASTI.
(1) 4.1 Specimen Certificate of Class A Common Stock of ASTI.
(2) 10.1 Research and Development Agreement dated as of March 6, 1998
between the Company and Allergan, Inc. ("Allergan").
(2) 10.2 Technology License Agreement dated as of March 6, 1998
between the Company and Allergan.
(2) 10.3 Services Agreement dated as of March 6, 1998 between the
Company and Allergan.
(2) 10.4 License Option Agreement dated as of March 6, 1998 between
the Company and Allergan.
(2) 10.5 Distribution Agreement dated as of March 6, 1998 between the
Company and Allergan.
(3) 10.6 Letter agreement dated as of October 23, 1998 between the
Company and Allergan.
10.7 Waiver letter dated as of October 23, 1998 between the
Company and Allergan.
24.1 Power of Attorney. Reference is made to page 32.
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-40503) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and incorporated herein by reference.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(Originally incorporated under the same name on November 12, 1997)
FIRST: NAME. The name of this corporation is Allergan Specialty Therapeutics,
Inc. (the "corporation").
SECOND: REGISTERED OFFICE; REGISTERED AGENT. The address of the registered
office of this corporation in the State of Delaware is 9 East
Loockerman Street, in the City of Dover, County of Kent. The name of
the registered agent of this corporation at such address is National
Registered Agents, Inc.
THIRD: PURPOSE. The purpose of this corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: AUTHORIZED CAPITAL STOCK.
(A) This corporation is authorized to issue two classes of shares, which shall
be known as Class A Common Stock ("Class A Common Stock") and Class B Common
Stock ("Class B Common Stock"). The total number of shares of stock of all
classes that this corporation is authorized to issue is 6,001,000. The total
number of shares of Class A Common Stock which this corporation is authorized to
issue is 6,000,000. The total number of shares of Class B Common Stock which
this corporation is authorized to issue is 1,000. Each share of Class A Common
Stock shall have a par value of $0.01, and each share of Class B Common Stock
shall have a par value of $1.00.
Effective immediately upon the filing of this Restated Certificate of
Incorporation (the "Filing Date"), each share of Common Stock, par value $1.00
per share, of this corporation outstanding immediately prior to such filing
shall be converted into and reclassified as ten shares of Class B Common Stock.
(B) The powers, designations, preferences, and relative, participating, optional
or other special rights granted to, and the qualifications, limitations and
restrictions imposed upon, the Class A Common Stock and Class B Common Stock and
the respective holders thereof are as follows:
(1) REDEMPTION. The shares of Class A Common Stock are redeemable and
may be redeemed as provided in (but only as provided in) Article FIFTH, Section
(F).
1
<PAGE> 2
(2) DIVIDENDS. The holders of shares of Class A Common Stock and Class B
Common Stock shall be entitled to receive per share and without preference such
dividends as may be declared by the Board of Directors from time to time out of
funds legally available therefor. No dividend may be declared on the Class A
Common Stock unless the same per share dividend is declared on the Class B
Common Stock, and no dividend may be declared on the Class B Common Stock unless
the same per share dividend is declared on the Class A Common Stock. Dividends
may not be declared, nor may shares of Class A Common Stock or Class B Common
Stock be repurchased, or redeemed (other than pursuant to Section (F) of Article
FIFTH), if, after payment of such dividend, or after effecting such repurchase
or redemption, the amount of this corporation's cash, cash equivalents,
short-term and long-term investments would be less than the amount of Available
Funds remaining after expenditures pursuant to the Research and Development
Agreement, as of the date of such dividend, repurchase or redemption.
(3) LIQUIDATION. In the event of voluntary or involuntary liquidation of
this corporation, the holders of the Class A Common Stock and Class B Common
Stock of the corporation shall be entitled to receive, on a pro rata per share
basis and without preference, all of the remaining assets of this corporation
available for distribution to its stockholders.
(4) VOTING RIGHTS. Except as otherwise required by law or provided
herein, the holders of Class A Common Stock and Class B Common Stock shall vote
together as a single class. Each holder of Class A Common Stock and Class B
Common Stock shall have one vote for each share standing in his or her name on
all matters submitted to a vote of holders of the common shares. At any meeting
of the stockholders of this corporation, the determination of a quorum shall be
based upon the presence of shares of Class A Common Stock and Class B Common
Stock representing a majority of the voting power of all of the shares of Class
A Common Stock and Class B Common Stock. This corporation shall not, without the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Class B Common Stock, voting separately and as a class, (a) alter or
change the powers, designations, preferences and relative, participating,
optional or other special rights granted to, or the qualifications, limitations
and restrictions imposed upon, the Class A Common Stock or the Class B Common
Stock, (b) alter or change this Article FOURTH or any of Articles FIFTH, SIXTH
or SEVENTH of this Restated Certificate of Incorporation, or otherwise make any
amendment to this Restated Certificate of Incorporation that would alter the
rights of the holders of the Class B Common Stock, (c) authorize the creation or
issuance of any additional class or series of stock, (d) undertake the voluntary
dissolution, liquidation or winding up of this corporation, (e) merge or
consolidate this corporation with or into any other corporation or entity, (f)
sell, lease, exchange, transfer or otherwise dispose of any substantial asset of
this corporation or (g) alter the bylaws of this corporation in a manner
described in the
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last sentence of Article EIGHTH. Furthermore, from and after the Purchase Option
Exercise Date, as defined in Article FIFTH, (i) the holders of Class B Common
Stock shall be entitled to remove directors with or without cause; and (ii) the
holders of the Class B Common Stock shall have the sole right to elect the
directors of this corporation. No new directorships created as a result of the
increase in the size of the Board of Directors pursuant to the preceding
sentence shall be filled other than by the holders of the Class B Common Stock.
(5) CONVERSION. The Class B Common Stock shall automatically convert
into fully paid and non-assessable shares of Class A Common Stock of this
corporation at 12:01 a.m. New York time on the day immediately following the
expiration of the Purchase Option without exercise granted in Article FIFTH. The
Class B Common Stock shall convert into Class A Common Stock at the rate of one
share of Class A Common Stock for each share of Class B Common Stock.
FIFTH: PURCHASE OPTION.
(A) DEFINITIONS. For purposes of this Restated Certificate of Incorporation, the
following terms shall have the following definitions:
(1) Allergan means Allergan, Inc. and its successors or assigns of the
Purchase Option.
(2) Allergan Common Stock means the Common Stock of Allergan or, if such
Common Stock is converted into or exchanged for another class or series of stock
of Allergan or any other corporation, such other class or series of stock.
(3) Available Funds means, as of any date of determination, $200 million
plus any investment income earned thereon less (i) the aggregate amount of all
Research and Development Costs paid or incurred by this corporation as of such
date, (ii) this corporation's aggregate reasonable ongoing administrative
expenses paid or incurred as of such date and (iii) the aggregate amount of all
Technology Fee payments paid or incurred by this corporation as of such date.
(4) ASTI Product means any dosage form of a compound which is the
subject of research and development as a potential human pharmaceutical product
which has been recommended by Allergan and accepted by the Board of Directors of
this corporation for development as such under the Research and Development
Agreement. Such recommendations may be made on on a field of use basis as
provided in the Research and Development Agreement. The following compounds have
been selected as the initial ASTI Products as of the Filing Date: (i) Tazarotene
(oral), (ii) Memantine, (iii) AGN 4310 and (iv) a compound to be selected from
the RAR alpha-selective agonist class of retinoid compounds for the treatment of
various cancers.
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(5) Developed Technology means any technology generated or otherwise
obtained pursuant to the Research and Development Agreement.
(6) Developed Technology Product means any product other than an ASTI
Product (i) covered, at the time of sale in a country, by one or more unexpired
patents issued in such country that are included in Developed Technology and
(ii) with respect to which Allergan receives any consideration.
(7) Developed Technology Royalties means the payments made by Allergan
to this corporation with respect to net sales of Developed Technology Products.
(8) Fair Market Value means, with reference to Allergan Common Stock,
(a) if Allergan Common Stock is listed on the New York Stock Exchange or any
other securities exchange reporting closing sales prices (including without
limitation the Nasdaq National Market), the average of the closing sales price
of Allergan Common Stock on such exchange (which shall be the New York Stock
Exchange or, if Allergan Common Stock is not then traded on such exchange, on
the principal exchange on which Allergan Common Stock is then traded), for the
twenty trading days ending with the trading day that is two trading days prior
to the date of determination, (b) if Allergan Common Stock is not listed on any
securities exchange described in clause (a) but is quoted on Nasdaq or another
quotation system providing bid prices, the average (over the twenty day period
described in clause (a)) of the bid prices at the close of each day in such
period on Nasdaq (or, if Allergan Common Stock is not then quoted on Nasdaq, the
largest quotation system on which Allergan Common Stock is then quoted), and (c)
if Allergan Common Stock is not listed on any exchange or quoted on any
quotation system, the value thereof as determined in good faith by Allergan's
board of directors.
(9) Final Purchase Option Exercise Price means the Purchase Option
Exercise Price minus (a) the amount by which this corporation's Liabilities
existing at the Purchase Option Exercise Date (other than Liabilities under the
Research and Development Agreement, Services Agreement and Technology License
Agreement) exceed the aggregate of this corporation's then existing cash, cash
equivalents and short-term and long-term investments (but excluding from such
cash, cash equivalents and short-term and long-term investments the amount of
Available Funds determined as of the Purchase Option Exercise Date which had
not, as of such date, been paid by this corporation in accordance with the
Research and Development Agreement) and minus (b), if the Purchase Option
Exercise Price was determined based upon the provisions of clause (c) of Section
(A)(19) of this Article FIFTH, any additional amounts not already included in
the calculation set forth in Article FIFTH, Section (A)(19) that are paid by (or
due from) this corporation under the Research and Development Agreement from the
date of the last report of such expenditures provided by this corporation to
Allergan in a Status Statement through the Purchase Option Exercise Date
pursuant to the Research and Development Agreement.
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(10) Liabilities means, with respect to this corporation, (a) all
liabilities required to be reflected or reserved against in this corporation's
financial statements under generally accepted accounting principles consistently
applied ("GAAP") and (b) any reimbursement or similar obligation with respect to
any letter of credit issued for the account of this corporation or as to which
this corporation is otherwise liable. Liabilities of the type described in (b)
shall be valued at the full amount of the potential liability of the corporation
thereon.
(11) License Agreement means any License Agreement between Allergan and
this corporation entered into upon the exercise by Allergan of the license
option granted to it pursuant to the License Option Agreement, as any such
agreement may be amended or modified from time to time by amendments approved by
Allergan and the Board of Directors of this corporation.
(12) License Option Agreement means the License Option Agreement between
Allergan and this corporation dated as of March 6, 1998, as such agreement may
be amended or modified from time to time by amendments approved by Allergan and
the Board of Directors of this corporation.
(13) Licensed Product means an ASTI Product as to which the license
option under the License Option Agreement has been exercised by Allergan.
(14) Pre-Selection Work means research and pre-clinical development work
involving a product candidate owned or controlled by Allergan or a third party
funded by this corporation pursuant to the Research and Development Agreement
and undertaken in order to determine the suitability of such candidate for
research and development.
(15) Pre-Selection Product means a product, other than one which becomes
an ASTI Product, for which this corporation funds Pre-Selection Work.
(16) Pre-Selection Product Payments means the payments made by Allergan
to this corporation with respect to net sales of Pre-Selection Products.
(17) Product Payments means payments made by Allergan to this
corporation under a License Agreement with respect to Licensed Products.
(18) Purchase Option Exercise Date means the date upon which Allergan
notifies this corporation in writing of its exercise of the Purchase Option as
provided in Section (C) of this Article FIFTH.
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(19) Purchase Option Exercise Price means the greatest of the following:
(a) (i) 25 times the aggregate of (A) all worldwide payments made
by and all worldwide payments due to be made by Allergan to this corporation
with respect to all Licensed Products, Developed Technology Products and
Pre-Selection Products for the four calendar quarters immediately preceding the
quarter in which the Purchase Option is exercised (the "Base Period") and (B)
all payments that would have been made by Allergan to this corporation during
the Base Period if Allergan had not previously exercised its payment buy-out
option with respect to such Licensed Product, Developed Technology Product or
Pre-Selection Product; provided, however, that for purposes of the foregoing
calculation, for any Licensed Product, Developed Technology Product or
Pre-Selection Product which has not been commercially sold during each of the
four calendar quarters in the Base Period, Allergan will be deemed to have made
Product Payments, Developed Technology Royalties and Pre-Selection Product
Payments to this corporation for each such quarter equal to the average of the
Product Payments, Developed Technology Royalties and Pre-Selection Product
Payments made by or due from Allergan to this corporation for each of such
calendar quarters during which such product was commercially sold, less (ii) any
amounts previously paid to exercise any payment buy-out option for any Licensed
Product, Developed Technology Product or Pre-Selection Product pursuant to a
License Agreement or the Research and Development Agreement.
(b) the Fair Market Value of five hundred thousand (500,000) shares
of Allergan Common Stock (which number of shares shall be proportionately
adjusted for any stock dividend, split-up, combination or reclassification of
the Allergan Common Stock) determined as of the Purchase Option Exercise Date;
(c) $250 million less the aggregate amount of all Technology Fee
payments and Research and Development Costs paid or incurred by this corporation
as of the Purchase Option Exercise Date; and
(d) $60 million.
(20) Purchase Option Expiration Time means 11:59 p.m. New York time on
December 31, 2002; provided that such date will be extended for successive six
month periods if, as of any June 30 or December 31 beginning with June 30, 2001,
this corporation has not paid (or accrued expenses for) at least 95% of all
Available Funds pursuant to the Research and Development Agreement.
Notwithstanding the foregoing sentence, the Purchase Option Expiration Time will
in no event occur later than 11:59 p.m. New York time on the 90th day after this
corporation provides Allergan with a statement that, as of the end of any
calendar month, there are less than $15 million of Available Funds remaining.
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(21) Research and Development Agreement means the Research and
Development Agreement between Allergan and this corporation, dated as of March
6, 1998, as such agreement may be amended or modified from time to time by
amendments approved by Allergan and the Board of Directors of this corporation.
(22) Research and Development Costs means payments paid by or due from
this corporation under the Research and Development Agreement as last reported
by this corporation to Allergan in a Status Statement through the Purchase
Option Exercise Date.
(23) Services Agreement means the Services Agreement between Allergan
and this corporation, dated as of March 6, 1998, as such agreement may be
amended or modified from time by amendments approved by Allergan and the Board
of Directors of this corporation.
(24) Status Statement means, as of any date, a balance sheet prepared by
the Company and delivered to Allergan dated as of such date, together with (a) a
statement and brief description of all other liabilities of this corporation
constituting Total Liabilities as of such date not reflected on such balance
sheet, (b) a statement of the amount of Available Funds remaining as of such
date, and (c) a statement of the total amounts paid by and due from this
corporation pursuant to the Research and Development Agreement through such
date.
(25) Technology Fee means the payments to be made over a maximum period
of four (4) years by this corporation to Allergan pursuant to the Technology
License Agreement.
(26) Technology License Agreement means the Technology License Agreement
between Allergan and this corporation , dated as of March 6, 1998, as such
agreement may be amended or modified from time to time by amendments approved by
Allergan and the Board of Directors of this corporation.
(27) Total Liabilities means (a) all Liabilities, plus (b) any other
debts, liabilities or obligations, absolute or contingent, matured or unmatured,
liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever
arising, including all costs and expenses relating thereto, and including those
debts, liabilities and obligations arising under any law, rule or regulation, or
under any pending or threatened action, suit or proceeding, or any order or
consent decree of any governmental entity or any award of any arbitrator of any
kind, and those arising under any contract, commitment or undertaking.
(B) GRANT OF OPTION. Allergan is hereby granted an exclusive irrevocable
purchase option to purchase all issued and outstanding shares of Class A Common
Stock of this corporation for the Final Purchase Option Exercise Price (the
"Purchase Option"). The
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Purchase Option, if exercised, must be exercised as to all, but not less than
all, issued and outstanding shares of Class A Common Stock and may be exercised
at any time at or prior to the Purchase Option Expiration Time. Allergan shall
pay the Final Purchase Option Exercise Price in cash. The Purchase Option,
together with the other rights of Allergan under this Article FIFTH and Article
SIXTH, may, at Allergan's option, be assigned or otherwise transferred to any
person or entity, including this corporation.
(C) MANNER OF EXERCISE. The Purchase Option shall be exercised, if at all, at or
before the Purchase Option Expiration Time by written notice (the "Exercise
Notice") from Allergan to this corporation stating that the Purchase Option is
being exercised and setting forth (1) the Purchase Option Exercise Price; and
(2) a closing date (the "Closing Date") on which all of the issued and
outstanding shares of Class A Common Stock will be purchased. The Purchase
Option shall be deemed to be exercised as of the date of mailing by first class
mail of the Exercise Notice to this corporation at its principal offices.
(D) CLOSING.
(1) CLOSING DATE; COOPERATION. Except as set forth below, the Closing
Date shall be the date specified as such in the Exercise Notice, which date
specified shall be no later than sixty (60) days after the Purchase Option
Exercise Date. The Closing Date may be extended by Allergan if, in the judgment
of Allergan, an extension of the Closing Date is necessary to obtain any
governmental or third party consent to the purchase of the Class A Common Stock
or to permit the expiration prior to the Closing Date of any statutory or
regulatory waiting period. Allergan may extend the Closing Date for the reasons
set forth in the preceding sentence by delivering written notice of such
extension to this corporation on or prior to the previously specified Closing
Date. This corporation shall cooperate with Allergan to effect the closing of
the Purchase Option, including without limitation seeking any required
third-party or governmental consents, and filing any applications,
notifications, registration statements or the like which may be necessary to
effect the closing.
(2) CERTAIN RESTRICTIONS FOLLOWING PURCHASE OPTION EXERCISE DATE. From
the Purchase Option Exercise Date until the Closing Date, this corporation will
not take any of the following actions (or permit any such actions to be taken on
its behalf) except with the prior written consent of Allergan:
(a) borrow money, or mortgage, remortgage, pledge, hypothecate or
otherwise encumber any of its assets;
(b) sell, lease, lend, exchange or otherwise dispose of any of its
assets, other than sales of inventory in the ordinary course of business;
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(c) pay or declare any dividends or make any distributions on or in
respect of any shares of its capital stock;
(d) default in its obligations under any material contract,
agreement, commitment or undertaking of any kind or enter into any material
contract, agreement, purchase order or other commitment; or
(e) enter into any other transaction or agreement or arrangement,
or incur any liabilities, not in the ordinary course of this corporation's
business.
(3) DETERMINATION OF FINAL PURCHASE OPTION EXERCISE PRICE. Not later
than twenty (20) business days following the Purchase Option Exercise Date, this
corporation shall deliver a final Status Statement to Allergan prepared as of
the Purchase Option Exercise Date. Following receipt of such Status Statement
and completion of any other investigation as Allergan shall deem necessary or
appropriate, and prior to the Closing Date, Allergan shall determine the Final
Purchase Option Exercise Price by making the adjustments to the Purchase Option
Exercise Price contemplated by Section (A)(9) of this Article FIFTH and shall
notify this corporation of such determination.
(4) PAYMENT OF FINAL PURCHASE OPTION EXERCISE PRICE. On or before the
Closing Date, Allergan shall deposit the full amount of the Final Purchase
Option Exercise Price with a bank or banks or similar entities designated by
Allergan to pay, on Allergan's behalf, the Final Purchase Option Exercise Price
(the "Payment Agent"). Funds deposited with the Payment Agent shall be delivered
in trust for the benefit of the holders of Class A Common Stock, and Allergan
shall provide the Payment Agent with irrevocable instructions to pay, on or
after the Closing Date, the Final Purchase Option Exercise Price for the shares
of Class A Common Stock to the holders of record thereof determined as of the
Closing Date. Payment for shares of Class A Common Stock shall be mailed to each
holder at the address set forth in this corporation's records or at the address
provided by each holder or, if no address is set forth in this corporation's
records for a holder or provided by such holder, to such holder at the address
of this corporation. As soon as practicable upon Allergan's request, this
corporation shall provide, or shall cause its transfer agent to provide, to
Allergan or to the Payment Agent, free of charge, a complete list of the record
holders of shares of Class A Common Stock, as of a specified date, including the
number of shares of Class A Common Stock held of record and the address of each
record holder as set forth in the records of this corporation's transfer agent.
(E) TRANSFER OF TITLE. Transfer of title to all of the issued and outstanding
shares of Class A Common Stock shall be deemed to occur automatically on the
Closing Date and thereafter this corporation shall be entitled to treat Allergan
as the sole holder of all of the issued and outstanding shares of its Class A
Common Stock, notwithstanding the failure
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of any holder of Class A Common Stock to tender the certificates representing
such shares to the Payment Agent, whether or not such tender is required or
requested by the Payment Agent. This corporation shall instruct its transfer
agent not to accept any shares of Class A Common Stock for transfer on and after
the Closing Date. This corporation shall take all actions reasonably requested
by Allergan to assist in effectuating the transfer of shares of Class A Common
Stock in accordance with this Article FIFTH.
(F) REDEMPTION OF CLASS A COMMON STOCK. At Allergan's election (which election
may be made at any time, provided it is made, by delivery of written notice
thereof to this corporation, not less than five days prior to the Closing Date),
this corporation shall, subject to applicable restrictions in the Delaware
General Corporation Law, redeem on the Closing Date all issued and outstanding
shares of Class A Common Stock for an aggregate redemption price equal to the
Final Purchase Option Exercise Price. Such redemption shall be in lieu of
Allergan paying the Final Purchase Option Exercise Price directly to the
stockholders of this corporation, and shall be subject to Allergan providing the
Final Purchase Option Exercise Price to this corporation to allow this
corporation to pay the redemption price.
SIXTH: PROTECTIVE PROVISIONS.
(A) LEGEND. Certificates evidencing shares of Class A Common Stock issued by or
on behalf of this corporation shall bear a legend in substantially the following
form: "The shares of Allergan Specialty Therapeutics, Inc. evidenced hereby are
subject to an option in favor of Allergan, Inc., its successors and assigns, as
described in the Restated Certificate of Incorporation of Allergan Specialty
Therapeutics, Inc. to purchase such shares at a purchase price determined in
accordance with Article FIFTH thereof exercisable by notice delivered to this
corporation at or prior to the Purchase Option Expiration Time (as defined in
the Restated Certificate of Incorporation of Allergan Specialty Therapeutics,
Inc.). Copies of the Restated Certificate of Incorporation of Allergan Specialty
Therapeutics, Inc. are available at the principal place of business of Allergan
Specialty Therapeutics, Inc. at 2525 Dupont Drive, Irvine, California 92612 and
will be furnished to any stockholder on request and without cost."
(B) NO CONFLICTING ACTION. This corporation shall not take, nor permit any other
person or entity within its control to take, any action inconsistent with
Allergan's rights under Article FIFTH. This corporation shall not enter into any
arrangement, agreement or understanding, whether oral or in writing, that is
inconsistent with or limits or impairs the rights of Allergan and the
obligations of this corporation hereunder, including without limitation any
arrangement, agreement or understanding which imposes any obligation upon this
corporation, or deprives this corporation of any material rights, as a
consequence of the exercise of the Purchase Option or the acquisition of the
outstanding Class A Common Stock pursuant thereto.
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(C) INSPECTION AND VISITATION RIGHTS; STATUS STATEMENTS. Allergan shall have the
right to inspect and copy, on reasonable notice and during regular business
hours, the books and records of this corporation. Allergan shall also have the
right to request from time to time (but not more frequently than monthly) a
Status Statement as of such fiscal month end as Allergan may request. Each
Status Statement shall be sent within twenty (20) business days of request by
Allergan. Allergan shall also have the right to send a non-voting representative
to attend all meetings of this corporation's Board of Directors and any
committees thereof. Any representative, if designated in writing by Allergan as
such, shall receive notice of all meetings of this corporation's Board of
Directors and each committee thereof, as well as copies of all documents and
other materials provided to any directors of this corporation in connection with
any such meeting not later than the time such materials are provided to other
directors. Such representative shall also be provided with copies of all
resolutions adopted or proposed to be adopted by unanimous written consent not
later than the time such resolutions are provided to other directors.
SEVENTH: BOARD OF DIRECTORS.
(A) The number of directors which shall constitute the whole Board of Directors
of this corporation shall initially be five.
(B) Subject to the provisions of this Article SEVENTH, nomination of candidates
for election to the Board of Directors shall be made as provided in the bylaws
of this corporation. Election of directors need not be by written ballot.
(C) Subject to Article FOURTH, Section (B)(4), the holders of the Class B Common
Stock, voting together as a separate class, shall be entitled to elect one (1)
director of the corporation, and the holders of the Class A Common Stock shall
be entitled to elect up to four (4) directors of the corporation. Subject to the
provisions of this Article SEVENTH, each director shall serve until the next
annual meeting of stockholders of this corporation following such director's
election as a member of the Board of Directors or until his or her successor is
duly elected and qualified or until his or her death, resignation,
disqualification or removal.
(D) Except as otherwise provided in Article FOURTH, Section (B)(4), or as
required by law, a vacancy in any directorship elected by the holders of the
Class B Common Stock shall be filled only by vote or written consent of the
holders of the Class B Common Stock, and a vacancy in any directorship elected
by the holders of the Class A Common Stock shall be filled only by vote or
written consent of the holders of the Class A Common Stock. Any director elected
in accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified. Except as otherwise provided in Article FOURTH,
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Section (B)(4), or as required by law, a director elected by the holders of the
Class B Common Stock may be removed without cause only by vote of holders of a
majority of the outstanding shares of Class B Common Stock, and a director
elected by the holders of the Class A Common Stock may be removed without cause
only by vote of holders of a majority of the outstanding shares of Class A
Common Stock.
(E) The name and mailing address of each person who is to serve as a director
until the first annual meeting of the stockholders after the Filing Date or
until a successor is elected or appointed and qualified are as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
- ---- ---------------
<S> <C>
Lester J. Kaplan, Ph.D. 2525 Dupont Drive
Irvine, CA 92612
William C. Shepherd 2525 Dupont Drive
Irvine, CA 92612
Gary L. Neil, Ph.D. 2525 Dupont Drive
Irvine, CA 92612
Marvin E. Rosenthale, Ph.D. 2525 Dupont Drive
Irvine, CA 92612
Alan J Lewis, Ph.D. 2525 Dupont Drive
Irvine, CA 92612
</TABLE>
EIGHTH: BYLAWS. In furtherance and not in limitation of the powers
conferred by statute, and subject to the next sentence, the Board of Directors
and the stockholders of this corporation are each expressly authorized to adopt,
amend or repeal the bylaws of this corporation subject to any particular
provisions concerning amendments set forth in this Restated Certificate of
Incorporation or the bylaws of this corporation. Any amendment of the bylaws
shall be subject to the provisions of this Restated Certificate of Incorporation
and no amendment to the bylaws may be adopted by the stockholders without the
approval of holders of a majority of the Class B Common Stock voting separately
as a class if such amendment would regulate the conduct of the Board's affairs
or the manner in which it may act.
NINTH: STOCKHOLDER MEETINGS.
(A) SPECIAL MEETINGS. Special meetings of the stockholders for any purpose or
purposes whatsoever may be called at any time only by the Board of Directors,
the Chairman of the Board or the President of this corporation.
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(B) NO ACTION WITHOUT MEETING. At any time when this corporation has more than
one stockholder of any class of capital stock, no action required to be taken or
which may be taken at any annual or special meeting of the stockholders may be
taken without a meeting, and the power of stockholders to consent in writing,
without a meeting, to the taking of any action is specifically denied.
Notwithstanding the foregoing, the holder or holders of the Class B Common Stock
may take any action permitted to be taken by such holders as a class by written
consent without a meeting.
TENTH: LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS.
(A) ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS. No director of this
corporation shall be personally liable to this corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director except, to the
extent provided by applicable law, for liability (i) for any breach of the
director's duty of loyalty to this corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. No amendment to or repeal of this Article TENTH shall
apply to or have any effect on the liability or alleged liability of any
director of this corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment.
(B) INDEMNIFICATION AND INSURANCE.
(1) RIGHT TO INDEMNIFICATION. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), because he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of this corporation or is or was
serving at the request of this corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise (including service with respect to employee benefit plans), whether
the basis of the proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
this corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits this
corporation to provide broader indemnification rights than that law permitted
this corporation to provide before such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, penalties, fines,
Employee Retirement Income Security Act of 1974 excise taxes or penalties, and
amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith; provided, however, that this corporation
shall indemnify any such person seeking
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indemnification in connection with a proceeding (or part thereof) initiated by
such person only if the proceeding (or part thereof) was authorized by the Board
of Directors of this corporation. Such indemnification shall continue as to a
person who has ceased to be a director or officer of this corporation and shall
inure to the benefit of his or her heirs, executors and administrators. The
right to indemnification conferred by this Section shall be a contract right
which may not be retroactively amended and shall include the right to be paid by
this corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that the payment of such
expenses incurred by a director or officer in his or her capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
with respect to an employee benefit plan) in advance of the final disposition of
the proceeding shall be made only upon delivery to this corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if ultimately it shall be determined that such director or officer
is not entitled to be indemnified under this Section or otherwise. This
corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of this corporation with the same scope and effect as the
indemnification of directors and officers.
(2) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Paragraph 1 of
this Section is not paid in full by this corporation within ninety (90) days
after a written claim has been received by this corporation, the claimant may at
any time thereafter bring suit against this corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to this
corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation Law for this corporation
to indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on this corporation. Neither the failure of this corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by this
corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
(3) NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or
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hereafter acquire under any statute, provision of this Restated Certificate of
Incorporation, bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise.
(4) INSURANCE. This corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of this
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not this
corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
15
<PAGE> 16
IN WITNESS WHEREOF, the undersigned officer has executed this Restated
Certificate of Incorporation on March 5, 1998 and does hereby certify that this
Restated Certificate of Incorporation, which restates and integrates, and also
further amends, the provisions of this corporation's Certificate of
Incorporation, was duly adopted by the stockholders of this corporation in
accordance with Sections 242 and 245 of the Delaware General Corporation Law.
ALLERGAN SPECIALTY THERAPEUTICS, INC.
By: /s/ Lester J. Kaplan
-------------------------------------
Lester J. Kaplan, Ph.D.
President and Chief Executive Officer
16
<PAGE> 1
EXHIBIT 10.7
Douglas S. Ingram, Esq.
Associate General Counsel
Direct: (714) 246-4535
Fax: (714) 246-4774
October 23, 1998
Francis R. Tunney, Esq.
Corporate Vice President,
General Counsel and Secretary
Allergan, Inc.
2525 Dupont Drive
Irvine, CA 92612
William C. Shepherd
President and Chief Executive Officer
Allergan Specialty Therapeutics, Inc.
2525 Dupont Drive
Irvine, CA 92612
RE: WAIVER OF POTENTIAL CONFLICT OF INTEREST
Dear Frank and Bill:
As you know, I am currently serving as in-house counsel to Allergan, Inc.
("Allergan") with the title of Associate General Counsel. In such capacity, I
handle a wide variety of legal matters on behalf of Allergan, including but not
limited to advising Allergan on matters relating to Allergan Specialty
Therapeutics, Inc.
("ASTI"), general corporate matters and other day-to-day legal matters.
I have been requested to serve as General Counsel and Secretary for ASTI. In
such capacity, I will remain an employee of Allergan but will also handle a wide
variety of legal matters for ASTI, including, but not limited to, advising ASTI
on matters relating to Allergan, general corporate matters and other day-to-day
legal matters.
As part of my ongoing concurrent representation of Allergan and ASTI, there may
be instances in which the interests of Allergan and ASTI may diverge and with
respect to which I determine that an actual conflict of interest exists in my
representation of both parties ("Actual Conflict Matters"). I will endeavor to
notify Allergan and ASTI of any Actual Conflict Matters of which I become aware.
With respect to such Actual Conflict Matters, I will cause ASTI to seek outside
<PAGE> 2
Francis R. Tunney, Jr.
William C. Shepherd
October 23, 1998
Page 2
- --------------------------------------------------------------------------------
legal advice and will refrain from giving advice to ASTI. However, regardless of
any Actual Conflict Matters, I will remain an employee of and counsel for
Allergan and will not refrain from providing advice to Allergan on any matter,
including the Actual Conflict Matter.
As an attorney in California, I am obliged to bring to your attention Rule 3-310
of the Rules of Professional Conduct promulgated by the State Bar of California
applicable to attorneys in California. Rule 3-310 provides, in relevant part:
(A) For purposes of this rule:
(1) "DISCLOSURE" means informing the client or former
client of the relevant circumstances and of the actual and reasonably
foreseeable adverse consequences to the client or former client;
(2) "INFORMED WRITTEN CONSENT" means the client's or
former client's written agreement to the representation following
written disclosure;
(3) "WRITTEN" means any writing as defined in
Evidence Code section 250.
. . .
(C) A member shall not, without the informed written consent
of each client:
(1) Accept representation of more than one client in
a matter in which the interests of the clients potentially conflict; or
(2) Accept or continue representation of more than
one client in a matter in which the interests of the clients actually
conflict; or
(3) Represent a client in a matter and at the same
time in a separate matter accept as a client a person or entity whose
interest in the first matter is adverse to the client in the first
matter.
. . .
(E) A member shall not, without the informed written consent
of the client or former client, accept employment adverse to the client
or former client, where, by reason of the representation of the client
or former client, the member has obtained confidential information
material to the employment.
<PAGE> 3
Francis R. Tunney, Jr.
William C. Shepherd
October 23, 1998
Page 3
- --------------------------------------------------------------------------------
In view of Rule 3-310 and my continuing representation of Allergan and ASTI as
outlined above, Allergan and ASTI each acknowledges (i) its express and informed
consent to my separate, ongoing and continuing representation of Allergan and
ASTI with regard to any matter other than Actual Conflict Matters and (ii) that
if an Actual Conflict Matter arises, I will not advise ASTI regarding such
matter but will continue as Allergan's counsel regardless of the Actual Conflict
Matter and will continue to provide counsel to Allergan on all matters.
You further agree that I may withdraw my continued representation of either
party at any time if, in my opinion, it might violate the applicable California
Rules of Professional Conduct. By giving your consent, you acknowledge that I
have made full disclosure to you of the facts and circumstances surrounding any
conflict of interest or potential conflict which may exist now or in the future
with regard to the foregoing matters.
Due to my ongoing separate representation of Allergan and ASTI, you understand
that I may receive confidential information from Allergan and ASTI in the course
of my separate representations. Under Rule 3-310(C), I am seeking consent only
as to the matters specified above, not to the disclosure of any confidential
information I may have received from Allergan or ASTI. Notwithstanding any
provision of this letter, I will continue to protect your respective
confidential information at all times.
I will be pleased to answer any questions you may have concerning my
representation or this requested consent. You are, of course, free to consult
independent counsel about this consent. Please indicate your consent to the
matters outlined above by signing this letter below and returning it to me.
Sincerely,
/s/ Douglas S. Ingram
Douglas S. Ingram
The foregoing is acknowledged, agreed to and consented to in all respects:
Allergan, Inc. Allergan Specialty Therapeutics, Inc.
/s/ Francis R. Tunney /s/ William C. Shepherd
- ----------------------------- -----------------------------
Francis R. Tunney, Esq. William C. Shepherd
Corporate Vice President, President and Chief Executive Officer
General Counsel and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS AND BALANCE SHEET OF ALLERGAN SPECIALTY THERAPEUTICS,
INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 158,667
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 158,667
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 165,137
<CURRENT-LIABILITIES> 4,804
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 160,299
<TOTAL-LIABILITY-AND-EQUITY> 165,137
<SALES> 0
<TOTAL-REVENUES> 9,043
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (34,296)
<INCOME-TAX> 2,512
<INCOME-CONTINUING> (36,808)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,808)
<EPS-PRIMARY> $(11.24)
<EPS-DILUTED> $(11.24)
</TABLE>
