<PAGE>
As filed with the Securities and Exchange Commission on October 10, 2000
Registration No. 333-35930
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT
NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
POZEN Inc.
(Exact name of registrant as specified in its charter)
Delaware 2834 62-1657552
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
6330 Quadrangle Drive
Suite 240
Chapel Hill, North Carolina 27514
(919) 490-0012
(Address, including zip code, and telephone number, including area code of
registrant's principal executive offices)
--------------
John R. Plachetka, Pharm.D.
POZEN Inc.
6330 Quadrangle Drive
Suite 240
Chapel Hill, North Carolina 27514
(919) 490-0012
(Name, address, including zip code and telephone number, including area code,
of agent for service)
--------------
Copies to:
Linda L. Griggs, Esq. Fred D. Hutchison, Esq. Justin P. Klein, Esq.
Morgan, Lewis & Bockius Helga L. Leftwich, Esq. Douglas M. Fox, Esq.
LLP Hutchison & Mason PLLC Ballard Spahr Andrews &
1800 M Street, N.W. Suite 100 Ingersoll, LLP
Washington, D.C. 20036- 3110 Edwards Mill Road 300 East Lombard Street
5869 Raleigh, North Carolina 19th Floor
(202) 467-7000 27612 Baltimore, Maryland
Facsimile: (202) 467- (919) 829-9600 21202
7176 Facsimile: (919) 829- (410) 528-5600
9696 Facsimile: (410) 528-
-------------- 5650
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the Securities and Exchange Commission +
+declares our registration statement effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated October 10, 2000
Preliminary Prospectus
5,000,000 Shares
POZEN INC.
Common Stock [LOGO OF POZEN INC.]
$ per share
--------------------------------------------------------------------------------
. POZEN Inc. is offering . This is our initial
5,000,000 shares. public offering and no
public market currently
exists for our shares.
. We anticipate that the . Proposed trading
initial public offering symbol: Nasdaq National
price will be between Market - POZN
$14.00 and $16.00 per
share.
-----------
This investment involves risks. See "Risk Factors" beginning on page 8.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -------
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discount......................................... $ $
Proceeds to POZEN Inc. ....................................... $ $
</TABLE>
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--------------------------------------------------------------------------------
The underwriters have a 30-day option to purchase up to 750,000 additional
shares of common stock from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of anyone's investment in these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
U.S. Bancorp Piper Jaffray
Prudential Vector Healthcare
a unit of Prudential Securities
Pacific Growth Equities, Inc.
The date of this prospectus is , 2000.
<PAGE>
[PICTURE OF MT 100 TABLETS]
MT 100
Oral tablets for first-line therapy
for migraine treatment
[LOGO OF POZEN, INC.]
[PICTURE OF MT 500 CAPSULES] [PICTURE OF MT 300 SYRINGES]
MT 500 MT 300
Oral capsules for Injectable therapy for
migraine prevention severe migraine treatment
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................................................. 4
Risk Factors........................................................ 8
Forward-Looking Statements.......................................... 18
Use Of Proceeds..................................................... 19
Dividend Policy..................................................... 19
Capitalization...................................................... 20
Dilution............................................................ 22
Selected Financial Data............................................. 24
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 25
Business............................................................ 31
Management.......................................................... 47
Certain Relationships And Related Transactions...................... 54
Principal Stockholders.............................................. 55
Description Of Capital Stock........................................ 57
Shares Eligible For Future Sale..................................... 61
Underwriting........................................................ 63
Legal Matters....................................................... 65
Experts............................................................. 65
Where You Can Find More Information................................. 66
Index To Financial Statements....................................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate
as of the date on the front cover, but the information may have changed since
that date.
3
<PAGE>
SUMMARY
This summary highlights information contained in this prospectus that we
believe is important. You should read the entire prospectus, especially "Risk
Factors" and the consolidated financial statements and notes, for a complete
understanding of our business and this offering, before deciding to invest in
shares of our common stock.
Our Business
We are a pharmaceutical development company committed to building a portfolio
of products with significant commercial potential in select therapeutic areas.
Our initial area of focus is migraine, where we have built a portfolio of four
product candidates through a combination of innovation and in-licensing. Our
lead product candidate is MT 100(TM) , which we are developing as an oral
first-line therapy for the treatment of migraine. As of September 2000, we have
completed three Phase 3 clinical trials of MT 100. We are currently conducting
two additional Phase 3 clinical trials of MT 100 which should be completed by
year end 2000. In addition to our MT 100 trials, we expect to begin two
additional Phase 3 or Phase 2 clinical trials for two of our other migraine
product candidates by the first half of 2001.
Migraine is characterized by recurring attacks of headache that are often
accompanied by visual, auditory or stomach disturbances. The average migraine
patient experiences attacks throughout his or her adult life. Migraine attacks
typically vary in severity. A variety of oral, injectable and intranasal
therapies are currently used to treat migraine attacks. We estimate that global
sales of prescription pharmaceuticals for the treatment of migraine will exceed
$2.0 billion by 2001. Triptans are the family of drugs most commonly prescribed
for the treatment of migraine attacks. According to statistics from IMS
Health's Retail and Provider Perspective, triptans represented approximately
$1.1 billion of sales in the U.S. in 1999. Although triptans can be effective
in treating migraine, they have several significant side effects, including
potentially fatal cardiac events. In addition, patients treated with triptans
often do not achieve sustained pain relief.
MT 100, our proprietary product candidate, combines metoclopramide
hydrochloride, a commercially available agent that relieves nausea and enhances
gastric emptying, and naproxen sodium, a commercially available anti-
inflammatory and analgesic agent. To date, more than 2,250 patients have
received MT 100 in Phase 2 and Phase 3 clinical trials. We believe that data
from these trials indicate that MT 100 provides more rapid and sustained
migraine pain relief compared to placebo and to MT 100's individual components.
We also believe that data from our trials indicate that MT 100 is as effective
as Imitrex(R), the leading triptan in terms of U.S. sales, in treating
migraine. Furthermore, MT 100 has been generally well tolerated, with no
indications of any serious cardiovascular events.
We are developing MT 300 to provide safe, convenient and long-lasting migraine
pain relief for patients needing an injectable therapy for severe migraines. MT
300 is a proprietary injectable formulation of the commercially available
compound dihydroergotamine mesylate, or DHE. In November 1998, we completed a
291 patient Phase 2 clinical trial of MT 300. In this clinical trial, MT 300
was well tolerated and, at the highest dosing level, MT 300 demonstrated a
statistically significant improvement in the percentage of patients achieving
sustained pain relief when compared to placebo. We plan to initiate an initial
Phase 3 clinical trial of MT 300 by the first half of 2001.
Pursuant to an agreement signed in September 1999 with F. Hoffmann-La Roche
Ltd, we are developing MT 500, an oral prophylactic treatment, or prevention,
of migraine pain. The migraine prophylactic market is currently composed of
drugs that were developed primarily for conditions other than migraine. Many of
those drugs have side effects, including fatigue, sexual dysfunction, weight
gain, insomnia and liver toxicity. We intend to initiate a Phase 2 clinical
trial of MT 500 in the second half of 2001.
4
<PAGE>
We are developing MT 400 as a co-active migraine therapy, which combines the
activity of a commercially approved triptan drug with that of a commercially
approved long-acting, non-steroidal, anti-inflammatory drug, which is a drug
that eliminates inflammation without the use of steroids. We believe that MT
400 may offer a faster onset of action and a longer duration of migraine
symptom relief than use of either drug component by itself. In addition, we
believe that the potential risks of triptan-related side effects may also be
reduced with MT 400.
In addition to migraine, members of our management team have significant
experience developing drugs for diseases of the gastrointestinal and
respiratory tracts, oncology and infectious diseases. We intend to leverage our
development expertise in these therapeutic areas, as well as in migraine, to
become a leading pharmaceutical development company.
5
<PAGE>
Office Location
Our offices are located at 6330 Quadrangle Drive, Suite 240, Chapel Hill, North
Carolina 27514, and our telephone number is (919) 490-0012.
The Offering
<TABLE>
<C> <S>
Common stock offered........................ 5,000,000 shares
Common stock outstanding after this
offering................................... 26,428,361 shares
Offering price.............................. $ per share
Use of proceeds............................. We intend to use the net
proceeds of this offering to
fund the cost of development,
approval and commercialization
of our product candidates, to
acquire products that are
complementary to ours and for
general corporate and working
capital purposes. See the
discussion under the caption
"Use of Proceeds" for a more
detailed description.
Proposed Nasdaq National Market symbol...... POZN
</TABLE>
The number of shares of our common stock outstanding after this offering is
based on shares outstanding as of August 28, 2000, and does not take into
account:
. 1,506,270 shares of common stock issuable upon the exercise of stock
options outstanding as of August 28, 2000 at a weighted average exercise
price of $1.12 per share;
. 348,595 shares of preferred stock issuable upon the exercise of
outstanding warrants, which will convert immediately prior to
consummation of this offering into warrants to purchase 470,255 shares
of our common stock, at an estimated weighted average exercise price of
$2.12 per share (based upon an assumed initial public offering price of
$15.00 per share and also assuming that warrants exercisable for our
series E convertible preferred stock will, at the time of the offering,
become warrants for common stock with an exercise price equal to the
initial public offering price); and
. 750,000 shares of common stock issuable upon the exercise of the
underwriters' over-allotment option.
Generally, the information in this prospectus, unless otherwise noted:
. reflects the issuance of 1,597,285 shares of series F convertible
preferred stock on August 28, 2000 for net proceeds of $10,742,000;
. reflects the reduction on September 15, 2000 of the conversion price of
the shares of the series E and the series F convertible preferred stock
pursuant to the terms of the series E and the series F convertible
preferred stock, respectively, to $4.25 per share;
. assumes the payment of $756,340 of dividends accumulated through
September 30, 2000 payable upon the automatic conversion of the series E
and the series F convertible preferred stock at the time of this
offering by delivery of 50,423 shares of our common stock based upon an
assumed initial public offering price of $15.00 per share and based upon
our estimate as of September 15, 2000 of the amount of accumulated
dividends that holders of series E convertible preferred stock will
elect to receive in shares of common stock in lieu of cash;
. reflects the conversion of all of the outstanding shares of preferred
stock into an aggregate of 15,555,663 shares of common stock, as
adjusted for the stock split, upon the closing of this offering; and
. reflects a 1.349-for-1 split of our common stock to holders of record
prior to the effectiveness of this offering.
Corporate Information
We were incorporated in Delaware in September 1996. We have trademark
protection for POZEN(R), MT(TM) and our logo. Each of the other trademarks,
trade names or service marks appearing in this prospectus belongs to its
respective holder.
6
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
September 26, 1996 Six Months Ended
Year Ended December 31, (inception) June 30,
-------------------------- through December -----------------------
1997 1998 1999 31, 1999 1999 2000
------- ------- -------- ------------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating expenses:
General and
administrative........ $ 1,021 $ 1,478 $ 2,320 $ 4,905 $ 884 $ 2,083
Research and
development........... 3,097 7,569 9,458 20,149 3,025 7,264
------- ------- -------- -------- ------- --------
Total operating
expenses............... 4,118 9,047 11,778 25,054 3,909 9,347
Interest income
(expense), net......... 315 309 (367) 267 (42) 305
------- ------- -------- -------- ------- --------
Net loss................ (3,803) (8,738) (12,145) (24,787) (3,951) (9,042)
Non-cash preferred stock
charge................. -- -- -- -- -- 16,875
Preferred stock
dividends.............. -- -- -- -- -- 391
------- ------- -------- -------- ------- --------
Net loss attributable to
common
stockholders........... $(3,803) $(8,738) $(12,145) $(24,787) $(3,951) $(26,308)
======= ======= ======== ======== ======= ========
Basic and diluted net
loss per common share.. $ (0.65) $ (1.50) $ (2.08) $ (0.68) $ (4.48)
======= ======= ======== ======= ========
Shares used in computing
basic and diluted net
loss per common share.. 5,814 5,835 5,845 5,844 5,866
======= ======= ======== ======= ========
Pro forma net loss per
common share--basic and
diluted
(unaudited)(1)......... $ (1.01) $ (1.56)
Pro forma weighted
average common shares
outstanding--basic and
diluted
(unaudited)(1)......... 12,008 16,811
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(2)
----------- ------------ --------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............. $13,850 $13,850 $82,100
Total assets.......................... 14,147 14,147 82,397
Redeemable preferred stock............ 16,614 -- --
Accumulated deficit .................. (34,220) (34,220) (34,220)
Total stockholders' equity
(deficit)(3)......................... (6,159) 10,716 78,966
</TABLE>
----------------------------
(1) The pro forma information assumes:
. the reduction on September 15, 2000 of the conversion price of the
shares of the series E convertible preferred stock pursuant to the
terms of the series E convertible preferred stock to $4.25 per share;
. the payment of $390,575 of dividends accumulated through June 30, 2000
upon the automatic conversion of the series E convertible preferred
stock at the time of this offering by delivery of 26,038 shares of our
common stock based upon an assumed initial public offering price of
$15.00 per share and based upon our estimate as of September 15, 2000
of the amount of accumulated dividends that holders of series E
convertible preferred stock will elect to receive in shares of common
stock in lieu of cash;
. the conversion of all shares of preferred stock outstanding as of June
30, 2000 into an aggregate of 12,909,256 shares of common stock, as
adjusted for the stock split, upon the closing of this offering; and
. a 1.349-for-1 split of our common stock to holders of record prior to
the effectiveness of this offering.
(2) The pro forma as adjusted balance sheet data gives effect to the pro forma
assumptions described in note 1 and to the issuance of 5,000,000 shares of
common stock in this offering at an assumed offering price of $15.00 per
share, after deducting underwriting discounts and estimated offering
expenses payable by us.
(3) Includes warrants exercisable for 348,595 shares of preferred stock that
will become warrants exercisable for 470,255 shares of common stock upon
the closing of this offering.
7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before you decide to
buy our common stock. If any of these risks actually occurs, our business
prospects, financial condition, operating results or cash flows could be
materially adversely affected. This could cause the trading price of our common
stock to decline, and you may lose part or all of your investment.
Risks Related to Our Business
We depend heavily on the success of our lead product candidate, MT 100, which
is still in clinical trials and may never be approved for commercial use. If we
are unable to develop, gain approval of or commercialize MT 100, we may never
be profitable.
Since our founding, we have invested a significant portion of our time and
financial resources in the development of MT 100 and anticipate that for the
foreseeable future our ability to achieve profitability will be dependent on
its successful development, approval and commercialization. Many factors could
negatively affect the success of our efforts to develop and commercialize MT
100, including:
. negative, inconclusive or otherwise unfavorable results from our
toxicology, genotoxicity or carcinogenicity studies or from our
clinical trials;
. an inability to obtain, or delay in obtaining, regulatory approval
for the commercialization of MT 100;
. an inability to establish collaborative arrangements with third
parties for the manufacture and commercialization of MT 100, or any
disruption of any of these arrangements, if established;
. a failure to achieve market acceptance of MT 100;
. significant delays in our ongoing clinical trials and toxicology,
genotoxicity and carcinogenicity studies; and
. significant increases in the costs of our clinical trials and
toxicology, genotoxicity and carcinogenicity studies.
We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable.
We have incurred losses in each year since our inception and we currently have
no source of product revenue. As of June 30, we had an accumulated deficit of
approximately $34.2 million. We expect to incur significant and increasing
operating losses and do not know when or if we will generate product revenue.
We expect that the amount of our operating losses will fluctuate significantly
from quarter to quarter as a result of increases and decreases in development
efforts, the timing of payments that we may receive from others, and other
factors. Our ability to achieve profitability is dependent on a number of
factors, including our ability to:
. develop and obtain regulatory approvals for our product candidates;
. receive upfront and milestone payments;
. successfully commercialize our product candidates, which may include
entering into collaborative agreements; and
. secure contract manufacturing and distribution services.
8
<PAGE>
If we, or our collaborators, do not obtain and maintain required regulatory
approvals, we will be unable to commercialize our product candidates.
Our product candidates under development are subject to extensive domestic and
foreign regulation. The FDA regulates, among other things, the development,
testing, manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertisement, promotion, sale and distribution of pharmaceutical
products. If we market our products abroad, they are also subject to extensive
regulation by foreign governments. None of our product candidates, including MT
100, has been approved for sale in the United States or any foreign market. We
will need to successfully complete clinical testing and toxicology studies for
each of our product candidates, including MT 100, before submitting a New Drug
Application, or NDA, to the FDA for approval to market the product candidate.
If we are unable to obtain and maintain FDA and foreign governmental approvals
for our product candidates, we will not be permitted to sell them.
Approval of a product candidate may be conditioned upon certain limitations and
restrictions as to the drug's use, or upon the conduct of further studies, and
is subject to continuous review. The FDA may also require us to conduct
additional post-approval studies. These post-approval studies may include
carcinogenicity studies in animals or further human clinical trials. The later
discovery of previously unknown problems with the product, manufacturer or
manufacturing facility may result in criminal prosecution, civil penalties,
recall or seizure of products, total or partial suspension of production, as
well as other regulatory action against our product candidates or us. If
approvals are withdrawn for a product, or if a product were seized or recalled,
we would be unable to sell that product and our revenues would suffer.
We and our contract manufacturers are required to comply with the applicable
FDA current Good Manufacturing Practices, or cGMP, regulations, which include
requirements relating to quality control and quality assurance, as well as the
corresponding maintenance of records and documentation. Further, manufacturing
facilities must be approved by the FDA before they can be used to manufacture
our product candidates, and are subject to additional FDA inspection. We or our
third-party manufacturers may not be able to comply with cGMP regulations or
other FDA regulatory requirements, resulting in delay or inability to
manufacture the products.
Labeling and promotional activities are subject to scrutiny by the FDA and
state regulatory agencies and, in some circumstances, the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products
for unapproved, or off-label, uses. These regulations and the FDA's
interpretation of them may impair our ability to effectively market products
for which we gain approval. Failure to comply with these requirements can
result in regulatory enforcement action by the FDA. Further, we may not obtain
the labeling claims we believe are necessary or desirable for the promotion of
our product candidates.
We need to conduct preclinical, toxicology, genotoxicity and carcinogenicity
studies and clinical trials of all of our product candidates. Any unanticipated
costs or delays in these studies or trials, or the need to conduct additional
trials, could reduce our revenues and profitability.
Generally, we must demonstrate the efficacy and safety of our product
candidates before approval to market can be obtained from the FDA. Our product
candidates are in various stages of clinical development. Depending upon the
stage at which a product candidate is in the development process, we will need
to complete preclinical, toxicology, genotoxicity and carcinogenicity studies,
as well as clinical trials on these product candidates before we submit
marketing applications in the United States and abroad. These studies and
trials can be very costly and time-consuming. In addition, we rely on third
parties to perform significant aspects of our studies and clinical trials,
introducing additional sources of risk into our development programs. Results
from preclinical testing and early clinical trials
9
<PAGE>
are not necessarily predictive of results obtained in later clinical trials
involving large scale testing of patients in comparison to control groups.
The completion of clinical trials depends upon many factors, including the rate
of enrollment of patients. If we are unable to accrue sufficient clinical
patients during the appropriate period, we may need to delay our clinical
trials and incur significant additional costs. In addition, FDA or
Institutional Review Boards may require us to conduct additional trials or
delay, restrict or discontinue our clinical trials on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk. Even if we complete our clinical trials, we may be
unable to submit an NDA to the FDA as scheduled. Once submitted, an NDA would
require FDA approval before we could distribute or commercialize the product
described in the application.
Even if we determine that data from our clinical trials, toxicology,
genotoxicity and carcinogenicity studies are positive, we cannot assure you
that the FDA, after completing its analysis, will not determine that the trials
should have been conducted or analyzed differently, and thus reach a different
conclusion from that reached by us, or request that further trials or analysis
be conducted. For example, the FDA may also require data in certain
subpopulations, such as pediatric use, prior to NDA approval, unless we can
obtain a waiver to delay such a study.
Our costs associated with our human clinical trials vary based on a number of
factors, including:
. the order and timing of clinical indications pursued;
. the extent of development and financial support from collaborative
parties, if any;
. the number of patients required for enrollment;
. the difficulty in obtaining sufficient patient populations and
clinicians;
. the difficulty of obtaining clinical supplies of our product
candidates; and
. governmental and regulatory delays.
Even if we obtain positive preclinical or clinical study results initially,
future clinical trial results may not be similarly positive.
We depend on collaborations with third parties, which may reduce our product
revenues or restrict our ability to commercialize products.
Our ability to develop, manufacture, commercialize and obtain regulatory
approval of our existing and any future product candidates depends upon our
ability to enter into and maintain contractual and collaborative arrangements
with others. We have and intend in the future to retain contract manufacturers
and clinical trial investigators. In addition, the identification of new
compounds or product candidates for development may require us to enter into
licensing or other collaborative agreements with others, including
pharmaceutical companies and research institutions. We currently intend to
market and commercialize our products through others, which will require us to
enter into sales, marketing and distribution arrangements with third parties.
These arrangements may reduce our product revenues.
Our third party contractual or collaborative arrangements may require us to
grant rights, including marketing rights, to one or more parties. These
arrangements may also contain covenants restricting our product development or
business efforts in the future, or other terms which are burdensome to us,
10
<PAGE>
and may involve the acquisition of our equity securities. Collaborative
agreements for the acquisition of new compounds or product candidates may
require us to pay license fees, make milestone payments and/or pay royalties.
We cannot be sure that we will be able to maintain our existing or future
collaborative or contractual arrangements, or that we will be able to enter
into future arrangements with third parties on terms acceptable to us, or at
all. If we fail to maintain our existing arrangements or to establish new
arrangements when and as necessary, we could be required to undertake these
activities at our own expense, which would significantly increase our capital
requirements and may delay the development, manufacture and commercialization
of our product candidates.
We are subject to a number of risks associated with our dependence on
contractual and collaborative arrangements with others:
. We may not have day-to-day control over the activities of our
contractors or collaborators.
. Third parties may not fulfill their obligations to us.
. We may not realize the contemplated or expected benefits from
collaborative or other arrangements.
. Business combinations and changes in the contractual or collaborative
party's business strategy may adversely affect its willingness or
ability to complete its obligations to us.
. The contractor or collaborative party may have the right to terminate
its arrangements with us on limited or no notice and for reasons
outside of our control.
. The contractual or collaborative party may develop or have rights to
competing products or product candidates and withdraw support or
cease to perform work on our products.
. Disagreements may arise regarding breach of the arrangement,
ownership of proprietary rights, clinical results or regulatory
approvals.
These factors could lead to delays in the development or commercialization of
our product candidates, and disagreements with our contractors or collaborators
could require or result in litigation or arbitration, which would be time-
consuming and expensive. Our ultimate success may depend upon the success and
performance on the part of these third parties. If we fail to maintain these
relationships or establish new relationships as required, development and
commercialization of our product candidates will be delayed.
We currently depend and will in the future depend on third parties to
manufacture our product candidates, including MT 100. If these manufacturers
fail to meet our requirements, the product development and commercialization of
our product candidates will be delayed.
We do not have, and have no plans to develop, the internal capability to
manufacture either clinical trial or commercial quantities of products that we
may develop or are under development. We rely upon third party manufacturers to
supply us with MT 100 and our other product candidates. We are negotiating a
contract with the manufacturer of our clinical trial materials to manufacture
MT 100 commercially; however, we may not be able to reach an agreement on terms
agreeable to us. Even if we are able to negotiate a commercial supply contract
with our current manufacturer, there is no guarantee that this manufacturer
will be a financially viable entity going forward. If any of the foregoing
occurs, or if our current manufacturer is unable to satisfy our requirements,
and we are required to find an alternative source of supply, there may be
additional cost and delays in product development and commercialization of our
product candidates, including MT 100, or we may be required to comply with
additional regulatory requirements.
11
<PAGE>
If we are unable to build sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize any of our drug candidates.
We intend to enter into agreements with third parties to market and sell any of
our product candidates approved by the FDA for commercial sale. We may not be
able to enter into marketing and sales agreements with others on terms
acceptable to us, if at all. To the extent that we enter into marketing and
sales agreements with others, our revenues, if any, will be affected by the
sales and marketing efforts of others. We may also retain the right, where
possible, to co-promote our products in conjunction with our collaborative
parties. If we are unable to enter into third-party sales and marketing
agreements, or if we are exercising our rights to co-promote a product, then we
will be required to develop internal marketing and sales capabilities. We may
not successfully establish marketing and sales capabilities or have sufficient
resources to do so.
If our competitors develop and commercialize products faster than we do or if
their products are superior to ours, our commercial opportunities will be
reduced or eliminated.
Our product candidates will have to compete with existing migraine therapies.
There are also numerous competitors developing new products to treat migraine
and the other diseases and conditions for which we may seek to develop products
in the future, which could render our product candidates or technologies
obsolete or non-competitive. Our competitors include large pharmaceutical
companies, biotechnology companies, universities and public and private
research institutions. We face, and will continue to face, intense competition
from other companies for securing collaborations with pharmaceutical companies,
establishing relationships with academic and research institutions, and
acquiring licenses to proprietary technology. These competitors, either alone
or with collaborative parties, may succeed with technologies or products that
are more effective than any of our current or future technologies or products.
Many of our actual or potential competitors, either alone or together with
collaborative parties, have substantially greater financial resources, and
almost all of our competitors have larger numbers of scientific and
administrative personnel than we do. Many of these competitors, either alone or
together with their collaborative parties, also have significantly greater
experience than we do in:
. developing product candidates;
. undertaking preclinical testing and human clinical trials;
. obtaining FDA and other regulatory approvals of product candidates;
and
. manufacturing and marketing products.
Accordingly, our actual or potential competitors may succeed in obtaining
patent protection, receiving FDA approval or commercializing products before we
do. Our competitors may also develop products or technologies that are superior
to those we are developing, and render our product candidates or technologies
obsolete or non-competitive. If we cannot successfully compete with new or
existing products, our marketing and sales will suffer and we may not ever be
profitable.
If we are unable to protect our patents or proprietary rights, or if we are
unable to operate our business without infringing the patents and proprietary
rights of others, we may be unable to develop our product candidates or compete
effectively.
The pharmaceutical industry places considerable importance on obtaining patent
and trade secret protection for new technologies, products and processes. Our
success will depend, in part, on our ability, and the ability of our licensors,
to obtain and to keep protection for our products and technologies under the
patent laws of the United States and other countries, so that we can stop
others from using our inventions. Our success also will depend on our ability
to prevent others from using our trade secrets. In addition, we must operate in
a way that does not infringe, or violate, the patent, trade secret, and other
intellectual property rights of other parties.
12
<PAGE>
We cannot know how much protection, if any, our patents will provide or whether
our patent applications will issue as patents. The breadth of claims that will
be allowed in patent applications cannot be predicted and neither the validity
nor enforceability of claims in issued patents can be assured. If, for any
reason, we are unable to obtain and enforce valid claims covering our products
and technology, we may be unable to prevent competitors from using the same or
similar technology or to prevent competitors from marketing identical products.
In addition, due to the extensive time needed to develop and test our products,
any patents that we obtain may expire in a short time after commercialization.
This would reduce or eliminate any advantages that such patents may give us.
We may need to license rights to third party patents and intellectual property
to continue the development and marketing of our product candidates. If we are
unable to acquire such rights on acceptable terms, our development activities
may be blocked and we may be unable to bring our product candidates to market.
We may enter into litigation to defend ourselves against claims of
infringement, assert claims that a third party is infringing one or more of our
patents, protect our trade secrets or know-how, or to determine the scope and
validity of other's patent or proprietary rights. As a result of such
litigation, our patent claims may be found to be invalid, unenforceable or not
of sufficient scope to cover the activities of an alleged infringer. If we are
found to infringe the patent rights of others, then we may be forced to pay
damages sufficient to irreparably damage the company and/or be prevented from
continuing our product development and marketing activities. Regardless of its
eventual outcome, any lawsuit that we enter into may consume time and resources
that will impair our ability to develop and market our product candidates.
We have entered into confidentiality agreements with our employees,
consultants, advisors and collaborators. However, these parties may not honor
these agreements and, as a result, we may not be able to protect our rights to
unpatented trade secrets and know-how. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how. Also, many of our scientific and
management personnel were previously employed by competing companies. As a
result, such companies may allege trade secret violations and similar claims
against us.
If we fail to acquire, develop and commercialize additional products or product
candidates, or fail to successfully promote or market approved products, we may
never achieve profitability.
As part of our business strategy, we plan to identify and acquire product
candidates or approved products in areas in which we possess particular
knowledge. Because we do not directly engage in basic research or drug
discovery, we must rely upon third parties to sell or license product
opportunities to us. Other companies, including some with substantially greater
financial, marketing and sales resources, are competing with us to acquire such
products. We may not be able to acquire rights to additional products on
acceptable terms, if at all. In addition, we may acquire new products with
different marketing strategies, distribution channels and bases of competition
than those of our current products. Therefore, we may not be able to compete
favorably in those product categories.
Any of our future products, including MT 100, may not be accepted by the
market, which would limit the commercial opportunities for our products.
Even if our product candidates perform successfully in clinical trials and are
approved by the FDA and other regulatory authorities, our future products,
including MT 100, may not achieve market acceptance and may not generate the
revenues that we anticipate. The degree of market acceptance will depend upon a
number of factors, including:
. the receipt and timing of regulatory approvals;
13
<PAGE>
. the availability of third-party reimbursement;
. indications for which the product is approved;
. rate of adoption by health care providers;
. rate of product acceptance by target patient populations;
. price of product relative to alternative therapies;
. availability of alternative therapies;
. extent of marketing efforts by us and third-party distributors and
agents;
. publicity regarding our products or similar products; and
. extent and severity of side effects as compared to alternative
therapies.
If we do not receive adequate third-party reimbursements for any of our future
products, our revenues and profitability will be reduced.
Our ability to commercialize our product candidates successfully will depend,
in part, on the extent to which reimbursement for the costs of such products
and related treatments will be available from government health administration
authorities, such as Medicare and Medicaid in the United States, private health
insurers and other organizations. Significant uncertainty exists as to the
reimbursement status of a newly approved health care product particularly for
indications for which there is no current effective treatment or for which
medical care is typically not sought. Adequate third-party coverage may not be
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of our products, our products may fail to achieve
market acceptance.
Our future revenues, profitability and access to capital will be affected by
the continuing efforts of governmental and private third-party payors to
contain or reduce the costs of health care through various means. We expect
that a number of federal, state and foreign proposals will seek to control the
cost of drugs through governmental regulation. We are unsure of the form that
any health care reform legislation may take or what actions federal, state,
foreign and private payors may take in response to the proposed reforms.
Therefore, we cannot predict the effect of any implemented reform on our
business.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
product candidates.
The testing and marketing of pharmaceutical products entails an inherent risk
of product liability. Product liability claims might be brought against us by
consumers, health care providers, pharmaceutical companies or others selling
our future products. If we cannot successfully defend ourselves against such
claims, we may incur substantial liabilities or be required to limit the
commercialization of our product candidates. We have obtained limited product
liability insurance coverage only for our human clinical trials. However,
insurance coverage is becoming increasingly expensive, and no assurance can be
given that we will be able to maintain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses due to liability. We may
not be able to obtain commercially reasonable product liability insurance for
any products approved for marketing. If a plaintiff brings a successful product
liability claim against us in excess of our insurance coverage, if any, we may
incur substantial liabilities and our business may fail.
14
<PAGE>
We may need substantial additional funding and may not have access to capital.
If we are unable to raise capital when needed, we may need to delay, reduce or
eliminate our product development or commercialization efforts.
We may need to raise additional funds to execute our business strategy. We have
incurred losses from operations since inception and we expect to incur
additional operating losses. In particular, we believe that we will require
additional capital to fund the acquisition of new product candidates. Our
actual capital requirements will depend upon numerous factors, including:
. the progress of our research and development programs;
. the progress of preclinical studies and clinical testing;
. the time and cost involved in obtaining regulatory approvals;
. the costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
. the effect of competing technological and market developments;
. the effect of changes and developments in our collaborative,
licensing and other relationships; and
. the terms and timing of any new collaborative, licensing and other
arrangements that we may establish.
We may be unable to raise sufficient funds to execute our business strategy. In
addition, we may not be able to find sufficient debt or equity funding on
acceptable terms. If we cannot, we may need to delay, reduce or eliminate
research and development programs. The sale by us of additional equity
securities or the expectation that we will sell additional equity securities
may have an adverse effect on the price of our common stock. In addition,
collaborative arrangements may require us to grant product development programs
or licenses to third parties for products that we might otherwise seek to
develop or commercialize ourselves.
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our research and
development efforts.
We are highly dependent on the efforts of our key management and scientific
personnel, especially John Plachetka, our President, Chief Executive Officer
and Chief Scientist. Dr. Plachetka signed an employment agreement with us on
April 1, 1999, for a three-year term with automatic one year renewal terms. We
do not have employment agreements with our other key management personnel. If
we lose the services of Dr. Plachetka or the services of any of our other key
personnel, or fail to recruit key scientific personnel, we may be unable to
achieve our business objectives. There is intense competition for qualified
scientific personnel. Since our business is very science-oriented, we need to
continue to attract and retain such people. We may not be able to continue to
attract and retain the qualified personnel necessary for developing our
business. Furthermore, our future success will also depend in part on the
continued service of our other key management personnel.
Risks Related to this Offering
Our stock price is likely to be highly volatile, and if the market price of our
common stock after this offering is lower than the price you paid, you may not
be able to sell your shares without incurring a loss.
Prior to this offering, there has been no public market for our common stock.
If you purchase shares of our common stock in this offering, you will not pay a
price that was established in a competitive
15
<PAGE>
market. Rather, you will pay a price that we negotiated with the
representatives of the underwriters. After this offering, an active trading
market in our stock might not develop or continue.
The market prices for securities of early-stage pharmaceutical and
biotechnology companies have been particularly volatile. Some of the factors
that may cause the market price of our common stock to fluctuate include:
. results of preclinical studies and clinical trials conducted by us or
on our behalf, or by our competitors;
. announcements of technological innovations or new commercial products
by us, by third parties with respect to strategic relationships
maintained with us, or by our competitors;
. regulatory developments in both the United States and foreign
countries;
. changes in reimbursement policies;
. developments or disputes concerning patents or other proprietary
rights;
. fluctuations in our operating results;
. changes in financial estimates or recommendations by security
analysts;
. public concern as to the safety and efficacy of products developed by
us, our collaborators or our competitors;
. lack of adequate trading liquidity as a public company;
. future sales or distributions of our common stock; and
. general market conditions.
In the past, following periods of volatility in the marketplace of a particular
company's securities, securities class action litigation has often been brought
against the company. We may become involved in this type of litigation in the
future. Litigation of this type is often extremely expensive and diverts
management's attention and resources.
As a result of prior sales of our common stock at prices lower than the price
in this offering, you will incur immediate and substantial dilution of the
value of your shares.
The offering price of our common stock is substantially higher than the net
tangible pro forma book value per share of our outstanding common stock. As a
result, investors purchasing common stock in this offering at an assumed
initial public offering price of $15.00 per share will incur immediate and
substantial dilution in the net tangible book value of their common stock of
$11.61 per share on a pro forma basis as of June 30, 2000. In the past, we
issued options and warrants to acquire capital stock at prices significantly
below the assumed offering price. There will be further dilution to investors
when any of these outstanding options and warrants are exercised.
Future sales of our common stock could cause the market price of our common
stock to decline.
The market price of our common stock could decline due to sales of a large
number of shares in the market after this offering or the perception that such
sales could occur, including sales or distributions of shares by our large
stockholders. These sales could also make it more difficult for us to sell
equity securities in the future.
16
<PAGE>
Our certificate of incorporation and bylaws may prevent or frustrate any
attempt to replace or remove the current management of the Company by
stockholders.
Our certificate of incorporation and bylaws, as in effect on the date of this
offering, include a number of provisions that may deter or impede changes of
control or management. These provisions include:
. our board of directors is classified into classes of directors with
staggered three-year terms;
. our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to determine the price, rights,
preferences and privileges of these shares, all without stockholder
approval;
. all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;
. special meetings of the stockholders may be called only by the chairman
of our board of directors, the chief executive officer or our board of
directors;
. a supermajority (75%) vote of our stockholders is required to remove a
member of our board of directors, and then only for cause; and
. no cumulative voting is permitted.
These provisions may have the effect of delaying or preventing a change of
control, even at stock prices higher than the then current price of our stock.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These forward-
looking statements include statements about the following:
. our product development efforts;
. anticipated regulatory requirements and clinical trial initiation dates
for our product candidates;
. our clinical trials;
. future collaborative agreements;
. status of our regulatory process for MT 100 and other product
candidates;
. plans for manufacturing, sales and marketing;
. competitive factors;
. patent and proprietary rights;
. our intentions to identify and acquire product candidates or approved
products;
. market acceptance of our approved products;
. royalty, license and other revenues;
. technological change;
. implementation of corporate strategy;
. financial performance; and
. governmental regulation.
When used in this prospectus, we intend the words "believe," "anticipate,"
"estimate," "expect," "seek," "intend," and "may" to identify "forward-looking
statements." Our forward-looking statements involve uncertainties and other
factors that may cause our actual results, performances or achievements, to be
far different from that suggested by our forward-looking statements. We discuss
these factors in more detail elsewhere in this prospectus, including under the
captions "Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." The cautionary
statements made under "Risk Factors" and elsewhere in this prospectus should be
read as being applicable to all related forward-looking statements wherever
they may appear. You should not place undue reliance on our forward-looking
statements.
The safe harbor for forward-looking statements contained in the Securities
Litigation Reform Act of 1995 protects companies from liability for their
forward-looking statements if they comply with the requirements of the Act. The
Act does not provide this protection for initial public offerings.
18
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 5,000,000 shares of common
stock in this offering will be approximately $68.3 million, or approximately
$78.7 million if the underwriters exercise their over-allotment option in full.
This is based upon an assumed initial public offering price of $15.00 per
share, less underwriting discounts and estimated offering expenses.
We expect to use these proceeds for the following purposes:
. approximately 65% for the development, approval and commercialization of
our product candidates;
. approximately 25% to acquire products that are complementary to ours;
and
. approximately 10% for general corporate and working capital purposes.
We will retain broad discretion in the allocation of the net proceeds of this
offering, and the amounts and timing of our actual expenditures for each
purpose may vary significantly depending upon numerous factors, including:
. the size, scope and progress of our product candidate development
efforts;
. regulatory approvals;
. competition;
. marketing and sales activities;
. the market acceptance of any products introduced by us;
. future revenue growth, if any; and
. the amount of cash, if any, we generate from operations.
Pending the uses described above, we intend to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on either our common or preferred stock. We
currently intend to retain all of our future earnings to finance the growth and
development of our business. We do not intend to pay cash dividends to our
stockholders in the foreseeable future, except for any cash dividends paid to
the holders of our series E convertible preferred stock at the time of this
offering. The terms of our series E and series F convertible preferred stock
provide for the payment of accumulated dividends upon their automatic
conversion at the time of this offering, which dividends are payable to the
holders of our series E convertible preferred stock either in shares of our
common stock or in cash, at the option of the holder, and, to the holders of
our series F convertible preferred stock, in shares of our common stock.
19
<PAGE>
CAPITALIZATION
(in thousands, except share and per share data)
The following table sets forth our capitalization as of June 30, 2000 on an
actual, pro forma and pro forma as adjusted basis. This table is based on the
number of outstanding shares as of June 30, 2000 and does not include the
following:
. 1,506,270 shares of common stock issuable upon the exercise of stock
options outstanding as of August 28, 2000 at a weighted average
exercise price of $1.12 per share; and
. 348,595 shares of preferred stock issuable upon the exercise of
outstanding warrants, which will immediately prior to completion of
this offering become warrants to purchase 470,255 shares of our
common stock at an estimated weighted average exercise price of $2.12
per share (based upon an assumed initial public offering price of
$15.00 per share and also assuming that warrants exercisable for our
series E convertible preferred stock will, at the time of the
offering, become warrants for common stock with an exercise price
equal to the initial public offering price).
The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(2)
----------- ------------ --------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents.............. $13,850 $24,592 $92,842
======= ======= =======
Redeemable convertible Series E
preferred stock, $0.001 par value;
3,167,260 shares designated, 2,589,927
shares issued and outstanding, actual,
no shares issued and outstanding, pro
forma and pro forma, as adjusted...... 16,614 -- --
Series E preferred stock warrants...... 261 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value;
20,000,000 shares authorized as of
June 30, 2000 (10,000,000 shares
authorized as of the effective date),
6,402,102 shares issued and
outstanding, actual, no shares issued
and outstanding, pro forma and pro
forma, as adjusted................... 6 -- --
Common stock, $0.001 par value;
30,000,000 shares authorized as of
June 30, 2000 (90,000,000 shares
authorized as of the effective date),
5,872,699 shares issued and
outstanding, actual, 21,428,361
shares issued and outstanding, pro
forma, 26,428,361 shares issued and
outstanding, pro forma, as adjusted.. 6 21 26
Additional paid-in capital............. 34,031 61,378 129,623
Warrants............................... 1,341 1,602 1,602
Deferred compensation.................. (7,323) (7,323) (7,323)
Accumulated deficit ................... (34,220) (34,220) (34,220)
------- ------- -------
Total stockholders' equity
(deficit)........................... (6,159) 21,458 89,708
------- ------- -------
Total capitalization............... $10,716 $21,458 $89,708
======= ======= =======
</TABLE>
-------------------------------
(1) The pro forma information assumes:
(a) with respect to the number of shares of common stock outstanding for
the period:
. the issuance as of June 30, 2000 of 1,597,285 shares of series F
convertible preferred stock which were sold on August 28, 2000 for
net proceeds of $10,742,000;
20
<PAGE>
. the reduction on September 15, 2000 of the conversion price of the
shares of the series E and the series F convertible preferred stock
pursuant to the terms of the series E and the series F convertible
preferred stock, respectively, to $4.25 per share;
. the payment of $756,340 of dividends accumulated through September
30, 2000 upon the automatic conversion of the series E and the series
F convertible preferred stock at the time of this offering by
delivery of 50,423 shares of our common stock based upon an assumed
initial public offering price of $15.00 per share and based upon our
estimate as of September 15, 2000 of the amount of accumulated
dividends that holders of series E convertible preferred stock will
elect to receive in shares of common stock in lieu of cash;
. the conversion of all outstanding shares of preferred stock into an
aggregate of 15,555,663 shares of common stock, as adjusted for the
stock split, upon the closing of this offering;
. a 1.349-for-1 split of our common stock to holders of record prior to
the effectiveness of this offering; and
(2) The pro forma as adjusted balance sheet data gives effect to the pro forma
assumptions described in note (1) and to the issuance of 5,000,000 shares
of our common stock in the offering at an assumed offering price of $15.00
per share, after deducting underwriting discounts and estimated offering
expenses payable by us.
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$10.7 million, or $0.57 per share of common stock. Our pro forma net tangible
book value assumes:
. the reduction on September 15, 2000 of the conversion price of the
shares of series E convertible preferred stock pursuant to the terms of
the series E convertible preferred stock to $4.25 per share;
. the payment of $390,575 of dividends accumulated through June 30, 2000
upon the automatic conversion of the series E convertible preferred
stock at the time of this offering by delivery of 26,038 shares of our
common stock based upon an assumed initial public offering price of
$15.00 per share and based upon our estimate as of September 15, 2000 of
the amount of accumulated dividends that holders of series E convertible
preferred stock will elect to receive in shares of common stock in lieu
of cash;
. the conversion of all shares of preferred stock outstanding as of June
30, 2000 into an aggregate of 12,909,256 in shares of common stock, as
adjusted for the stock split, upon the closing of this offering; and
. a 1.349-for-1 split of our common stock to holders of record prior to
the effectiveness of this offering.
After giving effect to our sale of 1,597,285 shares of series F convertible
preferred stock for $6.95 per share on August 28, 2000, and after giving effect
to the dividends accumulated on shares of series E convertible preferred stock
from July 1, 2000 through September 30, 2000, our pro forma net tangible book
value per share as of June 30, 2000 was approximately $21.5 million, or $0.43
per share of common stock. This pro forma net tangible book value also assumes
the items set forth in the bullet points above as well as the following:
. the reduction on September 15, 2000 of the conversion price of the
shares of series F convertible preferred stock pursuant to the terms of
the series F convertible preferred stock to $4.25 per share;
. the payment of $90,030 of dividends accumulated through September 30,
2000 upon the automatic conversion of the series F convertible preferred
stock at the time of this offering by delivery of 6,002 shares of our
common stock based upon an assumed initial public offering price of
$15.00 per share;
. the conversion of the shares of series F convertible preferred stock
into an aggregate of 2,621,609 shares of common stock, as adjusted for
the stock split, upon the closing of this offering; and
. the payment of $275,734 of dividends accumulated from July 1, 2000
through September 30, 2000 upon the automatic conversion of the series E
convertible preferred stock at the time of this offering by delivery of
18,382 shares of our common stock based upon an assumed initial public
offering price of $15.00 per share and based upon our estimate as of
September 15, 2000 of the amount of accumulated dividends that holders
of series E convertible preferred stock will elect to receive in shares
of common stock in lieu of cash.
Pro forma net tangible book value per share represents the amount of our pro
forma total tangible assets less total liabilities, divided by the number of
shares of common stock outstanding. After giving effect to the sale of the
5,000,000 shares of common stock offered hereby at an assumed initial public
offering price of $15.00 per share less underwriting discounts and estimated
offering expenses, our pro forma net tangible book value as of June 30, 2000,
after giving effect to our sale of series F convertible preferred stock and the
dividends accumulated on shares of series E convertible preferred stock from
July 1, 2000 through September 30, 2000, would have been approximately $89.7
million, or $3.39 per share of common stock.
22
<PAGE>
This represents an immediate increase in net tangible book value of $2.39 per
share to existing stockholders and an immediate decrease in net tangible book
value of $11.61 per share to new investors. The following table illustrates
this unaudited per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $15.00
------
Pro forma net tangible book value per share before this
offering....................................................... $0.57
Increase per share attributable to our sale of series F
preferred stock................................................ $0.43
-----
Pro forma net tangible book value per share before this offering
after giving effect to our sale of series F preferred stock.... $1.00
Increase in pro forma net tangible book value per share
attributable to new investors.................................. $2.39
-----
Pro forma net tangible book value per share after this offering... $ 3.39
------
Dilution per share to new investors............................... $11.61
======
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option, our
adjusted pro forma net tangible book value as of June 30, 2000, after giving
effect to this offering and to our sale of series F convertible preferred stock
and the dividends accumulated on shares of series E convertible preferred stock
from July 1, 2000 through September 30, 2000, would have been approximately
$3.69 per share, representing an immediate increase in pro forma tangible book
value of $2.69 per share to our existing stockholders and an immediate dilution
in pro forma net tangible book value of $11.31 per share to purchasers in this
offering.
The following table sets forth, as of August 28, 2000, the number of shares of
common stock previously issued by us on the pro forma basis described above,
the total consideration reflected in our accounts and the average price per
share to the existing stockholders and new investors, assuming the sale by us
of 5,000,000 shares of common stock at an assumed initial public offering price
of $15.00 per share and before deducting the estimated underwriting discounts
and estimated offering expenses with respect to such shares:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 21,428,361 81.1% $ 52,667,013 41.3% $ 2.46
New investors............ 5,000,000 18.9 75,000,000 58.7 15.00
---------- ----- ------------ ----- ------
Total................ 26,428,361 100.0% $127,667,013 100.0% $ 4.83
========== ===== ============ ===== ======
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option, the
percentage of shares held by existing stockholders would be 78.8% of the total
number of shares of common stock to be outstanding after the offering, and the
number of shares held by new stockholders would be increased to 5,750,000
shares, or 21.2% of the total number of shares of common stock to be
outstanding after the offering.
As of August 28, 2000, there were outstanding options to acquire 1,506,270
shares of common stock, at a weighted average exercise price of $1.12 per
share, and warrants to acquire 348,595 shares of preferred stock were
outstanding, which, immediately prior to consummation of this offering, will
become warrants to acquire 470,255 shares of common stock, at an estimated
weighted average exercise price of $2.12 per share (based upon an assumed
initial public offering price of $15.00 per share and also assuming that
warrants exercisable for our series E convertible preferred stock will, at the
time of the offering, become warrants for common stock with an exercise price
equal to the initial public offering price).
23
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
In the table below, we provide you with our selected historical financial data.
We have prepared this information using our financial statements for the three
years ended December 31, 1999, the period from September 26, 1996 (inception)
through December 31, 1999 and the six-month periods ended June 30, 2000 and
1999. The financial statements for the three years ended December 31, 1999 and
the period from September 26, 1996 (inception) through December 31, 1999 have
been audited by Ernst & Young LLP, independent auditors. The financial
statements for the six-month periods ended June 30, 2000 and 1999 have not been
audited.
When you read this summary historical financial data, it is important that you
read along with it the historical financial statements and related notes
included herein, as well as the sections of this prospectus titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Period from Six Months Ended
Year Ended December 31, September 26, 1996 June 30,
-------------------------- (inception) through -----------------------
1997 1998 1999 December 31, 1999 1999 2000
------- ------- -------- ------------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating expenses:
General and
administrative........ $ 1,021 $ 1,478 $ 2,320 $ 4,905 $ 884 $ 2,083
Research and
development........... 3,097 7,569 9,458 20,149 3,025 7,264
------- ------- -------- -------- ------- --------
Total operating
expenses............... 4,118 9,047 11,778 25,054 3,909 9,347
Interest income
(expenses), net........ 315 309 (367) 267 (42) 305
------- ------- -------- -------- ------- --------
Net loss................ (3,803) (8,738) (12,145) (24,787) (3,951) (9,042)
Non-cash preferred stock
charge ................ -- -- -- -- -- 16,875
Preferred stock
dividends.............. -- -- -- -- -- 391
------- ------- -------- -------- ------- --------
Net loss attributable to
common stockholders.... $(3,803) $(8,738) $(12,145) $(24,787) $(3,951) $(26,308)
======= ======= ======== ======== ======= ========
Basic and diluted net
loss per
common share........... $ (0.65) $ (1.50) $ (2.08) $ (0.68) $ (4.48)
======= ======= ======== ======= ========
Shares used in computing
basic and diluted net
loss per common share.. 5,814 5,835 5,845 5,844 5,866
======= ======= ======== ======= ========
Pro forma net loss per
common share--basic and
diluted
(unaudited)(1)......... $ (1.01) $ (1.56)
Pro forma weighted
average common shares
outstanding--basic and
diluted
(unaudited)(1)......... 12,008 16,811
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of June 30,
-------------------------------- --------------
1996 1997 1998 1999 2000
------ ------ ------- ------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.... $5,656 $8,089 $ 2,986 $ 4,171 $ 13,850
Total assets................. 5,656 8,291 3,113 4,325 14,147
Redeemable preferred stock... -- -- -- -- 16,614
Accumulated deficit.......... (101) (3,904) (12,642) (24,787) (34,220)
Total stockholders' equity
(deficit)(2)................ 5,402 6,367 1,047 1,965 (6,159)
</TABLE>
----------------------------
(1) The pro forma information assumes:
. the reduction on September 15, 2000 of the conversion price of the
shares of the series E convertible preferred stock pursuant to the
terms of the series E convertible preferred stock to $4.25 per share;
. the payment of $390,575 of dividends accumulated through June 30, 2000
upon the automatic conversion of the series E convertible preferred
stock at the time of this offering by delivery of 26,038 shares of our
common stock based upon an assumed initial public offering price of
$15.00 per share and based upon our estimate as of September 15, 2000
of the amount of accumulated dividends that holders of series E
convertible preferred stock will elect to receive in shares of common
stock in lieu of cash;
. the conversion of all outstanding shares of preferred stock through
June 30, 2000 into an aggregate of 12,909,256 shares of common stock,
as adjusted for the stock split, upon the closing of this offering;
and
. a 1.349-for-1 split of our common stock to holders of record prior to
the effectiveness of this offering.
(2) Includes warrants exercisable for 348,595 shares of preferred stock that
will become warrants exercisable for 470,255 shares of common stock upon
the closing of this offering.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of the financial condition and results
of operations in conjunction with our financial statements and the notes to
those financial statements included elsewhere in this prospectus.
Overview
We are a pharmaceutical company engaged in the development of products in
targeted therapeutic areas. Since our inception in 1996, our business
activities have primarily been associated with the development and acquisition
of four pharmaceutical product candidates. Our lead product candidate is MT
100, an orally delivered therapeutic in Phase 3 clinical trials for the
treatment of migraine. To date, we have devoted substantially all our resources
to the research and clinical development of MT 100 and of MT 300, our
injectable product candidate for severe migraine that is intended to begin
Phase 3 trial by the first half of 2001. Our other migraine therapeutic product
candidates include MT 500, a migraine prophylactic, and MT 400, an orally
delivered co-active therapy. Specifically, our business activities have
included:
. product candidate research and development;
. designing and funding clinical trials for our product candidates;
. regulatory and clinical affairs;
. intellectual property prosecution and expansion; and
. business development including product acquisition or in-licensing.
Historically, we have financed our operations and internal growth primarily
through private placements of preferred stock rather than through collaborative
or partnership agreements. Therefore we have no research funding or
collaboration payments payable to us nor have we received any payments which
are refundable or subject to performance milestones.
We have incurred significant losses since our inception and we have not
generated any revenue. As of June 30, 2000, our accumulated deficit was
$34,220,242. Our historical operating losses have resulted principally from our
research and development activities, including Phase 3 and Phase 2 clinical
trial activities for our product candidates MT 100 and MT 300, respectively,
and general and administrative expenses. We expect to continue to incur
operating losses over the next several years as we complete our MT 100 clinical
trials, apply for regulatory approval, continue development of our other
migraine therapeutic product candidates, and acquire and develop product
portfolios in other therapeutic areas. Our results may vary depending on many
factors, including:
. the progress of MT 100 and MT 300 in the regulatory process;
. the acceleration of our other product candidates in the regulatory
process;
. the establishment of collaborations for the development and
commercialization of any of our migraine product candidates; and
. acquisition or in-licensing of other therapeutic product candidates.
Our ability to generate revenue is dependent upon our ability, alone or with
others, to successfully develop MT 100 or our other migraine product
candidates, obtain regulatory approvals and, alone or with others, successfully
manufacture and market our future products.
In March 2000, we closed a private placement of series E convertible preferred
stock in which we raised net proceeds of $16,875,115 after commission and
expenses.
25
<PAGE>
In connection with this offering, we recorded a non-cash charge of $16,875,115
during March 2000 related to the beneficial conversion feature of the preferred
stock we sold in March 2000. The series E convertible preferred stock was sold
in March 2000 at $6.95 per share, which represented the fair value of the
preferred stock and was in excess of the deemed fair value of our common stock.
Subsequent to the commencement of our initial public offering process, we re-
evaluated the deemed fair market value of our common stock as of March 2000 and
determined it to be $22.48 per share (on a pre-split basis). Accordingly, the
incremental fair value is deemed to be the equivalent of a preferred stock
dividend. The non-cash charge was limited to the net proceeds received from the
series E offering.
In connection with the grant of stock options to employees, we recorded
deferred compensation of $5,284,017 in the six months ended June 30, 2000 and
$3,045,666 in the year ended December 31, 1999, respectively. These amounts
were recorded as a component of stockholders' equity and are being amortized as
charges to operations over the vesting period of the options using the straight
line method. The vesting period of the options is generally three years.
Approximately $1,304,000 and $613,000 of the deferred compensation were charged
to operations in the six months ended June 30, 2000 and in the year ended
December 31, 1999, respectively. As of June 30, 2000 we anticipate recording
the amortization of deferred compensation to operations of $2,949,117,
$2,812,157, $2,576,726 and $289,269 for the years ended December 31, 2000,
2001, 2002 and 2003, respectively.
Historical Results of Operations
Six months ended June 30, 2000 compared to the six months ended June 30, 1999
Revenue: We generated no revenue during the six months ended June 30, 2000 or
the six months ended June 30, 1999. In the future, we intend to generate
revenue from upfront and milestone payments connected to potential
collaborations for development and commercialization and from product royalty
revenue.
Research and Development: Research and development expenses increased 140.1% to
$7,263,556 for the six months ended June 30, 2000 from $3,025,045 for the six
months ended June 30, 1999. This net increase was due primarily to a $2,251,000
increase in clinical trial costs reflecting a $2,801,000 increase in MT 100
trial costs along with a net decrease of $550,000 in clinical trial activity
costs relating to other products. Toxicology study costs increased $857,000
reflecting a $1,159,000 increase in MT 500 toxicology costs and a decrease of
$302,000 in toxicology costs relating to other products. Pharmaceutical
development costs increased $183,000 for MT 100. Additional research and
development personnel costs increased $948,000 of which $500,000 represented
amortization of deferred stock compensation. We expect that research and
development expenditures will continue to increase during 2000 due to the
continuation and expansion of Phase 3 trials for MT 100 and MT 300, the
commencement of the MT 400 proof-of-concept trial, and the expansion of MT 500
pharmaceutical development and toxicology study expenditures. Research and
development expenses included the personnel costs related to our research
activities and clinical trial preparations and monitoring expenses, and any
regulatory matters.
General and Administrative: General and administrative expenses increased
135.6% to $2,083,482 for the six months ended June 30, 2000 from $884,160 for
the six months ended June 30, 1999. This increase of $1,199,000 resulted from
increases of $165,000 in personnel and related benefits, $572,000 for
amortization of deferred stock compensation, $174,000 in professional fees,
$108,000 in contracted consulting fees and $180,000 in other costs related to
our expanded operational infrastructure. We expect that general and
administrative expenditures will continue to increase during 2000 and
subsequent years due to increasing fees and expenses associated with growth in
our market research, business development and commercialization efforts. An
expansion in general and administrative expenditures is also expected to
accompany our infrastructure growth associated with our public
26
<PAGE>
company reporting activities. General and administrative expenses consisted
primarily of the costs of administrative personnel and related facility costs
along with legal, accounting and professional fees.
Interest Income, net: Interest income increased to $304,812 for the six months
ended June 30, 2000 from a net interest expense of $42,008 for the six months
ended June 30, 1999. The increase is attributable to higher interest income
offset by lower interest expense. Interest income increased to $305,000 for the
six months ended June 30, 2000 from $68,000 for the six months ended June 30,
1999 due to increased levels of cash and cash equivalents available for
investing. During the six months ended June 30, 2000 there was no interest
expense while interest expense was $110,000 for the six months ended June 30,
1999 and was related to the outstanding promissory note.
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenue: We generated no revenue during the year ended December 31, 1999 or the
year ended December 31, 1998.
Research and Development: Research and development expenses increased 25.0% to
$9,458,225 for the year ended December 31, 1999 from $7,569,187 for the year
ended December 31, 1998. This increase was primarily due to the $352,000
increase in toxicology studies and clinical trial costs associated with the
Phase 3 clinical trial of MT 100, an increase of $537,000 in research and
development personnel and benefits cost, and one-time licensing costs.
In September 1999, we entered into a license agreement with F. Hoffmann-La
Roche, Ltd and Syntex ("Roche") in which we were granted certain patent rights
and know how to develop, manufacture and commercialize Roche's MT 500 compound.
The agreement provides for a product option during two discrete development
periods whereby Roche would re-acquire all of the rights granted to us as well
as any data, documentation, know how and additional intellectual property
generated, owned or controlled by us. Depending upon the development period at
which the product option is exercised, Roche would make specified one-time
payments upon exercise of the product option and upon NDA approval. The maximum
potential aggregate amount of these one-time payments is $50,000,000. In
addition, Roche would make ongoing royalty payments based upon net sales
following approval.
We made a one-time nonrefundable payment of $1,000,000 to enter into this
agreement. If the product option is not exercised, we will pay Roche royalties
on net sales and a portion of all payments owed by any sublicensees less our
development costs. We charged the $1,000,000 payment to research and
development expense.
General and Administrative: General and administrative expenses increased 57.0%
to $2,319,939 for the year ended December 31, 1999 from $1,477,768 for the year
ended December 31, 1998 and primarily reflects a $842,000 increase in personnel
and related benefits, travel costs and professional fees.
Interest Income, net: Interest income, net decreased 218.7% to ($367,282) for
the year ended December 31, 1999 from $309,324 for the year ended December 31,
1998. The decrease is attributable to the $450,000 loan origination fee on the
convertible promissory note expensed as a financing cost and lower interest
income offset by higher interest expense. Interest income decreased to $219,000
for the year ended December 31, 1999 from $345,000 for the year ended December
31, 1998 due to lower levels of cash and cash equivalents available for
investing in 1999 as compared to 1998. Interest expense in the same periods was
$586,000 and $36,000, respectively. The increase in interest expense is
primarily due to interest paid upon the conversion of a promissory note.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenue: We generated no revenue during the year ended December 31, 1998 or the
year ended December 31, 1997.
27
<PAGE>
Research and Development: Research and development expenses increased 144.4% to
$7,569,187 for the year ended December 31, 1998 from $3,096,963 for the year
ended December 31, 1997. Of this $4,472,224 increase, approximately $3,227,000
or 72.2% was due to increased clinical trial activities for MT 100 and MT 300.
The remaining increase was primarily due to an increase in preclinical and
clinical activities along with an increase in personnel.
General and Administrative: General and administrative expenses increased 44.7%
to $1,477,768 for the year ended December 31, 1998 from $1,021,248 for the year
ended December 31, 1997 primarily due to a 1998 increase in personnel and other
operational infrastructure expenses over those of the 1997 start-up period.
Interest Income, net: Interest income, net remained relatively constant at
$309,324 for the year ended December 31, 1998 compared to $315,181 for the year
ended December 31, 1997.
Income Taxes
As of June 30, 2000, we had federal and state net operating loss carryforwards
of approximately $30,000,000 and research and development credit carryforwards
of approximately $930,000. These federal net operating loss carryforwards and
research and development credit carryforwards begin to expire in 2012. State
net operating loss carryforwards begin to expire in 2001. The utilization of
the loss carryforwards to reduce future income taxes will depend on our ability
to generate sufficient taxable income prior to the expiration of the net loss
carryforwards. In addition, the maximum annual use of net loss carryforwards is
limited in certain situations where changes occur in our stock ownership.
Liquidity and Capital Resources
Since our inception, we have financed our operations and internal growth
primarily through private placements of preferred stock resulting in aggregate
net proceeds to us of $38,914,170. As of June 30, 2000, cash and cash
equivalents were $13,850,252. The majority of the proceeds raised since
inception have funded our operating activities.
Financing activities provided cash in an aggregate amount of approximately
$41,925,013 since inception. These amounts represent the net proceeds we
received from the sale of preferred and common stock and proceeds from notes
payable. In March 2000, we closed a private placement of preferred stock
financing that raised net proceeds of $16,875,115 after commission and
expenses. In addition, in August 2000 we closed a private placement of
preferred stock financing that raised net proceeds of $10,742,000 after
commission and expenses. (We intend to recognize a non-cash preferred stock
charge of $10,742,000 with respect to this financing.)
Net cash used in investing activities included primarily additions of
equipment. Since inception through June 30, 2000, approximately $259,000 was
spent on equipment. We expect to continue to make purchases of equipment at
similar levels to support our expanding administrative operations.
At December 31, 1999, cash and cash equivalents totaled $4,171,086, an increase
of $1,185,006 as compared to December 31, 1998. At June 30, 2000, cash and cash
equivalents totaled $13,850,252, an increase of $9,679,166 as compared to
December 31, 1999. The increase in cash and cash equivalents resulted primarily
from our financing activities, offset by the cash used in operating activities.
Cash used by operations of $7,160,275 during the six months ended June 30, 2000
represented a net loss of $9,042,226 offset by non-cash charges of $1,326,554,
a decrease in prepaid and other assets of $125,022 and an increase in accounts
payable and accrued liabilities of $680,419. The increase in accounts payable
and accrued liabilities was primarily due to the increased spending in our
clinical activities.
Cash used in investing activities of $40,337 during the six months ended June
30, 2000 reflected the purchase of equipment.
28
<PAGE>
Cash provided by financing activities during the six months ended June 30,
2000, which totaled $16,879,778, was generated primarily by the net proceeds of
$16,875,115 from the sales of the series E preferred stock in March 2000.
Cash used by operations of $10,760,943 during 1999 represented a net loss of
$12,145,446 partially offset by non-cash charges of $1,106,724, an increase in
prepaid and other assets of $16,047 and an increase in accounts payable and
accrued liabilities of $293,826.
Cash used in investing activities during 1999 of $54,676 reflected the purchase
of equipment.
Cash provided by financing activities, which totaled $12,000,625 during 1999,
was generated primarily by the receipt of proceeds from the sales of the series
D preferred stock in July and September 1999 and proceeds from the July note
payable.
At December 31, 1998, cash and cash equivalents totaled $2,986,080, a decrease
of $5,102,550 as compared to December 31, 1997. The decrease in cash and cash
equivalents reflected the cash used in operating activities reduced by our
financing activities.
Cash used by operations of $7,287,096 during 1998 represented a net loss of
$8,737,631 partially offset by non-cash charges of $444,448, a decrease in
prepaid and other assets of $76,558, and an increase in accounts payable and
accrued liabilities of $929,529. The increase in accounts payable and accrued
liabilities was primarily due to the increased spending in our preclinical and
clinical activities.
Cash used in investing activities during 1998 of $44,334 reflected the purchase
of equipment.
Cash provided by financing activities, which totaled $2,228,880 during 1998,
were generated primarily by the receipt of $2,223,325 from the sales of the
series C preferred stock in March 1998.
We believe that the net proceeds from this offering, together with our current
cash balances, will be sufficient to complete our on-going and planned clinical
trials reflected in the description of business, to conduct appropriate
development studies, and to satisfy our other anticipated cash needs for
operating expenses for at least the next two years. We do not expect to make
any material capital expenditures during the next two years. In addition, we do
not currently have any milestone or other required material payment obligations
during that period. However, we cannot be certain that additional funding will
not be required and, if required, will be available on acceptable terms, or at
all. Further, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants.
Our forecast of the period of time through which our financial resources will
be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary as a result of
a number of factors. Our future capital requirements will depend on many
factors, including:
. the number and progress of our clinical trials;
. our ability to negotiate favorable terms with various contractors
assisting in these clinical trails;
. our success in commercializing the products to which we have rights; and
. the cost incurred enforcing and defending our patent claims and other
intellectual rights.
Disclosure About Market Risk
Our exposure to market risk is currently confined to our cash and cash
equivalents which have maturities of less than three months, and our short-term
investments which have maturities of less than one year. We maintain an
investment portfolio of commercial paper and short-term U.S. government
securities. The securities in our investment portfolio are not leveraged, are
classified as available-for-sale
29
<PAGE>
and are, due to their short-term nature, subject to minimal interest rate risk.
We currently do not hedge interest rate exposure. Because of the short-term
maturities of our investments, we do not believe that an increase in market
rates would have any significant negative impact on the realized value of our
investment portfolio but may negatively impact the interest expense associated
with our long-term debt.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Investments
and Hedging Activities," SFAS 133 establishes a new model for accounting for
derivatives and hedging activities and supercedes several existing standards.
SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect that the adoption of SFAS 133 will have a material impact on its
financial statements.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB 101 explains how the SEC staff applies by analogy the existing rules on
revenue recognition to other transactions not covered by such rules. In March
2000, the SEC issued SAB 101A that delayed the original effective date of SAB
101 until the second quarter of 2000 for calendar year companies. In June 2000,
the SEC issued SAB 101B that further delayed the effective date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The Company does not expect that the adoption of SAB 101
will have a material impact on its financial statements.
30
<PAGE>
BUSINESS
Overview
We are a commercially focused pharmaceutical development company committed to
building a portfolio of products in targeted therapeutic areas through a
combination of innovation and in-licensing. Our initial therapeutic focus is on
the migraine market. As of September 2000, we have completed three Phase 3
clinical trials for our lead product candidate, MT 100, which we are developing
as an oral first-line therapy for the treatment of migraine. In order to
compile data to support an NDA for MT 100, we are currently conducting two
Phase 3 clinical trials of MT 100 which should be completed by the end of 2000.
We also intend to initiate a Phase 3 trial by the first half of 2001 for MT
300, which we are designing as an injectable treatment for severe migraine
attacks. Our migraine portfolio also contains one additional product candidate
for the treatment of migraine and a prophylactic agent set to enter a Phase 2
clinical trial in the second half of 2001.
We intend to leverage our pharmaceutical product development expertise by
acquiring or in-licensing and developing commercially attractive products in
several areas outside of migraine. In addition, we plan to enter into
collaborations with established pharmaceutical companies to commercialize and
manufacture our product candidates.
Business Strategy
Our goal is to become a leading pharmaceutical development company. The
principal elements of our strategy are to:
Develop and commercialize our portfolio of migraine product candidates
A substantial portion of our efforts over the next few years will be devoted
to the further development, approval and commercialization of our portfolio
of migraine product candidates. We intend to conduct clinical trials with our
four migraine product candidates in order to obtain marketing approvals that
will allow us to provide therapeutic alternatives for all segments of
migraine patients. We intend to form collaborations with established
pharmaceutical companies for the worldwide commercialization of our migraine
product candidates.
Build a product pipeline through innovation, in-licensing and acquisition
We intend to build our product pipeline through innovation, in-licensing and
acquisition of select proprietary product candidates. We will focus primarily
on therapeutic areas with significant commercial potential in which members
of our management team have development expertise. These areas of expertise
include gastrointestinal disease, respiratory disease, infectious disease and
oncology. We plan to develop novel products that exhibit distinct advantages
over currently marketed products, as well as innovative combinations of
already approved products in more convenient or more therapeutically
appropriate formulations. We plan to identify and pursue product candidates
with the following attributes:
. significant commercial potential;
. sound scientific basis;
. established preclinical safety and efficacy data at a minimum;
. readily measurable clinical endpoints previously accepted by the FDA;
. clinical development timelines generally under four years; and
. cost-effective development programs.
31
<PAGE>
We believe that pursuing product candidates with these attributes will enable
us to develop commercially viable product candidates with lower development
and financial risk than traditional pharmaceutical drugs.
One of the strategies we will use to gain access to product candidates is to
employ our license back option model. We believe that this model differs from
a traditional in-licensing arrangement in that it affords us improved access
to commercially attractive compounds, by providing the licensor with an
option to license back the product candidate at various stages of development
and on set terms and conditions. We used this model to in-license our MT 500
product candidate from Roche.
Form collaborations for the commercialization of our product candidates
We plan to establish collaborative relationships with pharmaceutical
companies for the commercialization of our existing and future product
candidates. In general, we intend to license our product candidates to
pharmaceutical companies for commercialization once we have established
substantial evidence of safety and efficacy, at which point we believe that
we can obtain favorable economic terms. In addition, under our license back
option model, if the licensor chooses not to license back the rights to the
product candidate, we may pursue a collaboration with another third party for
commercialization of the product or commercialize the product ourselves.
Leverage development efforts through strategic outsourcing
While maintaining overall control of the planning, development and regulatory
processes, we seek to enter into strategic outsourcing relationships to
develop and commercialize our product candidates in a cost-effective manner.
We have contracted and plan to contract with third parties for product
candidate testing, development and manufacturing.
32
<PAGE>
Products Under Development
All of our migraine product candidates are being developed for the acute, or
episodic, treatment of migraine, except for MT 500, which is being developed as
a migraine prophylactic. If approved for commercial sale, all of the products
in our migraine portfolio will be sold by prescription. The following chart
sets forth information regarding our ongoing and currently planned clinical
studies and some of our completed clinical studies:
<TABLE>
<CAPTION>
Product Candidate Indication Trial Description Status
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MT 100 Oral tablet Migraine MT 100 vs. components Phase 3 complete
First-line therapy Multiple dosing regimen study Phase 3 complete
vs. placebo
Long-term safety study Phase 3 ongoing
Pilot study-- Phase 3 complete
MT 100 vs. Imitrex and placebo
MT 100 vs. components Phase 3 ongoing
Pharmacokinetic trials Phase 1 planned
-----------------------------------------------------------------------------------------------
MT 300 Migraine Dose response study-- Phase 2 complete
Injection Severe attacks MT 300 vs. placebo
MT 300 vs. placebo Phase 3 planned
Pharmacokinetic trials Phase 1 planned
-----------------------------------------------------------------------------------------------
MT 500 Migraine Single and repeat dose Phase 1 complete
Oral tablet Prophylaxis tolerance study
Extended tolerance study Phase 1 planned
MT 500 vs. placebo Phase 2 planned
-----------------------------------------------------------------------------------------------
MT 400 Oral tablet Migraine Pilot study-- Phase 2 complete
First-line therapy MT 400 vs. component
MT 400 vs. component and placebo Phase 2 planned
</TABLE>
Migraine Market
Migraine is characterized by recurring attacks of headache, often associated
with visual, auditory or gastrointestinal disturbances. While the precise
mechanism of migraine is unknown, researchers believe migraine attacks are
caused by acute inflammation surrounding selected blood vessels in the head.
The average migraine sufferer experiences the first attack during the early
teen years, and the attacks generally continue throughout adulthood. We
estimate that global sales of prescription pharmaceuticals for the treatment of
migraine will exceed $2 billion by 2001.
Not all migraine attacks are of the same severity. Consequently, a variety of
oral, injectable and intranasal therapies are used to treat different types of
migraine attacks. Many patients use a personal, individually developed, step-
care approach to treat their attacks. Attacks are often treated initially with
simple over-the-counter analgesics, particularly if the patient is unable to
determine if the attack is a migraine or some other type of headache. If over-
the-counter remedies are unsuccessful, patients often turn to more potent
prescription drugs, including narcotics, analgesic/narcotic drug combinations
and triptans.
33
<PAGE>
Currently, we are aware of no narcotics approved specifically for the treatment
of migraine. However, narcotics are prescribed outside their approved
indications to treat severe migraine attacks due to their ability to mask
migraine headache pain. The use of narcotics for the treatment of migraine has
been limited because they do not address the non-pain symptoms of migraine such
as nausea and vomiting and can cause side effects such as drowsiness, dizziness
and constipation, and because of their potential to cause addiction. In
addition, analgesics such as acetaminophen and aspirin are generally used to
treat only mild migraine attacks, and, similarly to narcotics, do not address
the non-pain symptoms of migraines such as nausea and vomiting.
Triptans are the family of drugs most commonly prescribed for the treatment of
migraine attacks. Triptans have demonstrated the ability to treat migraines by
constricting blood vessels in the brain. Although triptans can be effective in
treating migraine symptoms, they are often associated with significant side
effects and other disadvantages that include:
. the occurrence of cardiovascular related events, including chest
pain/discomfort, throat discomfort and warm/cold sensations;
. the potential for serious cardiovascular events, including death;
. difficulty in producing sustained pain relief with a single dose in a
majority of patients;
. the occurrence of nausea and dizziness during treatment; and
. the need for cardiovascular evaluations from physicians before
initially prescribing triptans to patients with cardiovascular
disease risk factors.
Despite these shortcomings, in 1999, according to IMS Health's Retail and
Provider Perspective, or IMS, total triptan sales in the U.S. were
approximately $1.1 billion. Imitrex(R), marketed by Glaxo Wellcome, is the
dominant triptan product, with, according to IMS, total U.S. sales of
approximately $855 million in 1999. There are currently three triptan
formulations commercially available: oral, intranasal and injectable. Oral
triptans are often prescribed as a first-line treatment for migraine pain.
Intranasal triptans are often prescribed for patients requiring faster relief
than oral drugs can provide or for patients who cannot take oral medications.
For the most severe attacks, patients sometimes use an injectable form of a
triptan.
Because of the problems associated with triptans, narcotics and analgesics, we
believe that an opportunity exists in all migraine therapeutic segments for
products designed to deliver an improved onset and duration of relief with
reduced side effects, especially those related to cardiovascular events.
MT 100
MT 100 is being developed as an oral first-line therapy for the treatment of
migraine pain and associated symptoms. Oral therapies are currently the most
prevalent form of migraine therapy. According to IMS, existing oral therapies
accounted for approximately $883 million in sales in the U.S. in 1999, of which
Imitrex's oral dosage form accounted for approximately $593 million.
MT 100 is a proprietary formulation that combines metoclopramide hydrochloride,
a commercially available agent that relieves nausea and enhances gastric
emptying, and naproxen sodium, a commercially available anti-inflammatory and
analgesic agent. MT 100 is designed to release a set amount of metoclopramide
hydrochloride initially, followed by a set amount of naproxen sodium. The
initial release of metoclopramide is intended to accelerate the absorption of
naproxen and to reduce nausea, which can be associated with migraines. Results
from our pharmacokinetic study in normal volunteers indicated that peak
naproxen blood levels were approximately 15% higher and were obtained
approximately 30 minutes faster following administration of MT 100 than with
naproxen sodium alone. Based on this study, we believe that MT 100 will enhance
the speed, effectiveness and
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duration of migraine symptom relief provided by each component alone, with
fewer adverse side effects than other migraine therapies.
MT 100 Clinical Trials
Generally, we must demonstrate the efficacy and safety of our product
candidates, including MT 100, before seeking marketing approval from the FDA.
To demonstrate efficacy in a combination product candidate like MT 100, which
combines two previously approved component products, we must demonstrate in
clinical trials that it is both superior to each of its individual components,
and more effective in treating symptoms of migraine when compared to a placebo.
Generally, the FDA requires two successful clinical trials to demonstrate that
the product candidate meets each of these standards for approval.
We have completed two Phase 2 clinical trials and three Phase 3 clinical trials
and have two Phase 3 clinical trials ongoing for MT 100. To date, more than
4,000 patients or volunteers have participated in Phase 2 and Phase 3 clinical
trials with MT 100, more than 2,250 of whom have received some form of MT 100.
In August 1998, we completed a randomized, double-blind, placebo controlled,
Phase 2 clinical trial designed to evaluate different dose combinations of
metoclopramide hydrochloride and naproxen sodium in the treatment of migraine.
A randomized, double-blind, placebo controlled trial is one in which the
treatment or placebo is randomly assigned (randomized), neither the
investigator nor the patient is aware of whether the treatment or placebo is
being administered (double-blind), and is a comparison of the efficacy of the
drug candidate to placebo (placebo controlled). The trial involved 514 patients
at 34 medical centers in the United States. Patients treated in this study
remained in the physician's office for two hours after dosing and then were
discharged to record any change in symptoms for the remainder of the 24-hour
study period. The results of the study indicated that the optimal dose of MT
100 would include 16mg of metoclopramide hydrochloride and 500mg of naproxen
sodium. While the study was not designed to demonstrate differences between the
MT 100 combination and its components, preliminary evidence suggested that MT
100 might represent an improvement over its components on a sustained response
basis.
Sustained response is a clinical measure used to evaluate both speed of onset
and duration of migraine pain relief provided by the drug being studied.
Sustained response is defined as:
. the reduction of moderate or severe pain at baseline to mild or no
pain without the use of rescue medication at two hours; and
. no return to either moderate or severe pain, or the use of rescue
medicine, over the next 22 hours.
In September 1998, we completed a second Phase 2 clinical trial involving two
different doses of MT 100. The 181 patient trial was conducted at 19 medical
centers in Germany and was similar in design to the Phase 2 clinical trial
conducted in the United States. While the study was not designed to distinguish
efficacy differences between doses, a dose-response relationship was observed
both on measures of acute relief and sustained response.
In December 1999, we completed a 1,064 patient Phase 3 clinical trial. This
clinical trial was conducted at 37 medical centers in the United States and was
designed to compare the safety and efficacy of MT 100 with its individual
components, naproxen sodium and metoclopramide hydrochloride, for the treatment
of migraine. In contrast to the design of our Phase 2 clinical trials in which
patients were treated at the physician's office, eligible patients in this
Phase 3 component clinical trial were provided a sealed packet of study
medication and a diary card. At the time of their next
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migraine attack, patients called their physician and were instructed to take
the study medication if their headache pain was moderate or severe, and to
record migraine symptoms for 24 hours after ingesting the dose.
The primary efficacy endpoint for this Phase 3 clinical trial comparing the
combination with the components was sustained response. The primary endpoint is
the outcome against which the success of the product candidate in a particular
trial is evaluated. Using the statistical analysis methodology specified in the
trial protocol, MT 100 showed statistically significant superiority over only
one of its two components. However, MT 100 showed statistically significant
superiority over both components when the results of this trial were analyzed
using a statistical test which was a refinement of the statistical analysis
methodology originally specified in the protocol.
The refined statistical analysis of this trial indicated that the percentage of
patients that achieved the primary endpoint of sustained response using MT 100
was a statistically significant 19% greater than the percentage of patients who
achieved sustained response using naproxen sodium, and a statistically
significant 81% greater than the percentage of those using metoclopramide
hydrochloride. There was no statistically significant difference in the
occurrence of adverse events for MT 100 relative to naproxen sodium or
metoclopramide hydrochloride. No single adverse event occurred from MT 100 in
more than 2.4% of the patient population. Adverse events included drowsiness,
diarrhea, abdominal pain, dizziness, infection and nervousness.
Based on our discussions with the FDA, we have designed our ongoing second
Phase 3 clinical trial comparing MT 100 to its components. Based on those
discussions, we believe that, if the results of this second trial are also
statistically significant using the refined statistical analysis method, the
FDA will accept the initial trial results, and we will have satisfied the FDA
requirement for the successful completion of two Phase 3 clinical trials
comparing MT 100 with its components. Finally, based on these discussions, in
addition to showing a statistically significant increase in patients achieving
sustained response in all of our trials, we must also demonstrate in our
planned Phase 3 placebo controlled trials that MT 100 is superior to placebo in
three additional endpoints to obtain FDA approval for the entire label that we
intend to seek in migraine. These additional endpoints are relief of nausea,
sensitivity to light and sensitivity to sound. MT 100 showed statistically
significant superiority to placebo for each of these endpoints in both our
Phase 3 multiple dosing trial and our Phase 3 pilot study discussed below.
In October 1999, we initiated a Phase 3 open label, long-term safety trial for
MT 100. In an open label, long-term safety trial, only one treatment is
administered (open label) and the trial continues until 300 patients have been
treated for at least six months and 100 patients have been treated for at least
12 months (long-term). Migraine patients in this trial receive a supply of MT
100 for use in the treatment of any migraine attack that occurs. Adverse events
are recorded by each patient. Patients are evaluated every three months and may
be treated for up to 12 months. To date, over 1,000 patients have been
recruited into this trial, with approximately 400 having completed six months
of treatment and 300 having completed nine months of treatment.
In addition, we have completed a Phase 3 multiple dosing trial in which
patients with migraine randomly received either placebo or a single tablet of
MT 100. The 426 patient trial was conducted at 15 medical centers in the United
States. Those patients who continued to have moderate or severe headache pain
at two hours randomly received a second tablet of either a placebo or MT 100.
MT 100 showed statistically significant superiority to placebo in the trial's
primary endpoint of two-hour sustained response rate. Furthermore, within two
hours after the initial dosing, MT 100 showed statistically significant
superiority to placebo in the trial's secondary endpoints of reducing pain,
relief of nausea, sensitivity to light and sensitivity to sound. A second dose
of MT 100 administered at two
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hours to non-responders was no more effective than placebo. No single adverse
event occurred from MT 100 in more than 7.0% of the patient population. Adverse
events included drowsiness, diarrhea, abdominal pain, dizziness, infection and
nervousness.
We recently conducted a 546 patient, double-blind, Phase 3 pilot study
comparing four treatments: placebo, MT 100 one tablet, MT 100 two tablets, and
Imitrex 50mg. Results from that study indicate that all active treatments were
statistically superior to placebo for pain relief at 2 hours and that there
were no statistically significant differences between active treatments. Only
the MT 100 one tablet and MT 100 two tablet groups showed statistically
significant superiority over placebo for all of the secondary endpoints of
relief of nausea, sensitivity to light and sensitivity to sound. In addition,
only the MT 100 one tablet and MT 100 two tablet groups showed statistically
significant superiority over placebo with respect to the efficacy parameter of
sustained response, i.e. pain relief at two hours that is maintained throughout
the next 22 hours. All treatments were generally well tolerated with no serious
adverse events reported. Only in the MT 100 two tablet and Imitrex treatment
groups did the incidence of adverse events occur with a frequency that exceeded
the placebo rate by more than 2%. The most common adverse event for the MT 100
two tablet group was drowsiness and for the Imitrex group was pain and
tightness in the chest or throat.
We intend to complete our ongoing trials described above, including the second
Phase 3 clinical trial comparing MT 100 with each of its components, prior to
submitting an NDA for MT 100.
Generally, genotoxicity and long term carcinogenicity testing are required
prior to the approval of most new products. The long term carcinogenicity
studies, which are conducted with laboratory animals, typically take
approximately two and a half years to complete, although in some instances
studies of less than one year have been accepted. To date, we have conducted
four types of short term studies designed to assess the potential genotoxicity
of MT 100, three of which showed no indications of genotoxicity. We recently
received the results of the fourth type of short term study, a mouse cell
study, performed in test tubes. The results of two such mouse cell studies
indicate that one or more of the breakdown products of naproxen sodium cause
chromosomal changes under the test conditions. The FDA will consider our
genotoxicity results when it determines whether to require us to complete
animal carcinogenicity studies prior to obtaining approval for MT 100. Based
primarily upon the long history of use of naproxen sodium as well as the fact
that three out of the four types of short term studies showed no evidence of
genotoxicity, we believe that the FDA may allow us to complete any required
long term animal carcinogenicity studies post approval of the NDA for MT 100.
If the FDA requires that we complete the long term carcinogenicity testing
prior to NDA approval, however, this could delay our planned commercialization
of MT 100 in the United States for at least one year.
MT 300
MT 300 is being developed to provide long-lasting pain relief for patients
needing a convenient injectable therapy for severe migraine, with a reduced
side effect profile compared to existing injectable products. Currently,
patients often use an injectable form of triptans or other drugs such as
dihydroergotamine mesylate, or DHE, to alleviate the symptoms of the most
severe migraine attacks quickly and effectively. However, many patients are
unable to tolerate the injections, especially those sensitive to the vascular
side effects associated with injectable Imitrex. Nevertheless, according to
IMS, injectable migraine therapeutics represented approximately $188 million in
1999 U.S. sales.
MT 300 is a proprietary formulation of injectable DHE that we intend to package
in an easy-to-use, sterile, pre-filled syringe that can be administered alone
or with an auto-injector. Compared to the existing injectable DHE products, MT
300 appears to possess improved solubility and stability at room temperature.
We believe that these characteristics will allow us to supply patients in our
future clinical trials with MT 300 in pre-filled syringes, rather than the
difficult snap-ring glass ampoules that are used to supply injectable DHE.
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Injectable DHE is currently approved for use in the treatment of migraine and
cluster headache episodes. Based upon recently published clinical trial
results, injectable DHE has been shown to provide comparable efficacy to
injectable Imitrex three hours after administration. Importantly, only 18% of
injectable DHE patients experienced headache recurrence within 24 hours as
compared to 45% of injectable Imitrex patients. In addition, injectable
Imitrex's acute vascular side effects were reported by 23% of the patients
receiving injectable Imitrex, but by only 2% of the patients receiving
injectable DHE.
MT 300 Clinical Trials
In November 1998, we completed a placebo controlled, dose-response Phase 2
clinical trial of MT 300. The 291 patient trial was conducted at 21 medical
centers in the United States. In this trial, eligible patients with an acute
migraine attack were treated in the physician's office, monitored for two hours
after the dose, and then discharged to record their symptoms on a diary card
for the remainder of the 24-hour study period. Participants in the study were
divided into four dosing groups, with three receiving varying doses of MT 300
and one receiving placebo. A total of 291 patients received a single
subcutaneous dose of MT 300 or placebo in this study. In this clinical trial,
MT 300 demonstrated a statistically significant improvement in the percentage
of patients achieving four-hour response rates when compared to placebo and
demonstrated a statistically significant lower use of rescue medication. MT 300
was well tolerated and no serious adverse events were reported. The most
commonly reported side effect was nausea, reported by 4% of patients in the
high dose group. The four-hour sustained response rate used in this trial
differs from the sustained response measure used thus far in our clinical
trials of MT 100 and MT 400, in that the four-hour rate measures pain reduction
after four hours, without return to moderate or severe pain or rescue over the
next 20 hours.
We plan to initiate a 300-patient, placebo controlled, Phase 3 clinical trial
of a single, subcutaneous dose of MT 300 in patients with moderate to severe
migraine by the first half of 2001. It is likely that we will be required to
conduct an additional Phase 3 trial prior to submitting an NDA for MT 300.
MT 500
MT 500 is being developed as an orally administered drug for the prophylactic
treatment of migraine pain. The prophylaxis market is currently composed of
drugs such as anticonvulsants, anti-hypertensives, such as beta-blockers, and
anti-depressants, which were developed primarily for uses outside of migraine.
Many have side effects including fatigue, sexual dysfunction, weight gain,
insomnia and liver toxicity. Studies of the migraine patient population
indicate that approximately 25% of migraine patients experience four or more
migraine attacks per month. We believe these patients may benefit from the
prophylactic treatment of their migraine attacks.
In September 1999, utilizing our license back option model, we obtained an
exclusive worldwide license for MT 500, a novel serotonin (5-HT\\2\\B) receptor
antagonist discovered by Roche. Receptors are substances in the body that
interact with drugs to produce certain bodily functions. 5-HT\\2\\B receptors
are believed to be activated by a mobilization of serotonin, provoking
inflammation of the nerves in cerebral blood vessels and leading ultimately to
the pain and associated symptoms of migraine. We believe that MT 500 acts as an
antagonist, or blocker, of the 5-HT\\2\\B receptor, and is the first orally
administered, highly selective 5-HT\\2\\B receptor antagonist being developed
specifically for the prophylactic treatment of migraine in patients suffering
frequent and debilitating attacks. By selectively blocking the 5-HT\\2\\B
receptor, MT 500 may prevent or reduce the occurrence of migraine without
producing the unwanted side effects associated with currently used prophylactic
migraine therapies.
MT 500 Studies
MT 500 has been evaluated in five Phase 1 clinical trials and one Phase 2
clinical trial conducted by Roche. The Phase 2 trial was for an indication
unrelated to migraine. In all studies, MT 500 was
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generally well tolerated. There were no serious adverse events reported, and
side effects were generally mild or moderate.
We have performed two 13-week toxicology studies with MT 500, one in rats and
one in dogs. These studies were intended to support a proof-of-concept study in
migraine patients. Both studies administered a twice-daily dosing regimen of MT
500 using oleic acid as a delivery medium. In the dog study we found unexpected
changes in the liver that were not observed in the studies performed by Roche
using a different delivery medium and a once-daily dosing regimen. An
additional study has been initiated in dogs to determine whether the liver
changes are due to the delivery medium, the drug or the dosing regimen.
If the results of the additional studies do not show further unexpected changes
in the liver, we intend to initiate a Phase 1 tolerance study of MT 500 in the
first half of 2001 and a Phase 2 proof-of-concept study in migraine prophylaxis
in the second half of 2001.
MT 400
We are developing MT 400 as a co-active migraine therapy, which combines the
activity of a commercially approved triptan drug with that of a commercially
approved long-acting, non-steroidal, anti-inflammatory drug. We believe that
the effective treatment of migraine requires targeted, specific and
complementary co-active therapy to achieve maximum therapeutic benefit with the
fewest side effects. We believe that MT 400 will prove to offer a faster onset
of action or a longer duration of migraine symptom relief than use of either
drug component by itself. In addition, since lower doses of the triptan
components could be used in certain MT 400 formulations relative to use of
triptans by themselves, we believe that the potential risks of triptan-related
side effects may also be reduced with MT 400.
MT 400 represents a commercially attractive opportunity to create multiple
products based on different combinations of triptans and long acting, non-
steroidal, anti-inflammatory drugs. We believe that these MT 400 products will
be attractive to pharmaceutical companies due to their potential to expand the
reach of the existing triptan brands to patients with less severe migraine,
offer maximum oral therapy for severe attacks, provide an effective route for
the over-the-counter transfer of the triptan brand and potentially expand the
proprietary life of most triptan brands.
MT 400 Clinical Trials
In 1998, we completed an open label pilot study for MT 400. In this study, MT
400 had a 74% higher sustained response rate and a substantially lower
recurrence of headache pain compared to use of triptans by themselves. The MT
400 IND was submitted to the FDA in July 2000. Assuming the FDA approves the
development plan, we plan to initiate a Phase 2 clinical trial of MT 400 by the
end of 2000. In order to commercialize MT 400, we will need to license the
rights to a triptan.
Product In-Licensing
In order to continue to expand our product pipeline, we intend to complement
our internal product innovations by in-licensing additional product candidates.
Our in-licensing strategy to obtain new product candidates will include using
our license back option model, which we believe provides us with improved
access to promising compounds. Specifically, the major elements of our license
back option model are:
. We in-license a product candidate at the late preclinical or Phase 1
development stage.
. We grant the licensor an option to license back the product candidate at
various stages of development.
. We assume all development and funding responsibility.
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. If the licensor exercises its option to license back the product
candidate, we receive certain milestone payments and a royalty on sales
of the product candidate.
. If the licensor foregoes its option, we have the right to license the
product candidate to another third party or commercialize the product
ourselves, with sublicense royalties in both cases being paid to the
original licensor.
. All financial terms are set when the original license agreement is
signed.
We believe that our license back option model offers advantages to both us and
the licensor and will be an effective tool in expanding our product portfolio
successfully. The advantages of this model for the licensor include:
. realization of value from product candidates whose development would
otherwise be delayed or never undertaken;
. delayed commitment of resources and capital until the product
candidate's technical risk and commercial potential are better defined;
and
. utilization of our product development and regulatory expertise.
We believe that the advantages of our license back option model for us include:
. improving our access to attractive product candidates;
. limiting our financial exposure to product candidate development
expenses due to low upfront costs compared to traditional in-licensing
structures; and
. in-licensing product candidates with substantial preclinical development
risk removed.
Our success under this license back option model is dependent upon the
successful development of the product licensed and the extent to which the
milestone and royalty payments we receive from the licensor exceed our
development expenses associated with the product candidate.
We used our license back option model to acquire the migraine prophylactic
agent, MT 500, from Roche in September 1999. In exchange for an upfront
payment, Roche granted us a royalty-bearing, exclusive, worldwide license to
develop and commercialize MT 500. Under the terms of the agreement, Roche can
exercise its right to license back MT 500 following completion of either the
Phase 2 or Phase 3 clinical trials in exchange for set milestone payments and
royalties on future sales of MT 500. If Roche does not exercise either of its
options to license back MT 500, we have the right to sublicense to a third
party the commercialization rights for MT 500 or to commercialize the product
ourselves in exchange for fixed royalties payable to Roche. If we sublicense
MT 500, we are obligated to pay Roche a set percentage of any milestone
payments and royalties we receive from the third party sublicensees. The
royalty obligations of either party expire on a country-by-country basis upon
the earlier of patent expiration or the tenth anniversary of first sale in a
country.
The license agreement provides us with worldwide exclusive rights to develop,
manufacture and commercialize MT 500 under patents owned by Roche, as well as
exclusive worldwide rights to know-how and data which had been generated by
Roche prior to entering into the agreement. As part of the agreement, Roche
provided us with an amount of MT 500 which we believe will be sufficient to
carry out the initial stages of the development program. We are obligated to
advance MT 500 through the clinical development process and to bear the full
expense associated with the development program. Either Roche or we may
terminate the agreement upon a material breach by the other party which is not
cured within 90 days, in which case all rights to MT 500 would revert to the
terminating party. Additionally, until Roche has exercised one of its options
to license back MT 500, we may terminate the agreement for any reason upon 180
days' notice.
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Sales and Marketing
We currently have no sales or distribution capabilities. We intend to
commercialize our products through other pharmaceutical companies in exchange
for upfront and milestone payments, proceeds from the manufacturing of drug
substance and royalties. In the future, we may retain the right to co-promote
our products.
Manufacturing
We currently have no manufacturing capability and we currently do not intend to
establish internal manufacturing capabilities. To date, we have entered into
arrangements with third party manufacturers for the supply of formulated and
packaged MT 100 and MT 500 clinical trial materials. Use of third party
manufacturing enables us to focus on our clinical development strengths,
minimize fixed costs and capital expenditures and gain access to advanced
manufacturing process capabilities and expertise. We also intend to enter into
agreements with third party manufacturers for the commercial scale
manufacturing of our products.
In March 1999, we entered into a Development Agreement with Catalytica
Pharmaceuticals, Inc. under which Catalytica has supplied us with clinical
trial materials for all of our MT 100 clinical trials. To date, we have
received from Catalytica sufficient clinical trial materials to complete our
planned clinical development program for MT 100. We have the right to terminate
the agreement upon 60 days' notice to Catalytica. Pursuant to the terms of the
agreement, we are currently in negotiations with Catalytica for the commercial
manufacturing of MT 100.
In March 2000, we entered into a Clinical Development and Clinical Supply
Agreement with R.P. Scherer Corporation for the exclusive, worldwide
manufacturing of MT 500 for all of our clinical requirements. R.P. Scherer
will, at our request, conduct development and validation studies combining MT
500 with their softgel delivery technology and manufacture MT 500. The
agreement expires on September 30, 2004, unless extended by the parties. We
have the right to terminate the agreement upon 30 days' notice to R.P. Scherer.
We believe our current supply of compounds and product candidates, together
with our current suppliers' capacity, should be sufficient to complete both our
ongoing and planned clinical trials.
Competition
Not all migraine attacks are of the same severity. Consequently, a variety of
oral, injectable and intranasal therapies are used to treat different types of
migraine attacks. Attacks are often treated initially with simple over-the-
counter analgesics, particularly if the patient is unable to determine if the
attack is a migraine or some other type of headache. These analgesics include
Excedrin Migraine(R), which is approved for the pain associated with migraine.
If over-the-counter remedies are unsuccessful, patients often turn to more
potent prescription drugs, including triptans. According to IMS, in 1999, total
triptan sales in the U.S. were approximately $1.1 billion. Imitrex, marketed by
Glaxo Wellcome, is the dominant triptan product, with total U.S. sales of
approximately $855 million in 1999, according to IMS.
Narcotics such as codeine and drugs containing analgesic/narcotic combinations,
along with other non-narcotic pain medications, are also used for the treatment
of migraine. If approved, our migraine product candidates will most likely
compete with one or more of the existing migraine therapeutics, as well as any
therapies developed in the future.
The pharmaceutical and biopharmaceutical industries are intensely competitive
and are characterized by rapid technological progress. Certain pharmaceutical
and biopharmaceutical companies and academic and research organizations
currently engage in, or have engaged in, efforts related to the discovery and
development of new medicines for the treatment of migraine symptoms.
Significant levels of research in
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chemistry and biotechnology occur in universities and other nonprofit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results. They also compete
with us in recruiting skilled scientific talent.
Our ability to compete successfully will be based on our ability to create and
maintain scientifically advanced technology, develop proprietary products,
attract and retain scientific personnel, obtain patent or other protection for
our products, obtain required regulatory approvals and manufacture and
successfully market our products either alone or through outside parties. Some
of our competitors have substantially greater financial, research and
development, manufacturing, marketing and human resources and greater
experience in product discovery, development, clinical trial management, FDA
regulatory review, manufacturing and marketing than we do.
Patents and Proprietary Information
We intend to actively seek, when appropriate, protection for our products and
proprietary technology by means of U.S. and foreign patents, trademarks and
contractual arrangements. In addition, we plan to rely upon trade secrets and
contractual agreements to protect certain of our proprietary technology and
products.
We own or have exclusive rights to six issued U.S. patents and four pending
U.S. patent applications. In addition, we presently have pending foreign patent
applications or issued foreign patents relating to MT 100, MT 400 and MT 500.
Applications have been filed under the Patent Cooperation Treaty, or PCT, and
are in the international phase relating to MT 300 and MT 400. There can be no
assurance that our patent applications will issue as patents or, with respect
to our issued patents, that they will provide us with significant protection.
The following provides a general description of our patent portfolio and is not
intended to represent an assessment of claim limitations or claim scope.
MT 100
We have one issued U.S. patent with claims relating to dosage forms that can be
used in administering metoclopramide and a long acting non-steroidal anti-
inflammatory drug to a patient with migraine headache. There are also claims
relating to a method of manufacturing a specific type of dosage form. We have
one pending U.S. patent application with claims relating to various
pharmaceutical compositions and treatment methods that can be used for migraine
patients. In addition, there are applications relating to MT 100 that are
pending in Australia, Canada, Europe and Japan. The expected expiration date of
the issued U.S. patent relating to MT 100 is November 12, 2016. Foreign
patents, if issued, are expected to expire in a similar timeframe.
MT 300
With respect to MT 300, we presently have one pending U.S. application and one
pending international application filed under the PCT. Both of these have
claims relating to liquid pharmaceutical compositions for treating migraine
which contain concentrated dihydroergotamine. There are also claims relating to
treating patients for migraine using these compositions and to therapeutic
packages which include the compositions.
MT 500
Through our license agreement with Roche, we have exclusive worldwide rights to
patents and patent applications relating to MT 500. In the U.S., we have
exclusive rights to three issued patents. These have claims relating to certain
chemical compounds and to various treatment methods involving the use of the
compounds. Related non-U.S. applications are pending or have issued in numerous
countries including Australia, Canada, Europe and Japan. The issued U.S.
patents relating to MT 500 have an
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expected expiration date of May 20, 2017. Foreign patents, if issued, are
expected to expire in a similar timeframe.
MT 400
We have two issued U.S. patents with claims relating to methods, compositions
and therapeutic packages involving the use of certain non-steroidal, anti-
inflammatory drugs and 5-HT receptor agonists in treating patients with
migraine. Outside of the U.S., we have an issued patent in Australia and
applications relating to MT 400 pending in Canada, Europe and Japan. In
addition, we have two pending U.S. applications with claims relating to dosage
forms and methods of treatment involving a 5-HT receptor agonist and a
particular subset of NSAIDs and to the use of MT 400 in the treatment of other
types of headache. We also have one pending international application related
to MT 400. The expected expiration date of the issued U.S. patents relating to
MT 400 is August 14, 2016. Foreign patents, if issued, are expected to expire
in a similar timeframe.
Other Intellectual Property
Much of the know-how of importance to us is dependent upon the knowledge,
experience and skills of key scientific and technical personnel. To protect our
rights to proprietary know-how and technology, we require employees,
consultants and advisors to enter into confidentiality agreements which
prohibit the disclosure of confidential information to anyone outside of the
company. There can be no assurance that these agreements will effectively
prevent disclosure of our confidential information. In the absence of effective
patent or other protection of intellectual property, our business may be
adversely affected by competitors who develop substantially equivalent or
superior technology or know-how.
The patent and other intellectual property positions of pharmaceutical
companies are highly uncertain and involve complex legal and factual questions.
We cannot assure you that:
. our patent rights will provide us with proprietary protection or
competitive advantages against our competitors;
. our patent applications will not be challenged, invalidated or
circumvented;
. others will not independently develop technologies similar to ours or
duplicate our technologies; or
. the patents issued to or licensed by us will not be infringed or
challenged.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions and
in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceutical product candidates.
These agencies and other federal, state and local entities regulate research
and development activities and the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record-keeping, approval and
promotion of our product candidates. All of our product candidates will require
regulatory approval before commercialization. In particular, therapeutic
product candidates for human use are subject to rigorous preclinical and
clinical testing and other requirements of the Federal Food, Drug, and Cosmetic
Act (FFDCA), implemented by the FDA, as well as similar statutory and
regulatory requirements of foreign countries. Obtaining these marketing
approvals and subsequently complying with ongoing statutory and regulatory
requirements is costly and time-consuming. Any failure by us or our
collaborators, licensors or licensees to obtain, or any delay in obtaining,
regulatory approvals or in complying with other requirements could adversely
affect
43
<PAGE>
the commercialization of product candidates then being developed by us and our
ability to receive product or royalty revenues.
The steps required before a new drug product candidate may be distributed
commercially in the U.S. generally include:
. conducting appropriate preclinical laboratory evaluations of the
product candidate's chemistry, formulation and stability and
preclinical studies to assess the potential safety and efficacy of
the product candidate;
. submitting the results of these evaluations and tests to the FDA,
along with manufacturing information and analytical data, in an
investigational new drug application, or IND;
. initiating clinical trials under the IND after the resolution of any
safety or regulatory concerns of the FDA;
. obtaining approval of Institutional Review Boards, or IRBs, to
introduce the drug into humans in clinical studies;
. conducting adequate and well-controlled human clinical trials that
establish the safety and efficacy of the product candidate for the
intended use, typically in the following three sequential, or
slightly overlapping stages;
Phase 1: The product is initially introduced into human subjects
or patients and tested for safety, dose tolerance, absorption,
metabolism, distribution and excretion;
Phase 2: The product candidate is studied in patients to
identify possible adverse effects and safety risks, to determine
dosage tolerance and the optimal dosage, and to collect some
efficacy data;
Phase 3: The product candidate is studied in an expanded patient
population at multiple clinical study sites, to confirm efficacy
and safety at the optimized dose, by measuring a primary
endpoint established at the outset of the study;
. submitting the results of preclinical studies, and clinical trials as
well as chemistry, manufacturing and control information on the
product candidate to the FDA in an NDA; and
. obtaining FDA approval of the NDA prior to any commercial sale or
shipment of the product candidate.
This process can take a number of years and require substantial financial
resources. The results of preclinical studies and initial clinical trials are
not necessarily predictive of the results from large-scale clinical trials, and
clinical trials may be subject to additional costs, delays or modifications due
to a number of factors, including the difficulty in obtaining enough patients,
clinical investigators, product candidate supply, or financial support. The FDA
may also require testing and surveillance programs to monitor the effect of
approved product candidates that have been commercialized, and the agency has
the power to prevent or limit further marketing of a product candidate based on
the results of these post-marketing programs. Upon approval, a product
candidate may be marketed only in those dosage forms and for those indications
approved in the NDA.
In addition to obtaining FDA approval for each indication to be treated with
each product candidate, each domestic product candidate manufacturing
establishment must register with the FDA, list its product with the FDA, comply
with cGMP regulations and permit and pass manufacturing plant inspections by
the FDA. Moreover, the submission of applications for approval may require
additional time to complete manufacturing stability studies. Foreign
establishments manufacturing product for distribution in the U.S. also must
list their product candidates with the FDA and comply with cGMP
44
<PAGE>
regulations. They are also subject to periodic inspection by the FDA or by
local authorities under agreement with the FDA.
Any product candidates manufactured or distributed by us pursuant to FDA
approvals are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the
product candidate. In addition to continued compliance with standard regulatory
requirements, the FDA may also require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product. Adverse experiences
with the product candidate must be reported to the FDA. Product approvals may
be withdrawn if compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product are discovered following
approval.
The FFDCA also mandates that products be manufactured consistent with cGMP
regulations. In complying with the FDA's regulations on cGMP regulations,
manufacturers must continue to spend time, money and effort in production,
record-keeping quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects manufacturing facilities to ensure compliance with cGMP
regulations. Failure to comply subjects the manufacturer to possible FDA
action, such as warning letters, suspension of manufacturing, seizure of the
product, voluntary recall of a product or injunctive action, as well as
possible civil penalties. We currently rely on, and intend to continue to rely
on, third parties to manufacture our compounds and product candidates. These
third parties will be required to comply with cGMP regulations.
Even after the FDA approval has been obtained, further studies, including post-
marketing studies, may be required. Results of post-marketing studies may limit
or expand the further marketing of the products. If we propose any
modifications to a product, including changes in indication, manufacturing
process, manufacturing facility or labeling, a supplement to our NDA may be
required to be submitted to the FDA.
Products manufactured in the U.S. for distribution abroad will be subject to
FDA regulations regarding export, as well as to the requirements of the country
to which they are shipped. These latter requirements are likely to cover the
conduct of clinical trials, the submission of marketing applications, and all
aspects of manufacturing and marketing. Such requirements can vary
significantly from country to country.
We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use of and
disposal of hazardous or potentially hazardous substances used in connection
with our research work. Although we believe that our safety procedures for
handling and disposing of such materials comply with current federal, state and
local laws, rules, regulations and policies, the risk of accidental injury or
contamination from these materials cannot be entirely eliminated.
The extent of government regulation which might result from future legislation
or administrative action cannot be accurately predicted. In this regard,
although the Food and Drug Administration Modernization Act of 1997 modified
and created requirements and standards under the FFDCA Act with the intent of
facilitating product development and marketing, the FDA is still in the process
of developing regulations implementing the Food and Drug Administration
Modernization Act of 1997. Consequently, the actual effect of these
developments on our own business is uncertain and unpredictable.
Legal Proceedings
We are not a party to any material legal proceeding.
On October 6, 2000, an action was filed against us by Punk Ziegel & Company
arising out of our engagement of Punk Ziegel in early 1999 to assist us with
the sale of convertible preferred stock in a private placement offering. Punk
Ziegel alleges in the action that POZEN owes it certain fees and expenses in
connection with our termination of their engagement, and transaction
consideration, including warrants, in connection with our issuance and sale of
preferred stock in the twelve-month period following our termination of such
engagement. We are currently investigating this matter but believe that this is
not a material proceeding.
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<PAGE>
Employees
As of August 28, 2000, we had a total of 18 full-time employees. All 18
employees are based at our headquarters in Chapel Hill, North Carolina.
Fourteen of the 18 employees hold advanced degrees, including six Pharm.D. or
Ph.D. degrees.
Facilities
Our leased corporate facilities, located in Chapel Hill, North Carolina,
currently occupy approximately 7,000 square feet. This lease expires in
February of 2003. We believe that our existing facility is adequate for our
current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms.
46
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MANAGEMENT
Set forth below is certain information regarding our executive officers,
directors and key employees, including their age as of August 28, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
John R. Plachetka, Pharm.D. .... 47 President, Chief Executive Officer,
Chief Scientist and Director
Matthew E. Czajkowski........... 51 Chief Financial Officer, Senior Vice
President, Finance and Administration
Andrew L. Finn, Pharm.D. ....... 51 Executive Vice President, Product
Development
Kristina M. Adomonis............ 46 Senior Vice President, Business
Development
Mark B. Zimmerman, Ph.D. ....... 49 Senior Vice President, Scientific
Affairs and Acquisitions
John E. Barnhardt............... 51 Vice President, Finance and
Administration
Donna L. Gilbert, Ph.D. ........ 40 Vice President, Pharmaceutical
Development
Dennis L. McNamara.............. 35 Vice President, Business Development
Jacques F. Rejeange (/1/)(/2/).. 60 Chairman of the Board of Directors
Bruce A. Tomason (/1/)(/2/)..... 53 Director
Peter J. Wise, M.D.(/1/)........ 65 Director
Ted G. Wood(/2/)................ 62 Director
</TABLE>
-------------------------------
(/1/)Member of the Compensation Committee.
(/2/)Member of the Audit Committee.
John R. Plachetka, Pharm.D., is a co-founder and President, Chief Executive
Officer, Chief Scientist and a member of the Board of Directors of POZEN. Prior
to founding POZEN, Dr. Plachetka was Vice President of Development at Texas
Biotechnology Corporation from 1993 to 1995 and was President and Chief
Executive Officer of Clinical Research Foundation-America, a leading clinical
research organization, from 1990 to 1992. From 1981 to 1990, he was employed at
Glaxo Inc. Dr. Plachetka received his B.S. in Pharmacy from the University of
Illinois College of Pharmacy and his Doctor of Pharmacy from the University of
Missouri-Kansas City.
Matthew E. Czajkowski joined POZEN in March 2000 as Chief Financial Officer and
Senior Vice President of Finance and Administration. Prior to joining POZEN,
Mr. Czajkowski was an investment banker. From 1997 through 1998, he was a
Managing Director of Mergers and Acquisitions at Societe Generale. From 1992 to
1997, he was a Managing Director in charge of Corporate Finance at Wheat First
Butcher Singer, Inc. From 1983 to 1991, he was employed with, and served as a
Vice President beginning in 1987 at Goldman, Sachs & Co. Mr. Czajkowski
received his B.A. from Harvard University and his M.B.A. from Harvard Business
School.
Andrew L. Finn, Pharm.D. joined POZEN in January 2000 as Executive Vice
President of Product Development. Prior to joining POZEN, Dr. Finn co-founded
enVision Sciences, a specialized clinical research and regulatory services
company, in 1996. From 1991 to 1996, he was Vice President of U.S. Clinical
Research and Biometrics for Solvay Pharmaceuticals. He joined Glaxo Inc. in
1981 as Assistant Director of Anti-Infective Development. Dr. Finn received his
B.S. in Pharmacy from the University of North Carolina, Chapel Hill and his
Doctor of Pharmacy from the University of Michigan.
Kristina M. Adomonis joined POZEN in June 1999 as Senior Vice President of
Business Development. Prior to joining POZEN, Ms. Adomonis was Vice President
of Global Business Development & Licensing, OTC at Novartis Consumer Health
from 1997 to 1999. From 1994 to 1997, she was Director of Business Development
in Glaxo Wellcome's U.S. operations. Prior to Glaxo, she served on the Canadian
Executive Committees of Burroughs Wellcome and Abbott Laboratories, where she
managed the Business Development Units of these two respective operations. She
joined the industry in
47
<PAGE>
1980 with F. Hoffman-La Roche Ltd. Ms. Adomonis received a B.S. in Chemistry
from Tufts University and an M.B.A. from McGill University.
Mark B. Zimmerman, Ph.D. joined POZEN in August 1997 and is Senior Vice
President of Scientific Affairs and Acquisitions. Prior to joining POZEN, Dr.
Zimmerman was International Director of Metabolic Diseases in Clinical
Pharmacology at Glaxo Wellcome from 1995 to 1997. Previously, he was Director
of Migraine Clinical Research at Glaxo. Dr. Zimmerman received his M.S. and
Ph.D. from the University of Pittsburgh.
John E. Barnhardt joined POZEN in March 1997 as Vice President of Finance and
Administration. Prior to joining POZEN, Mr. Barnhardt was Chief Financial
Officer and Principal Accounting Officer of Medco Research, Inc. from 1993 to
1996 and Microwave Laboratories, Inc. from 1988 to 1993. Mr. Barnhardt received
a B.S. from North Carolina State University, and while employed at Ernst &
Young LLP, received his CPA certification.
Donna L. Gilbert, Ph.D. joined POZEN in October 1998 as Director of
Pharmaceutical Development and was promoted to Vice President in 1999. Prior to
joining POZEN, Dr. Gilbert held various scientific positions at DuPont
Pharmaceuticals from 1993 to 1998 and Hoechst Marion Roussel, Inc. (formerly
Marion Laboratories, Inc. and Marion Merrell Dow, Inc.) from 1988 to 1993,
including Principal Research Scientist and Project Leader. Dr. Gilbert received
her M.S. and Ph.D. from the University of Utah.
Dennis L. McNamara joined POZEN in December 1998 as Vice President of Business
Development. Prior to joining POZEN, Mr. McNamara was at AlphaVax, Inc. from
1997 to 1998. From 1995 to 1996, he was at Sequana Therapeutics, Inc., a public
genomics company. Previously, he managed business development activities for
Apex Bioscience and held positions with Abbott Laboratories and Merck. From
1987 to 1990, he conducted receptor pharmacology research at the University of
North Carolina, Chapel Hill. Mr. McNamara received his A.B. from Duke
University and his M.B.A. from the University of Michigan.
Jacques F. Rejeange was elected to the Board of Directors of POZEN in April
1997 and as Chairman of the Board of Directors in December 1999. Mr. Rejeange
is currently President of Florham Consulting S.A. based in Areuse, Switzerland.
From 1991 to 1994, he was initially Chief Operating Officer and later President
and Chief Executive Officer of Sterling Winthrop, Inc. From 1989 to 1991, he
was President and Chief Executive Officer of Sandoz Pharmaceuticals Corporation
USA.
Bruce A. Tomason was elected to the Board of Directors of POZEN in 1997. He
currently provides corporate financial consulting services. From 1996 to 1998,
Mr. Tomason was President and Chief Executive Officer of One Call Medical,
Inc., a medical management company specializing in workers' compensation. From
1991 to 1995, he was President of Apollo Capital Corporation, a healthcare
investment banking and venture capital company. From 1984 to 1990, he was Vice
President of Evans Medical Inc. and Finance and Commercial Director of Evans
Healthcare Ltd., a privately owned biopharmaceutical company in Horsham,
England. He joined the pharmaceutical/healthcare industry in 1971 with Organon
Inc. where he was Manager of Corporate Development and General Manager of the
Nutritional Products Division. Mr. Tomason received an M.B.A. in Economics and
Finance from Columbia University.
Peter J. Wise, M.D. is a co-founder and serves as Senior Medical Affairs
Advisor and as a member of the Board of Directors of POZEN. Prior to founding
POZEN, Dr. Wise was President and Chief Operating Officer at Pharmaceutical
Product Development, Inc. from 1993 to 1996. From 1979 to 1993, he was Senior
Vice President of Medical Operations and Chief Medical Officer at Glaxo Inc.
48
<PAGE>
Ted G. Wood was elected to the Board of Directors of POZEN in May 2000.
Presently, he is President of United Operating Companies, an affiliate of The
United Company in Bristol, Virginia, one of the Company's principal
shareholders. From 1992 to 1993, he was President of Boehringer Mannheim
Pharmaceutical Corporation in Rockville, Maryland. From 1993 to 1994 he was
President of KV Pharmaceuticals in St. Louis, Missouri. From 1975 to 1991, he
was employed by SmithKline where he served as President of Beecham Laboratories
from 1988 to 1989 and Executive Vice President of SmithKline from 1990 to 1991.
He served as account supervisor at Frank J. Corbett, Inc. in Chicago, Illinois
from 1972 to 1974. From 1962 to 1971, he held various sales and marketing
management positions with The Dow Chemical Company. He graduated from the
University of Kentucky with a B.S. in Commerce in 1960. In 1986 he completed
the Advanced Management Program at Harvard University.
Audit Committee
We have recently established an audit committee which will report to the board
of directors with regard to the selection of our independent auditors, the
scope of our annual audits, fees to be paid to the auditors, the performance of
our independent auditors, compliance with our accounting and financial
policies, and management's procedures and policies relative to the adequacy of
our internal accounting controls. The members of our audit committee are
Jacques F. Rejeange, Bruce A. Tomason and Ted G. Wood.
Compensation Committee and Compensation Committee Interlocks and Insider
Participation
We have established a compensation committee. Our compensation committee is
responsible for the evaluation, approval and administration of all salary,
incentive compensation, benefit plans and other forms of compensation for our
officers, directors and other employees, including bonuses and options granted
under our 1996 Stock Option Plan and our 2000 Equity Compensation Plan. The
members of the Compensation Committee are Jacques F. Rejeange, Bruce A. Tomason
and Peter J. Wise. None of the Compensation Committee members has served as an
officer or employee of the company.
Director Compensation
We reimburse each member of our board of directors for out-of-pocket expenses
incurred in connection with attending our meetings. We also pay each of our
directors a fee for each meeting attended, which currently is $1,500 for each
meeting attended in person and $750 if attendance is by telephone.
Additionally, each of our outside board members currently receives annually
options to purchase 20,000 shares of our common stock for their services as
directors granted as of the date of the initial board meeting for each calendar
year.
Executive Compensation
The following table summarizes the compensation paid to or earned during the
fiscal year ended December 31, 1999 by our chief executive officer and all of
our other executive officers whose salary and bonus exceeded $100,000. We refer
to these persons as the named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
1999 Annual
Compensation Shares
------------------ Underlying All Other
Name and Principal Position Salary($) Bonus($) Options(#) Compensation
--------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
John R. Plachetka, Pharm.D. ......
Chief Executive Officer,
President and Chief Scientist $240,000 $60,000 -- --
John E. Barnhardt.................
Vice President, Finance and
Administration $108,200 $21,640 33,725 --
Kristina M. Adomonis(/1/).........
Senior Vice President, Business
Development $ 94,800 $18,960 101,175 --
</TABLE>
(/1/) Kristina M. Adomonis' employment began on June 15, 1999, and the table
above reflects only compensation paid to her since this date.
-------------------------------
49
<PAGE>
1999 Option Grants
The following table contains certain information regarding stock option grants
during the twelve months ended December 31, 1999 by us to our named executive
officers.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Number of Percentage of Appreciation for
Securities Total Options Option Term(/2/)
Underlying Granted to ---------------------
Options Employees in Exercise Expiration
Name Granted(#)(/1/) Fiscal Year Price ($/share) Date 5%($) 10%($)
---- --------------- ------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John R. Plachetka,
Pharm.D................ -- -- -- -- -- --
John E. Barnhardt....... 33,725 6.4% $0.89 3/09 $ 794,002 $1,282,094
Kristina M. Adomonis.... 101,175 19.2% $0.89 6/09 $2,382,005 $3,846,283
</TABLE>
-------------------------------
(/1/)These options were granted with an exercise price equal to the fair market
value of the common stock on the date of grant as determined by the Board
of Directors.
(/2/)The dollar amounts under these columns are the result of calculations at
rates set by the SEC and, therefore, are not intended to forecast possible
future appreciation, if any, in the price of the underlying common stock.
The potential realizable values are calculated by assuming an initial
public offering price of $15.00 per share and assuming that the market
price appreciates from this price at the indicated rate for the entire
term of each option and that each option is exercised and sold on the last
day of its term at the appreciated price.
Option Exercises and Year-End Option Values
The following table provides information about the number of shares issued upon
option exercises by the named executive officers during the year ended December
31, 1999, and the value realized by the named executive officers. The table
also provides information about the number and value of options held by the
named executive officers at December 31, 1999. As our common stock is not
publicly traded, a readily ascertainable market value is not available.
Aggregated Option Exercises In Last Fiscal Year And
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money Options
Underlying Unexercised at Fiscal Year-
Shares Options at Fiscal Year-End(#) End($)(/1/)
Acquired Value --------------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- -------------- ----------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John R. Plachetka,
Pharm.D................ -- -- -- -- -- --
John E. Barnhardt....... -- -- 47,777 95,554 $707,802 $1,391,854
Kristina M. Adomonis.... -- -- -- 101,175 -- $1,427,625
</TABLE>
-------------------------------
(/1/)Based on the difference between the option exercise price and an assumed
initial public offering price of $15.00 per share of common stock.
50
<PAGE>
Stock Option and Other Compensation Plans
Stock Option Plan
We adopted our stock option plan in November 1996. We authorized a total of
1,605,310 shares of our common stock for issuance under our stock option plan.
At August 28, 2000, options to purchase 1,506,270 shares of common stock at a
weighted average exercise price of $1.12 per share were outstanding and options
convertible into 40,531 shares of common stock remain available for future
grant. Options to purchase an aggregate of 58,509 shares of common stock have
been exercised under our stock option plan. Our board has determined not to
grant any additional options under this plan after this offering.
In the event that:
. we merge with or consolidate into another corporation, which results in
our stockholders owning less than 50% of the voting power of the voting
securities of the surviving corporation, or
. we sell, lease or otherwise dispose of all or substantially all of our
assets,
then any unvested options outstanding under this plan become fully vested as of
a date prior to the merger, consolidation, sale, lease or other disposition of
assets. Any option that becomes vested and exercisable solely because of this
provision is conditioned upon the consummation of the transaction that gave
rise to the accelerated vesting. Our board of directors may, in its discretion,
terminate any unexercised options that become vested and exercisable solely
because of this provision.
2000 Equity Compensation Plan
Our board of directors has adopted, and our stockholders have approved, the
2000 Equity Compensation Plan, which will become effective upon the
consummation of this offering. The 2000 plan provides for grants of incentive
stock options, nonqualified stock options, stock awards, performance units, and
other stock-based awards to our employees, non-employee directors, advisors,
and consultants.
The 2000 plan authorizes up to 3,000,000 shares of our common stock for
issuance under the terms of the 2000 plan. The maximum number of shares for
which any individual may receive grants in any calendar year is 1,000,000
shares. If options granted under the 2000 plan expire or are terminated for any
reason without being exercised, or if stock awards, performance units or other
stock-based awards are forfeited or otherwise terminate, the shares of common
stock underlying the grants will again be available for purposes of the 2000
plan. No options, stock awards, performance units, or other stock-based awards
have been granted under the 2000 plan.
The compensation committee of our board of directors administers and makes
grants under the 2000 plan. Grants under the 2000 plan will become exercisable
and be governed by such other terms as are determined by the compensation
committee and specified in the grant instrument.
Upon a change of control, unless the compensation committee determines
otherwise:
. outstanding options will automatically accelerate and become fully
exercisable;
. restrictions and conditions on outstanding stock awards will immediately
lapse;
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<PAGE>
. performance units will be paid at their target value, or in such other
amount as the compensation committee may determine; and
. other stock-based awards will become fully exercisable, vested or
payable in full, as applicable.
If a change of control occurs where we are not the surviving entity or where we
survive only as a subsidiary of another entity, unless the compensation
committee determines otherwise, outstanding grants will be assumed by or
replaced with comparable options or other grants by the surviving corporation.
In addition, upon a change of control, the compensation committee may:
. require that grantees surrender their outstanding options in exchange
for payment, in cash or stock, of an amount equal to the amount by which
the fair market value of the shares of common stock subject to the
option exceeds the exercise price;
. after giving grantees an opportunity to exercise their outstanding
options, terminate unexercised options; and
. determine that grantees holding performance units or other stock-based
awards will receive a payment in settlement of the performance units or
other stock-based awards.
A "change of control" is defined as the following events:
. any person becomes a beneficial owner, directly or indirectly, of stock
representing 50% or more of the voting power of the then-outstanding
shares of our stock;
. a merger or consolidation with another corporation where our
stockholders, immediately before the transaction, will not beneficially
own, immediately after the transaction, shares entitling the
stockholders to more than 50% of all votes to which all stockholders of
the surviving corporation would be entitled in the election of
directors;
. a sale or other disposition of all or substantially all of our assets;
or
. a liquidation or dissolution.
Our board of directors may amend or terminate the 2000 plan at any time.
However, stockholder approval is required for any change that is required to be
approved by the stockholders under section 162(m) or section 422 of the
Internal Revenue Code or by an applicable stock exchange. The 2000 plan will
terminate ten years after its effective date, unless our board of directors
terminates the 2000 plan earlier or extends it with approval of the
stockholders.
Section 162(m) of the Internal Revenue Code imposes a $1,000,000 limit on the
amount a public corporation can deduct for federal income tax purposes for
compensation paid to the chief executive officer or any of the four other most
highly compensated officers in any year. This limit generally applies to all
compensation, including amounts received upon the exercise of stock options and
the value of shares or cash paid pursuant to other grants. An exception exists,
however, for "performance-based compensation." The 2000 plan is intended to
allow grants to meet the requirements of "performance-based compensation."
Stock options generally will meet the requirements of performance-based
compensation. Not all stock awards, performance units, and other stock-based
grants are considered performance-based compensation under section 162(m). As
described above under "Performance-Based Compensation," our compensation
committee may grant stock awards and performance units that are based on
attainment of objective performance goals and are intended to meet the
requirements of performance-based compensation under section 162(m).
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<PAGE>
401(k) Profit Sharing Plan
We maintain a 401(k) Profit Sharing Plan which is intended to be a tax-
qualified defined contribution plan under Section 401(k) of the Code. In
general, all of our employees are eligible to participate. The 401(k) Plan
includes a salary deferral arrangement pursuant to which participants may
contribute, subject to certain Code limitations, a maximum of 15% of their
salary on a pre-tax basis, up to a maximum of $10,000. We do not currently make
any contributions to the Plan. Distributions from the 401(k) Plan may be made
in the form of a lump-sum cash payment or in installment payments.
Other Employment Arrangements
Our principal employees, including executive officers, are required to sign an
agreement restricting solicitation of customers and employees following
employment with us and providing for ownership and assignment of intellectual
property rights to us.
Under an executive employment agreement dated April 1, 1999, we agreed to
employ John R. Plachetka as our Chief Executive Officer for three years at an
annual base salary of $240,000, which is subject to performance and merit-based
increases. The agreement automatically renews for successive one-year terms
thereafter, unless either party terminates the agreement.
On January 1, 2000, we hired Andrew L. Finn as our Executive Vice President,
Product Development. In connection with his employment, we granted him options
to purchase 134,900 shares of common stock at an exercise price of $1.48 per
share. These options vest in equal installments over a three-year period.
On March 20, 2000, we hired Matthew E. Czajkowski as our Senior Vice President
and Chief Financial Officer. In connection with his employment, we granted him
options to purchase 148,390 shares of common stock at an exercise price of
$2.02 per share. These options vest in equal installments over a three-year
period.
Limitation of Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the personal liability of directors for
breach of fiduciary duty to the maximum extent permitted by the Delaware
General Corporation Law. Our certificate of incorporation provides that no
director will have personal liability to us or to our stockholders for monetary
damages for breach of fiduciary duty or other duty as a director. However,
these provisions do not eliminate or limit the liability of any of our
directors:
. for any breach of their duty of loyalty to us or our stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for voting or assenting to unlawful payments of dividends or other
distributions; or
. for any transaction from which the director derived an improper
personal benefit.
Any amendment to or repeal of these provisions will not eliminate or reduce the
effect of these provisions in respect of any act or failure to act, or any
cause of action, suit or claim that would accrue or arise prior to any
amendment or repeal or adoption of an inconsistent provision. If the Delaware
General Corporation Law is amended to provide for further limitations on the
personal liability of directors of corporations, then the personal liability of
our directors will be further limited to the greatest extent permitted by the
Delaware General Corporation Law.
Our certificate of incorporation provides that we will indemnify our directors
and executive officers and may indemnify our other corporate agents to the
fullest extent permitted by law. We believe that indemnification under our
certificate of incorporation covers at least negligence and gross negligence on
the part of indemnified parties.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March and August 2000, as part of our sale of an aggregate of 4,187,212
shares of our series E and series F convertible preferred stock at a price of
$6.95 per share:
. We sold an aggregate of 1,428,058 shares of our series E and series F
convertible preferred stock to Canaan Equity II L.P., Canaan Equity II
L.P. (QP) and Canaan Equity II Entrepreneurs LLC. The general partner of
each of these entities is Canaan Equity Partners II LLC. These entities
acquired these shares on the same terms as other purchasers in these
transactions.
. We sold an aggregate of 1,079,138 shares of our series E and series F
convertible preferred stock to Vector Later-Stage Equity Fund II, L.P.
and Vector Later-Stage Equity Fund II (Q.P.), L.P. The general partner
of each of these entities is Vector Fund Management, LLC. These entities
acquired these shares on the same terms as other purchasers in these
transactions.
. We sold 35,971 shares of our series E convertible preferred stock to
Matthew E. Czajkowski, our Senior Vice President and Chief Financial
Officer. Mr. Czajkowski acquired these shares on the same terms as the
other purchasers in this transaction.
In December 1996 and December 1997, respectively, as part of our sale of
2,105,931 shares of our series A convertible preferred stock at a price of
$3.15 per share and 1,139,377 shares of our series B convertible preferred
stock at a price of $4.00 per share, we sold an aggregate of 284,690 shares of
series A convertible preferred stock and series B convertible preferred stock
to Florham Holdings Ltd., an affiliate of Jacques F. Rejeange, one of our
directors. These shares were purchased on the same terms as the other
purchasers in this transaction.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of August 28, 2000, and as adjusted
to reflect the sale of 5,000,000 shares of common stock in this offering, by:
. each person, or group of affiliated persons, who is known by us to
beneficially own more than 5% of our common stock;
. each of our directors;
. each of our named executive officers; and
. all of our directors and current executive officers as a group.
Except as otherwise noted, the persons or entities in this table have sole
voting and investing power with respect to all of the shares of common stock
beneficially owned by them, subject to community property laws, where
applicable.
The "Number of Shares Beneficially Owned" column is based on an assumed
21,428,361 shares of common stock outstanding before the offering, and
26,428,361 shares of common stock outstanding after the offering. For purposes
of the table below, we deem shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of August 28, 2000 to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of the person but we do not
treat them as outstanding for the purpose of computing the percentage ownership
of any other person.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares ---------------------------
Beneficially Before After
Name of Beneficial Owner(/1/) Owned Offering(/2/) Offering(/3/)
----------------------------- ---------------- ------------- -------------
<S> <C> <C> <C>
Canaan Equity II L.P............ 2,358,711(/4/) 11.0% 8.9%
105 Rowayton Avenue
Rowayton, CT 06853
MEDGROWTH S.A. ................. 3,206,685(/5/) 15.0% 12.1%
c/o Bellevue Asset Management
AG
Grafenauweg 4
CH-6301 Zug
Switzerland
Vector Later-Stage Equity Fund 1,783,243(/6/) 8.3% 6.7%
II, L.P. ......................
1751 Lake Cook Road, Third
Floor
Deerfield, IL 60015
John R. Plachetka............... 3,895,507(/7/) 18.2% 14.7%
Kristina M. Adomonis............ 33,725(/8/) * *
John E. Barnhardt............... 118,038(/9/) * *
Matthew E. Czajkowski........... 59,793 * *
Andrew L. Finn.................. 6,745(/10/) * *
Jacques F. Rejeange............. 411,027(/11/) 1.9% 1.6%
Bruce A. Tomason................ 26,980(/12/) * *
Peter J. Wise................... 578,856 2.7% 2.2%
Ted G. Wood..................... 0 0.0% 0.0%
All current directors and
executive officers
as a group (9 persons)......... 5,130,671(/13/) 23.7% 19.3%
</TABLE>
-------------------------------
* Less than one percent.
(/1/)Unless otherwise set forth herein, the street address of the named
beneficial owner is c/o POZEN Inc., Suite 240, 6330 Quadrangle Drive,
Chapel Hill, North Carolina 27514.
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<PAGE>
(/2/)For purposes of calculating the percentage beneficially owned before this
offering, the number of shares of common stock deemed outstanding prior to
this offering includes (i) 13,345,401 shares outstanding as of August 28,
2000, and (ii) shares issuable by the Company pursuant to options held by
the respective person or group which may be exercised within 60 days
following August 28, 2000 ("Presently Exercisable Options"). Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission that deem shares to be beneficially owned by any
person or group who has or shares voting and investment power with respect
to such shares. In addition, the number of shares of common stock deemed
outstanding prior to the offering (i) reflects the issuance of 1,597,285
shares of series F convertible preferred stock on August 28, 2000; (ii)
reflects the reduction on September 15, 2000 of the conversion price of
the shares of the series E and the series F convertible preferred stock
will be reduced pursuant to the terms of the series E and the series F
convertible preferred stock, respectively, to $4.25 per share; (iii)
assumes the payment of accumulated dividends payable upon the automatic
conversion of the series E and the series F convertible preferred stock at
the time of this offering in shares of our common stock based upon an
assumed initial public offering price of $15.00 per share and based upon
our estimate as of September 15, 2000 of the amount of accumulated
dividends that holders of series E convertible preferred stock will elect
to receive in shares of common stock in lieu of cash; (iv) reflects the
conversion of all outstanding shares of preferred stock into an aggregate
of 15,555,663 shares of common stock, as adjusted for the stock split,
upon the closing of this offering; and (v) reflects a 1.349-for-1 split of
our common stock to holders of record prior to the effectiveness of this
offering.
(/3/)For purposes of calculating the percentage beneficially owned after this
offering, the number of shares of common stock deemed outstanding after
the offering assumes the issuance of 5,000,000 shares of common stock in
this offering.
(/4/)Includes shares owned by Canaan Equity II Entrepreneurs LLC and Canaan
Equity II L.P. (QP), affiliates of Canaan Equity II LP. Canaan Equity
Partners II LLC is the general partner of Canaan Equity II L.P. and Canaan
Equity II L.P. (QP) and the manager of Canaan Equity II Entrepreneurs LLC.
Eight individuals are the managers of Canaan Equity Partners II LLC. The
managers of Canaan Equity Partners II LLC have the authority to vote these
shares pursuant to a two-thirds vote of these managers.
(/5/)Includes 269,800 shares subject to warrants that are currently exercisable
by BB Medtech AG, a holding company incorporated in Switzerland of which
MEDGROWTH S.A. is a wholly owned subsidiary.
(/6/)Includes shares owned by Vector Later-Stage Equity Fund II, L.P. and
Vector Later-Stage Equity Fund II (QP) L.P. The general partner of each
fund is Vector Fund Management, LLC, which has appointed Vector Fund
Management L.P. as the manager of the shares. There is no single person at
the funds that exercises voting or investment control over the shares held
by the funds. Voting and investment of the shares is conducted by an
internal investment committee of Vector Fund Management, L.P. The address
of the funds is 1751 Lake Cook Road, Deerfield, IL 60015.
(/7/)Consists of 3,895,507 shares owned by Silver Hill Investments, LLC, which
is 50% owned by the John R. Plachetka Irrevocable Trust, 40% owned by John
R. Plachetka and 10% owned by his wife, Clare Plachetka. John R. Plachetka
may be deemed a beneficial owner of these shares.
(/8/)Consists of 33,725 shares issuable pursuant to options exercisable within
60 days.
(/9/)Consists of 118,038 shares issuable pursuant to options exercisable within
60 days.
(/10/)Includes 6,745 shares issuable pursuant to options exercisable within 60
days.
(/11/)Includes 384,047 shares owned by Florham Holdings Ltd. Mr. Rejeange is
president of Florham Consulting SA, an affiliated entity of Florham
Holdings Ltd. and may be deemed to be a beneficial owner of these shares.
Mr. Rejeange disclaims such beneficial ownership. Also includes 26,980
shares issuable pursuant to options exercisable within 60 days.
(/12/)Includes 26,980 shares issuable pursuant to options exercisable within 60
days.
(/13/)Includes 212,468 shares issuable pursuant to options exercisable within
60 days.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our capital stock will be as described
below.
Our Authorized Capital Stock
. 90,000,000 shares of common stock, par value $0.001 per share
. 10,000,000 shares of preferred stock, par value $0.001 per share
. immediately after the sale of the shares of common stock in this
offering, we will have 26,428,361 shares of common stock outstanding
and no shares of preferred stock outstanding
Common Stock
Voting:
. one vote for each share held of record on all matters submitted to a
vote of stockholders
. no cumulative voting rights
. election of directors by plurality of votes cast; removal of
directors (only for cause) by 75% of all eligible votes
. all other matters by majority of votes cast
Dividends:
. subject to preferential dividend rights of outstanding shares of
preferred stock, if any, common stockholders are entitled to receive
ratably declared dividends
. our Board of Directors may only declare dividends out of legally
available funds
Additional Rights:
. subject to the preferential liquidation rights of outstanding shares
of preferred stock, if any, common stockholders are entitled to
receive ratably net assets, available after the payment of all debts
and liabilities, upon our liquidation, dissolution or winding up
. no preemptive rights
. no subscription rights
. no redemption rights
. no sinking fund rights
. no conversion rights
The rights and preferences of common stockholders are subject to the right of
any series of preferred stock we may issue in the future.
Preferred Stock
We may, by resolution of our board of directors, and without any further vote
or action by our stockholders, authorize and issue, subject to limitations
prescribed by law, up to an aggregate of 10,000,000 shares of preferred stock.
The preferred stock may be issued in one or more classes or series of shares of
any class or series. With respect to any classes or series, our board of
directors may determine the designation and the number of shares, preferences,
limitations and special rights,
57
<PAGE>
including dividend rights, conversion rights, voting rights, redemption rights
and liquidation preferences. Because of the rights that may be granted, the
issuance of preferred stock may delay, defer or prevent a change of control.
Prior to this offering, we had 2,105,931 shares of series A convertible
preferred stock, 1,139,377 shares of series B convertible preferred stock,
563,044 shares of series C convertible preferred stock, 2,593,750 shares of
series D convertible preferred stock, 2,589,927 shares of series E convertible
preferred stock and 1,597,285 shares of series F convertible preferred stock
issued and outstanding. Upon the completion of this offering, all of our
outstanding shares of preferred stock will automatically convert into a total
of 15,555,663 shares of common stock. In addition, upon the conversion of the
series E convertible preferred stock, the holders have the option of payment of
all accumulated dividends in either common stock or cash. Upon the conversion
of the series F convertible preferred stock, the holders will receive all
accumulated dividends in common stock.
Warrants
As of August 28, 2000, we had outstanding warrants to purchase 24,485 shares of
series E convertible preferred stock, at an exercise price of $6.59 per share
(which warrants will, immediately prior to the consummation of this offering,
become warrants to purchase 33,030 shares of our common stock in exchange for
payment to us of an amount per share equal to the initial public offering price
per share of the common stock), warrants to 200,000 purchase shares of series D
convertible preferred stock, at an exercise price of $3.15 per share, and
warrants to purchase 8,884 shares of series C convertible preferred stock,
warrants to purchase 36,450 series B convertible preferred stock and warrants
to purchase 78,776 shares of series A convertible preferred stock,
respectively, all at an exercise price of $0.001 per share. All outstanding
warrants provide for anti-dilution adjustments in the event of certain mergers,
consolidations, reorganizations, recapitalizations, stock dividends, stock
splits or other changes in our corporate structure. The warrants to purchase
series E convertible preferred stock also provide for net issuance exercise.
All of our warrants become exercisable for an aggregate of 470,255 shares of
our common stock immediately prior to the completion of this offering.
Options
As of August 28, 2000, options to purchase 1,506,270 shares of common stock at
a weighted average exercise price of $1.12 per share were outstanding and
options convertible into 40,531 shares of common stock remain available for
future grant. Options to purchase an aggregate of 58,509 shares of common stock
have been exercised under our stock option plan as of August 28, 2000.
Anti-Takeover Provisions
Under Delaware law, all stockholder actions must be effected at a duly called
annual or special meeting. Our bylaws provide that, except as otherwise
required by law, special meetings of the stockholders can only be called by our
chairman of the board, President or any two members of the board of directors.
In addition, our bylaws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders, including
proposed nominations of persons for election to the board. Stockholders at an
annual meeting may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the direction of the
board of directors or by a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has delivered timely
written notice in proper form to our secretary of the stockholder's intention
to bring such business before the meeting. The holders of a majority of our
outstanding shares will constitute a quorum for the transaction of business.
Each stockholder has one vote per share of stock. Except as explained below or
provided by Delaware law, approval of a majority of those stockholders who are
present is required to take any action.
58
<PAGE>
Our certificate of incorporation and our bylaws provide that a director may be
removed from office only with cause by the affirmative vote of stockholders
holding 75% of the outstanding shares entitled to vote at an election of
directors. Our bylaws may only be amended by our board of directors or by an
affirmative vote of shareholders holding 75% of our outstanding shares of
voting stock.
These provisions of our certificate of incorporation and bylaws are intended to
discourage types of transactions that may involve an actual or threatened
change of control of POZEN. Such provisions are designed to reduce the
vulnerability of POZEN to an unsolicited acquisition proposal and, accordingly,
could discourage potential acquisition proposals and could delay or prevent a
change in control of POZEN. Such provisions are also intended to discourage
tactics that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for our shares and, consequently,
may also inhibit fluctuations in the market price of our shares that could
result from actual or rumored takeover attempts. These provisions may also have
the effect of preventing changes in the management of POZEN.
We are subject to Section 203 of the Delaware General Corporation Law, or the
anti-takeover law, which regulates corporate acquisitions. The anti-takeover
law prevents certain Delaware corporations, including those whose securities
are listed for trading on the Nasdaq National Market, from engaging under
certain circumstances in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the anti-takeover law, a "business
combination" includes, among other things, a merger or consolidation involving
POZEN, and the "interested stockholder" and the sale of more than 10% of
POZEN's assets. In general, the anti-takeover law defines an "interested
stockholder" as any entity or person beneficially owning 15% or more the
outstanding voting stock of POZEN and any entity or person affiliated with or
controlling or controlled by such entity or person. In addition, the
restrictions contained in Section 203 are not applicable to any of our existing
stockholders. A Delaware corporation may "opt out" of the anti-takeover law
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the corporation's
outstanding voting shares. We have not "opted out" of the provisions of the
anti-takeover law.
Registration Rights
Upon the completion of this offering, holders of 15,571,375 shares of our
common stock and 33,030 shares of common stock underlying warrants will be
entitled to certain rights with respect to the registration of these shares
under the Securities Act.
If we register any of our common stock, either for our own account or for the
account of other security holders, the holders of all of these shares are
entitled to notice of the registration and to include their shares of common
stock in the registration. All of these rights to register securities in
connection with this offering have been waived as required by the respective
agreements granting these rights.
Beginning 180 days after the completion of this offering, subject to specified
limitations, holders of 10,418,196 shares of common stock, representing shares
issued in conversion of our series D, E and F convertible preferred stock, may
require that we register all or part of these securities for sale under the
Securities Act. Until we are entitled to register our shares on Form S-3, a
short form registration statement, these holders may only make two such
demands. Once we are entitled to use Form S-3, which may be as early as ,
2001, holders of 6,919,227 of these shares may make such demands for
registrations on Form S-3 on an unlimited number of occasions and holders of
3,498,969 of these shares may make such demands for registrations on Form S-3
on up to two occasions.
59
<PAGE>
Other than in a demand registration, with certain exceptions a holder's right
to include shares in a registration is subject to the ability of the
underwriters to limit the number of shares included in the offering. All fees,
costs and expenses of any demand registrations and up to three registrations on
Form S-3 all of these registrations will be paid by us, and all selling
expenses will be paid by the holders of the securities being registered.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is StockTrans.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and we
cannot assure you that a liquid trading market for our common stock will
develop or be sustained after this offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options and warrants or in the public market after this offering, or the
anticipation of those sales could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital through sales
of our equity securities.
After the closing of this offering, we will have outstanding 26,428,361 shares
of common stock, which assumes that the underwriters do not exercise their
over-allotment option and holders do not exercise any outstanding options or
warrants. Of these shares, the shares sold in this offering will be freely
tradable without restriction under the Securities Act unless purchased by our
"affiliates", as that term is defined in Rule 144 under the Securities Act.
Substantially all of the remaining 21,428,361 restricted shares held by
existing stockholders are subject to various lock-up agreements providing that,
with limited exceptions, the stockholder will not offer, sell, contract to
sell, grant an option to purchase, effect a short sale or otherwise dispose of
or engage in any hedging or other transaction that is designed or reasonably
expected to lead to a disposition of any shares of common stock or any option
to purchase common stock or any securities exchangeable for or convertible into
common stock for a period of 180 days after the date of this prospectus. Though
these shares may be eligible for earlier sale under the provisions of the
Securities Act, none of these shares will be saleable until 180 days after the
date of this prospectus as a result of these lock-up agreements.
In general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, who has beneficially owned restricted shares for at
least one year is entitled to sell within any three-month period up to that
number of shares that does not exceed the greater of: (1) 1% of the number of
shares of common stock then outstanding, which will be approximately 264,000
shares immediately after this offering, or (2) the average weekly trading
volume of the common stock during the four calendar weeks preceding the filing
of a Form 144 with respect to the sale. Sales under Rule 144 are also subject
to certain "manner of sale" provisions and notice requirements and to the
requirement that we have made current public information about POZEN available.
Under Rule 144(k), a person who is not deemed to have been an affiliate of the
issuer at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of qualified shares held by some affiliates in
reliance upon Rule 144 but without compliance with some restrictions, including
the holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased his or her shares pursuant to a written
compensatory plan or contract prior to the completion of this offering may be
entitled to rely on the resale provisions of Rule 701. Rule 701 further
provides that non-affiliates may sell shares in reliance on Rule 144 without
having to comply with the holding period, public information, volume limitation
or notice provisions of Rule 144. All holders of Rule 701 shares of common
stock are required to wait until 90 days after the date of this prospectus
before selling shares. However, substantially all of the shares issued pursuant
to Rule 701 are subject to lock-up agreements and will only become eligible for
sale at the expiration of the 180 day lock-up.
Upon the completion of this offering, the holders of 15,571,375 shares of our
common stock and 33,030 warrants will be entitled to certain registration
rights under the Securities Act. See "Description of Capital Stock--
Registration Rights." After registration pursuant to these rights, these shares
will become freely tradable without restriction under the Securities Act.
61
<PAGE>
As of August 28, 2000, we had outstanding options to purchase 1,506,270 shares
of common stock. In addition, as of August 28, 2000, we had outstanding
warrants to purchase an aggregate of 348,595 shares of series A convertible
preferred stock, series B convertible preferred stock, series C convertible
preferred stock, series D convertible preferred stock and series E convertible
preferred stock, respectively, all of which will, immediately prior to the
consummation of this offering, become warrants to purchase an aggregate of
470,255 shares of common stock. Substantially all of such shares are subject to
the lock-up agreements described above. As of August 28, 2000, an additional
40,531 shares of common stock were available for future grants under our 1996
stock option plan and 3,000,000 shares under our 2000 Equity Compensation Plan.
Following this offering, we intend to file a registration statement on Form S-8
under the Securities Act to register all of the shares of common stock subject
to outstanding stock options and options issuable pursuant to our stock option
plan and our equity compensation plan. Subject to the lock-up agreements,
shares covered by this registration statement will be eligible for sale in the
public markets, other than shares owned by our affiliates, which may be sold in
the public market if they qualify for an exemption from registration under Rule
144 or 701.
62
<PAGE>
UNDERWRITING
Subject to certain terms and conditions contained in an underwriting agreement,
the underwriters named below, for whom U.S. Bancorp Piper Jaffray Inc.,
Prudential Securities Incorporated and Pacific Growth Equities, Inc. are acting
as representatives, have severally agreed to purchase the number of shares of
common stock from us set forth opposite their names below:
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
U.S. Bancorp Piper Jaffray Inc. ............................
Prudential Securities Incorporated..........................
Pacific Growth Equities, Inc. ..............................
Total.....................................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of common stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of common stock are purchased by the underwriters pursuant to the
underwriting agreement, all such shares of common stock (other than the shares
of common stock covered by the over-allotment option described below) must be
so purchased.
We have been advised by the representatives that the underwriters propose to
offer the shares of common stock to the public initially at the price to the
public set forth on the cover page of this prospectus and to certain dealers
(who may include the underwriters) at such price less a concession not to
exceed $ per share. The underwriters may allow, and such dealers may reallow,
discounts not in excess of $ per share to any other underwriter and certain
other dealers.
We have granted to the underwriters an option to purchase up to 750,000
additional shares of common stock at the initial public offering price less the
underwriting discount solely to cover over-allotments. Such option may be
exercised in whole or in part from time to time during the 30-day period after
the date of this prospectus. To the extent that the underwriters exercise such
option, each of the underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
underwriter's initial commitment as indicated in the preceeding table. If the
underwriters exercise their option in full, the total price to the public would
be $ , the total underwriting discount would be $ and total proceeds to
us would be $ .
The following table shows the per share and total underwriting discount to be
paid to the underwriters by us. These amounts are shown assuming no exercise
and full exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
Paid by POZEN
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.......................................... $ $
Total ............................................. $ $
</TABLE>
We estimate total offering expenses payable by us, other than the underwriting
discount referred to above, will be approximately $1.5 million.
We, together with certain of our stockholders and our executive officers and
directors, have agreed not to directly or indirectly offer, pledge, sell,
contract to sell, sell any option or contract to purchase or grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock, or enter into any swap or other arrangement that transfers
all or a portion of the economic consequences associated with
63
<PAGE>
the ownership of such common stock, or to cause a registration statement
covering any shares of common stock to be filed, for a period of 180 days after
the date of this prospectus without the prior written consent of U.S. Bancorp
Piper Jaffray, Inc. on behalf of the underwriters subject to limited
exceptions. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no established trading market for the
common stock. The initial price to the public for the common stock offered by
us will be determined by negotiation among the underwriter representatives and
us. The factors to be considered in determining the initial price to the public
will include the history of and the prospects for the industry in which we
compete, the ability of our management, our past and present operations, our
prospects for future earnings, the general condition of the securities markets
at the time of this offering and the recent market prices of securities of
generally comparable companies. We will apply to list our common stock on the
Nasdaq National Market.
The underwriters do not intend to make sales to accounts over which they
exercise discretionary authority in excess of 5% of the number of shares of
common stock offered hereby.
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain, or otherwise affect the price of the common stock during
and after the offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the common stock for their own account by
selling more shares of common stock than have been sold to them by us. A short
position may involve either "covered" short sales or "naked" short sales.
Covered short sales are sales made in an amount not greater than the
underwriters' over-allotment option to purchase additional shares in the
offering described above. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing shares
in the open market. In determining the source of shares to close the covered
short position, the underwriters will consider, among other things, the price
of shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. Naked short
sales are sales in excess of the over-allotment option. The underwriters may
close out any naked short position by purchasing shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who purchase in
the offering.
Accordingly, to cover these short sales positions or to otherwise stabilize or
maintain the price of the common stock, U.S. Bancorp Piper Jaffray Inc., on
behalf of the underwriters, may bid for or purchase shares of common stock in
the open market and may impose penalty bids. If penalty bids are imposed,
selling concessions allowed to syndicate members or other broker-dealers
participating in the offering are reclaimed if shares of common stock
previously distributed in the offering are repurchased, whether in connection
with stabilization transactions or otherwise. The effect of these transactions
may be to stabilize or maintain the market price of the common stock at a level
above that which might otherwise prevail in the open market. The impositions of
a penalty bid may also effect the price of the common stock to the extent that
it discourages resale of the common stock. The magnitude or effect of any
stabilization or other transactions is uncertain. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
U.S. Bancorp Piper Jaffray Inc. beneficially owns warrants to purchase 24,485
shares of our series E convertible preferred stock, which will, immediately
prior to consummation of this offering, become warrants to purchase 33,030
shares of our common stock in exchange for payment to us of an amount per share
equal to the initial public offering price per share of the common stock. The
warrants were acquired by U.S. Bancorp Piper Jaffray Inc. in connection with a
private placement of our series E preferred stock which was completed in March
2000. The warrants provide U.S. Bancorp Piper Jaffray Inc. with the right to
include shares issued upon exercise of the warrants with those sought to be
registered by the holders of series E convertible preferred stock upon their
exercise of the registration rights afforded them in the private placement. U.S
Bancorp Piper Jaffray Inc. received reasonable and
64
<PAGE>
customary compensation for their placement services in connection with the
series E and series F private placements, including the warrants and a right of
first refusal to act as lead manager in connection with this offering. In
addition U.S. Bancorp Piper Jaffray, Inc. has agreed not to transfer either the
warrants or any shares acquired upon exercise of the warrants for a period of
one year after the effective date of the offering, subject to limited
exceptions. The Company also reimbursed U.S. Bancorp Piper Jaffray Inc. for
reasonable out-of-pocket expenses incurred in connection with the private
placements and indemnified it against certain liabilities.
Some employees of Prudential Securities Incorporated indirectly own shares of
our series E and series F convertible preferred stock, which will, as of the
effective time of the offering, convert into 29,780 shares of common stock.
These shares may not be offered or sold for a period of one year after the
effective date of the offering, subject to limited exceptions, and an agreement
has been executed to that effect.
At our request, the underwriters have reserved for sale, at the initial public
offering price, up to 250,000 shares of common stock for our directors,
officers, employees and business associates. The number of shares of common
stock available for sale to the general public will be reduced to the extent
those persons purchase any of the reserved shares. Any reserved shares that are
not purchased will be offered by the underwriters to the general public on the
same basis as the other shares in this offering.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
Each underwriter has represented that it has complied and will comply with all
applicable laws and regulations in connection with the offer, sale or delivery
of the shares and related offering materials in the United Kingdom, including:
.the Public Offers of Securities Regulations 1995;
.the Financial Services Act 1986; and
. the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 (as amended).
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM, a full service brokerage firm program, may view offer terms and a
prospectus online and place orders through their financial advisors.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP will pass upon the validity of the common stock
offered by this prospectus. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Ballard Spahr Andrews &
Ingersoll, LLP, Baltimore, Maryland.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial statements
at December 31, 1999 and 1998, for each of the three years in the period ended
December 31, 1999, and for the period from September 26, 1996 (inception)
through December 31, 1999, as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
65
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the stock
we are offering by this prospectus. This prospectus does not include all of the
information contained in the registration statement. You should refer to the
registration statement and its exhibits for additional information. While we
have disclosed the material terms of any of our contracts, agreements or other
documents referenced in this prospectus, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we will also be
required to file annual, quarterly and special reports, proxy statements and
other information with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at
450 Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300,
New York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities.
You should rely only on the information contained in the registration
statement, including its exhibits. We have not, and the underwriters have not,
authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, the
securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date in the
front, but the information may have changed since that date.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Report of Independent Auditors.............................................. F-2
<S> <C>
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit) ............................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
POZEN Inc.
We have audited the accompanying balance sheets of POZEN Inc. (a development
stage company) as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years ended December 31, 1999, and for the period from September 25, 1996
(inception) through December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of POZEN Inc. (a development
stage company) at December 31, 1998 and 1999 and the results of its operations
and its cash flows for each of the three years ended December 31, 1999, and for
the period from September 25, 1996 (inception) through December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 4, 2000, except for Note 3,
as to which the date is March 24, 2000 and
Note 10, as to which the date is October 6, 2000
F-2
<PAGE>
POZEN Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
Pro Forma Common
December 31, Stockholders' Equity
-------------------------- June 30, at
1998 1999 2000 June 30, 2000
ASSETS ------------ ------------ ------------ --------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 2,986,080 $ 4,171,086 $ 13,850,252
Prepaid expenses...... 9,037 14,720 152,668
Accrued interest
receivable........... 9,558 19,297 6,833
Other current assets.. 8,928 9,553 9,091
------------ ------------ ------------
Total current
assets........... 3,013,603 4,214,656 14,018,844
Equipment, net of
accumulated
depreciation of
$64,718, $108,533 and
$131,243 at
December 31, 1998 and
1999 and
June 30, 2000,
respectively......... 99,490 110,351 127,978
------------ ------------ ------------
Total assets........ $ 3,113,093 $ 4,325,007 $ 14,146,822
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...... $ 841,535 $ 359,370 $ 1,933,392
Accrued expenses...... 1,224,936 2,000,927 1,497,899
------------ ------------ ------------
Total current
liabilities...... 2,066,471 2,360,297 3,431,291
Redeemable convertible
Series E preferred
stock, $0.001 par
value, 3,167,260
shares designated,
2,589,927 shares
issued and
outstanding at June
30, 2000; aggregate
liquidation
preference of
$17,999,993 ......... -- -- 16,614,115 $ --
Series E preferred stock
warrants............. -- -- 261,000 --
Stockholders' equity
(deficit):
Series A preferred
stock, $0.001 par
value, 2,750,000
shares designated,
2,105,931 shares
issued and
outstanding at
December 31, 1998 and
1999 and June 30,
2000; aggregate
liquidation
preference of
$6,633,683 .......... 2,106 2,106 2,106 --
Series B preferred
stock, $0.001 par
value, 4,000,000
shares designated,
1,139,377 shares
issued and
outstanding at
December 31, 1998 and
1999 and June 30,
2000; aggregate
liquidation
preference of
$4,557,508 .......... 1,139 1,139 1,139 --
Series C preferred
stock, $0.001 par
value, 2,839,507
shares designated,
563,044 shares issued
and outstanding at
December 31, 1998 and
1999 and June 30,
2000; aggregate
liquidation
preference of
$2,280,328 .......... 563 563 563 --
Series D preferred
stock, $0.001 par
value, 6,000,000
shares designated,
2,593,750 shares
issued and
outstanding at
December 31, 1999 and
June 30, 2000;
aggregate liquidation
preference of
$12,450,000 ......... -- 2,594 2,594 --
Common stock, $0.001
par value, 90,000,000
shares authorized,
issued and
outstanding
5,844,167, 5,847,540
and 5,872,699 shares
at December 31, 1998
and 1999 and June 30,
2000, respectively... 5,844 5,848 5,873 18,782
Additional paid-in
capital.............. 14,173,461 28,742,154 34,030,809 50,638,417
Preferred stock
warrants............. 416,000 1,341,000 1,341,000 1,602,000
Deferred
compensation......... (910,496) (3,343,253) (7,323,426) (7,323,426)
Deficit accumulated
during the
development stage.... (12,641,995) (24,787,441) (34,220,242) (34,220,242)
------------ ------------ ------------ -----------
Total stockholders'
equity
(deficit)........ 1,046,622 1,964,710 (6,159,584) 10,715,531
------------ ------------ ------------ -----------
Total liabilities
and stockholders'
equity
(deficit)........ $ 3,113,093 $ 4,325,007 $ 14,146,822
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
POZEN Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
Period from
September 26,
1996
(inception) Six Months Ended June
Year Ended December 31, through 30,
-------------------------------------- December 31, -------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ------------ ------------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
General and
administrative....... $ 1,021,248 $ 1,477,768 $ 2,319,939 $ 4,904,925 $ 884,160 $ 2,083,482
Research and
development.......... 3,096,963 7,569,187 9,458,225 20,149,099 3,025,045 7,263,556
----------- ----------- ------------ ------------ ----------- ------------
Total operating
expenses............. 4,118,211 9,046,955 11,778,164 25,054,024 3,909,205 9,347,038
Interest income
(expense), net....... 315,181 309,324 (367,282) 266,582 (42,008) 304,812
----------- ----------- ------------ ------------ ----------- ------------
Net loss................ (3,803,030) (8,737,631) (12,145,446) (24,787,442) (3,951,213) (9,042,226)
Non-cash preferred stock
charge................. -- -- -- -- -- 16,875,115
Preferred stock
dividends.............. -- -- -- -- -- 390,575
----------- ----------- ------------ ------------ ----------- ------------
Net loss attributable
to common
stockholders........... $(3,803,030) $(8,737,631) $(12,145,446) $(24,787,442) $(3,951,213) $(26,307,916)
=========== =========== ============ ============ =========== ============
Basic and diluted net
loss per common share.. $ (0.65) $ (1.50) $ (2.08) $ (0.68) $ (4.48)
=========== =========== ============ =========== ============
Shares used in computing
basic and diluted net
loss per common share.. 5,814,190 5,835,133 5,845,304 5,844,167 5,866,269
=========== =========== ============ =========== ============
Pro forma net loss per
common share--basic and
diluted (unaudited).... $ (1.01) $ (1.56)
Pro forma weighted
average common shares
outstanding--basic and
diluted (unaudited).... 12,008,496 16,810,821
</TABLE>
See accompanying notes.
F-4
<PAGE>
POZEN Inc.
(a development stage company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series A Series B Series C Series D Additional Preferred Receivable
Date of Preferred Preferred Preferred Preferred Common Paid-In Stock From
Transaction Stock Stock Stock Stock Stock Capital Warrants Stockholders
------------------ --------- --------- --------- --------- ------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
5,814,190
shares of
common stock at
$0.001 per September
share.......... 1996 $ -- $ -- $-- $ -- $5,814 $ (1,504) $ -- $ (4,310)
Issuance of
2,105,931
shares of
preferred stock
at $3.15 per December
share.......... 1996 2,106 -- -- -- -- 6,231,314 -- (1,000,000)
Issuance of
78,776 shares
of Series A
preferred stock
warrants for
financing December
activities..... 1996 -- -- -- -- -- -- 242,000 --
Deferred
compensation.. -- -- -- -- -- 190,385 -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- --
Net loss......... -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ---------- -----------
BALANCE AT
DECEMBER 31,
1996............ 2,106 -- -- -- 5,814 6,420,195 242,000 (1,004,310)
Proceeds from
stockholders'
receivables.... -- -- -- -- -- -- -- 1,004,310
Issuance of
1,135,000
shares of
preferred stock
at $4.00 per December
share.......... 1997 -- 1,135 -- -- -- 4,195,865 -- --
Issuance of
36,450 shares
of Series B
preferred stock
warrants for
financing December
activities..... 1997 -- -- -- -- -- -- 139,000 --
Deferred
compensation.. -- -- -- -- -- 1,001,629 -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- --
Net loss......... -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ---------- -----------
BALANCE AT
DECEMBER 31,
1997............ 2,106 1,135 -- -- 5,814 11,617,689 381,000 --
Issuance of 4,377
shares of
preferred stock
at $4.00 per March
share.......... 1998 -- 4 -- -- -- 17,508 -- --
Issuance of
563,044 shares
of preferred
stock at $4.05 March
per share...... 1998 -- -- 563 -- -- 2,170,250 -- --
Exercise of
29,977 stock
options at
$0.19 per
share.......... -- -- -- -- 30 5,525 -- --
Issuance of 8,884
shares of
Series C
preferred stock
warrants for
financing March
activities..... 1998 -- -- -- -- -- -- 35,000 --
Deferred
compensation.. -- -- -- -- -- 362,489 -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- --
Net loss......... -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ---------- -----------
BALANCE AT
DECEMBER 31,
1998............ 2,106 1,139 563 -- 5,844 14,173,461 416,000 --
Issuance of July and September
2,593,750 1999
shares of
preferred stock
at $4.80 per
share.......... -- -- -- 2,594 -- 11,522,406 -- --
Exercise of 3,373
stock options
at $0.19 per
share.......... -- -- -- -- 4 621 -- --
Deferred
compensation... -- -- -- -- -- 3,045,666 -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- --
Issuance of
200,000 shares
of Series D
preferred stock
warrants for
financing July and September
activities..... 1999 -- -- -- -- -- -- 925,000 --
Net loss......... -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ---------- -----------
BALANCE AT
DECEMBER 31,
1999............ 2,106 1,139 563 2,594 5,848 28,742,154 1,341,000 --
Exercise of
25,159 stock
options at
$0.19 per
share.......... -- -- -- -- 25 4,638 -- --
Deferred
compensation... -- -- -- -- -- 5,284,017 -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- --
Preferred stock
dividends..... -- -- -- -- -- -- -- --
Net loss......... -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ---------- -----------
BALANCE AT JUNE
30, 2000
(unaudited)..... $2,106 $1,139 $563 $2,594 $5,873 $34,030,809 $1,341,000 $ --
====== ====== ==== ====== ====== =========== ========== ===========
<CAPTION>
Deficit
Accumulated Total
During the Stockholders'
Deferred Development Equity
Compensation Stage (Deficit)
------------- ------------- -------------
<S> <C> <C> <C>
Issuance of
5,814,190
shares of
common stock at
$0.001 per
share.......... $ -- $ -- $ --
Issuance of
2,105,931
shares of
preferred stock
at $3.15 per
share.......... -- -- 5,233,420
Issuance of
78,776 shares
of Series A
preferred stock
warrants for
financing
activities..... -- -- 242,000
Deferred
compensation.. (190,385) -- --
Amortization of
deferred
compensation... 28,267 -- 28,267
Net loss......... -- (101,334) (101,334)
------------- ------------- -------------
BALANCE AT
DECEMBER 31,
1996............ (162,118) (101,334) 5,402,353
Proceeds from
stockholders'
receivables.... -- -- 1,004,310
Issuance of
1,135,000
shares of
preferred stock
at $4.00 per
share.......... -- -- 4,197,000
Issuance of
36,450 shares
of Series B
preferred stock
warrants for
financing
activities..... -- -- 139,000
Deferred
compensation.. (1,001,629) -- --
Amortization of
deferred
compensation... 214,272 -- 214,272
Net loss......... -- (3,803,030) (3,803,030)
------------- ------------- -------------
BALANCE AT
DECEMBER 31,
1997............ (949,475) (3,904,364) 6,366,548
Issuance of 4,377
shares of
preferred stock
at $4.00 per
share.......... -- -- 17,512
Issuance of
563,044 shares
of preferred
stock at $4.05
per share...... -- -- 2,170,813
Exercise of
29,977 stock
options at
$0.19 per
share.......... -- -- 5,555
Issuance of 8,884
shares of
Series C
preferred stock
warrants for
financing
activities..... -- -- 35,000
Deferred
compensation.. (362,489) -- --
Amortization of
deferred
compensation... 401,468 -- 401,468
Net loss......... -- (8,737,631) (8,737,631)
------------- ------------- -------------
BALANCE AT
DECEMBER 31,
1998............ (910,496) (12,641,995) 1,046,622
Issuance of
2,593,750
shares of
preferred stock
at $4.80 per
share.......... -- -- 11,525,000
Exercise of 3,373
stock options
at $0.19 per
share.......... -- -- 625
Deferred
compensation... (3,045,666) -- --
Amortization of
deferred
compensation.... 612,909 -- 612,909
Issuance of
200,000 shares
of Series D
preferred stock
warrants for
financing
activities..... -- -- 925,000
Net loss......... -- (12,145,446) (12,145,446)
------------- ------------- -------------
BALANCE AT
DECEMBER 31,
1999............ (3,343,253) (24,787,441) 1,964,710
Exercise of
25,159 stock
options at
$0.19 per
share.......... -- -- 4,663
Deferred
compensation... (5,284,017) -- --
Amortization of
deferred
compensation... 1,303,844 -- 1,303,844
Preferred stock
dividends..... -- (390,575) (390,575)
Net loss......... -- (9,042,226) (9,042,226)
------------- ------------- -------------
BALANCE AT JUNE
30, 2000
(unaudited)..... $(7,323,426) $(34,220,242) $(6,159,584)
============= ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
POZEN Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
September 26,
1996
(inception) Six Months Ended June
Year Ended December 31, through 30,
-------------------------------------- December 31, ------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ------------ ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(3,803,030) $(8,737,631) $(12,145,446) $(24,787,441) $(3,951,213) $(9,042,226)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation........... 21,738 42,980 43,815 108,533 18,849 22,710
Amortization of
deferred
compensation.......... 214,272 401,468 612,909 1,256,916 232,203 1,303,844
Noncash financing
charge................ -- -- 450,000 450,000 -- --
Changes in operating
assets and liabilities:
Prepaid expenses and
accrued interest
receivable............ (95,174) 76,579 (15,422) (34,017) (25,471) (125,484)
Other assets........... (8,907) (21) (625) (9,553) -- 462
Accounts payable and
accrued expenses...... 958,019 929,529 293,826 2,360,297 (409,453) 680,419
----------- ----------- ------------ ------------ ----------- -----------
Net cash used in
operating activities.. (2,713,082) (7,287,096) (10,760,943) (20,655,265) (4,135,085) (7,160,275)
Investment activities
Purchase of equipment.. (119,874) (44,334) (54,676) (218,884) (15,500) (40,337)
----------- ----------- ------------ ------------ ----------- -----------
Net cash used in
investing activities.. (119,874) (44,334) (54,676) (218,884) (15,500) (40,337)
Financing activities
Proceeds from issuance
of preferred stock.... 4,336,000 2,223,325 9,000,000 21,034,745 -- 16,875,115
Proceeds from issuance
of common stock....... -- 5,555 625 6,180 -- 4,663
Proceeds from
stockholders'
receivables........... 1,004,310 -- -- 1,004,310 -- --
Proceeds from notes
payable............... -- -- 3,000,000 3,000,000 3,000,000 --
Repayments on notes
payable to related
parties............... (75,000) -- -- -- -- --
----------- ----------- ------------ ------------ ----------- -----------
Net cash provided by
financing activities.. 5,265,310 2,228,880 12,000,625 25,045,235 3,000,000 16,879,778
----------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 2,432,354 (5,102,550) 1,185,006 4,171,086 (1,150,585) 9,679,166
Cash and cash
equivalents at
beginning of period.... 5,656,276 8,088,630 2,986,080 -- 2,986,080 4,171,086
----------- ----------- ------------ ------------ ----------- -----------
Cash and cash
equivalents at end of
period................. $ 8,088,630 $ 2,986,080 $ 4,171,086 $ 4,171,086 $ 1,835,495 $13,850,252
=========== =========== ============ ============ =========== ===========
Supplemental schedule of
cash flow information
Cash paid for
interest.............. $ 5,095 $ 35,630 $ 136,318 $ 178,644 $ 110,406 $ 241
=========== =========== ============ ============ =========== ===========
Supplemental schedule of
noncash investing and
financing activities
Conversion of notes
payable to preferred
stock................. $ -- $ -- $ 3,000,000 $ 3,000,000 $ -- $ --
=========== =========== ============ ============ =========== ===========
Preferred stock
dividend.............. $ -- $ -- $ -- $ -- $ -- $ 390,575
=========== =========== ============ ============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company--The Company is a pharmaceutical company committed to
building a portfolio of products with significant commercial potential in
select therapeutic areas. The Company's initial area of focus is migraine,
where it has built a portfolio of four product candidates through a combination
of innovation and in-licensing. The Company uses the term in-licensing to mean
acquiring a royalty-bearing exclusive license to make, have made, use, sell,
offer for sale or import a compound or technology under the licensor's patents
and know-how in the agreed field and territory. The Company's lead product
candidate is MT 100, which is being developed as an oral first-line therapy for
the treatment of migraine.
In order to continue to expand its product pipeline, the Company intends to
complement its internal product innovations by in-licensing additional product
candidates. The Company intends to commercialize its product candidates through
other pharmaceutical companies in exchange for upfront and milestone payments,
proceeds from the manufacturing of drug substance and royalties. In the future,
the Company may retain the right to co-promote its products.
The Company's in-licensing strategy, intended to improve the Company's access
to commercially attractive compounds, also provides the licensor with an option
to license back the product candidate at various stages of development and on
set terms and conditions.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from the estimates and
assumptions used.
Cash and Cash Equivalents--The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Cash is invested in interest-bearing investment-grade securities.
Equipment--Equipment consists primarily of furniture and fixtures and is
recorded at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets ranging from five to seven years.
Research and Development Costs--Research and development costs are charged to
operations as incurred.
Income Taxes--The Company accounts for income taxes using the liability method.
Deferred income taxes are provided for temporary differences between financial
reporting and tax bases of assets and liabilities.
Unaudited Financial Information--The accompanying financial statements and
related notes to the financial statements as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 are unaudited, but in the opinion of
management, include all adjustments consisting of normal recurring adjustments
necessary for a fair presentation of results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted for the June 30 periods, although the Company believes that
the disclosures included are adequate to make the information presented not
misleading. Results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
F-7
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Non-Cash Preferred Stock Charge--In accordance with EITF 98-5, the Company has
recorded a non-cash preferred stock charge on the Series E which represents the
excess of the fair market value of the underlying common stock and warrants
issued to the Series E holders over the sale price of the securities but
limited to the net proceeds received from the Series E offering.
Net Loss Per Share--Basic and diluted net loss per common share are presented
in conformity with the Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share", for all periods presented. Following the guidance
given by the Securities and Exchange Commission in Staff Accounting Bulletin
("SAB") No. 98, common stock and convertible preferred stock that has been
issued or granted for nominal consideration prior to the anticipated effective
date of the initial public offering must be included in the calculation of
basic and diluted net loss per common share as if these shares had been
outstanding for all periods presented. To date, the Company has not issued or
granted shares for nominal consideration.
In accordance with SFAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period. Pro forma basic and diluted net loss per common
share, as presented in the statements of operations, has been computed for the
year ended December 31, 1999 and the six months ended June 30, 2000 as
described above, and also gives effect to the conversion of the convertible
preferred stock that will automatically convert to common stock immediately
prior to the completion of the Company's initial public offering (using the if-
converted method) from the original date of issuance and the payment in shares
of common stock of the accumulated dividend on the Series E preferred stock.
Reclassifications--Certain amounts in the 1997, 1998 and 1999 financial
statements have been reclassified to conform with June 30, 2000
classifications. Those reclassifications did not result in any changes to net
loss or stockholders' equity (deficit) as previously reported.
F-8
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per common share (in thousands except per share da-
ta):
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- -----------------------
1997 1998 1999 1999 2000
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net loss attributable to
common stockholders....... $(3,803) $(8,738) $(12,145) $(3,951) $(26,308)
======= ======= ======== ======= ========
Basic and diluted:
Weighted-average shares
of common stock
outstanding............. 5,814 5,835 5,845 5,844 5,866
======= ======= ======== ======= ========
Weighted-average shares
used in computing basic
and diluted net loss per
common share............ 5,814 5,835 5,845 5,844 5,866
======= ======= ======== ======= ========
Basic and diluted net loss
per common share.......... $ (0.65) $ (1.50) $ (2.08) $ (0.68) $ (4.48)
======= ======= ======== ======= ========
Pro forma:
Shares used above........ 5,845 5,866
Pro forma adjustment to
reflect weighted effect
of conversion of
convertible preferred
stock (unaudited)....... 6,163 10,945
-------- --------
Shares used in computing
pro forma basic and
diluted net loss per
common share
(unaudited)............. 12,008 16,811
======== ========
Pro forma basic and
diluted net loss per
common share
(unaudited)............. $ (1.01) $ (1.56)
======== ========
</TABLE>
The Company has excluded all convertible preferred stock, outstanding stock
options, and warrants from the calculation of net loss per common share because
such securities are antidilutive for all periods presented. Had the Company
been in a net income position, these securities would have been included in the
calculation. These potentially dilutive securities consist of the following:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- -----------------------
1997 1998 1999 1999 2000
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock.................. 2,903,823 4,982,280 6,163,192 5,137,467 10,908,938
Convertible preferred
stock dividends........ -- -- -- -- 35,614
Outstanding common stock
options................ 348,516 545,330 903,261 799,953 1,353,451
Outstanding warrants.... 108,290 164,995 246,516 167,424 453,928
--------- --------- --------- --------- ----------
Total................. 3,360,629 5,692,605 7,312,969 6,104,844 12,751,931
========= ========= ========= ========= ==========
</TABLE>
F-9
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Based Compensation--The Company accounts for stock options issued to
employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock or stock options issued with an
exercise price equivalent to the fair value of the Company's common stock. In
general, stock options and other equity instruments granted or issued to
consultants and others who are not employees or directors are accounted for in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation." For
companies that continue to account for stock based compensation arrangements
under APB 25, SFAS 123 requires disclosure of the pro forma effect on net
income (loss) as if the fair value based method prescribed by SFAS 123 had been
applied. The Company has adopted the pro forma disclosure requirements of SFAS
123.
Comprehensive Income--As of January 1, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income." SFAS 130 established new rules for the
reporting and display of comprehensive income or loss and its components;
however, the adoption of this statement had no impact on the Company's
operating results or stockholders' equity (deficit).
Segment Reporting--As of January 1, 1998, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company has determined that it does not have any separately
reportable operating segments as of December 31, 1999.
Recently Issued Accounting Standards--In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Investments and Hedging Activities," SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes several existing standards. SFAS 133, as amended by SFAS 137 and
SFAS 138, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company does not expect that the adoption of SFAS 133 will
have a material impact on its financial statements.
In December 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. SAB 101 explains how the SEC staff applies by analogy the existing
rules on revenue recognition to other transactions not covered by such rules.
In March 2000, the SEC issued SAB 101A that delayed the original effective date
of SAB 101 until the second quarter of 2000 for calendar year companies. In
June 2000, the SEC issued SAB 101B that further delayed the effective date of
SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company does not expect that the adoption of SAB
101 will have a material impact on its financial statements.
2. STOCKHOLDERS' EQUITY (DEFICIT)
In December 1996, the Company completed a private placement of 2,105,931 shares
of its Series A Convertible Preferred Stock ("Series A") and received cash of
$5,475,420 and notes receivable of $1,000,000, net of offering costs. The notes
receivable were collected during 1997. In conjunction with
F-10
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
the issuance of the Series A, in January 1997, the Company issued warrants to
purchase 78,776 shares of Series A at a purchase price of $0.001 per share to
certain key advisors for their services related to financing activities. The
warrants have been accounted for as offering costs related to the issuance of
the Series A at a value calculated under the "Black-Scholes" formula at
approximately $242,000.
In December 1997, the Company completed a private placement of 1,135,000 shares
of its Series B Convertible Preferred Stock ("Series B") and received cash of
$4,336,000, net of offering costs. At December 31, 1997, the Company was
obligated to issue warrants to purchase 36,450 shares of Series B at a purchase
price of $0.001 per share to certain key advisors for their services related to
financing activities. The warrants have been accounted for as offering costs
related to the issuance of the Series B at a value calculated under the "Black-
Scholes" formula at approximately $139,000.
In March 1998, the Company issued an additional 4,377 shares of its Series B
for $17,512 interest accrued on the funds received prior to the December 1997
Series B private placement.
On March 4, 1998, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock, par value $.001, from
10,000,000 shares to 20,000,000 shares.
In March 1998, the Company completed a private placement of 563,044 shares of
its Series C Convertible Preferred Stock ("Series C") and received cash of
$2,205,813, net of offering costs. In conjunction with the issuance of the
Series C, the Company issued warrants to purchase 8,884 shares of Series C at a
purchase price of $0.001 per share to certain key advisors for their services
related to financing activities. The warrants have been accounted for as
offering costs related to the issuance of Series C at a value calculated under
the "Black-Scholes" formula at approximately $35,000.
In July 1999, the Company amended its Certificate of Incorporation to increase
the number of authorized shares of common stock, par value $0.001 per share,
from 20,000,000 shares to 30,000,000 shares and the number of authorized shares
of preferred stock, par value $0.001 per share, from 10,000,000 shares to
20,000,000 shares.
In July, 1999 the Company completed a private placement of 1,875,000 shares of
its Series D Convertible Preferred Stock ("Series D") and received cash of
$9,000,000. In September 1999, upon completion of the Series D private
placement, the previously issued Convertible Promissory Note ("Note") funded by
MEDGROWTH S.A. ("MEDGROWTH") in bridge financing, issued on March 1, 1999 for
$3 million, automatically converted into 625,000 shares of Series D at $4.80
per share. The terms of the Note provided for automatic conversion into shares
of Series D on the same terms and conditions extended to other purchasers of
Series D, the conversion of the $450,000 loan origination fee into Series D or
payable in cash at the time of conversion and the issuance of 200,000 warrants
to BB Medtech AG, of which MEDGROWTH is a wholly owned subsidiary to purchase
200,000 shares of Series D at a purchase price of $3.15 per share with a term
of two years for their services related to financing activities. Interest on
the Note was paid at a fixed rate of 11% annually. The warrants have been
accounted for as offering costs related to the issuance of the Series D at a
value calculated under the "Black-Scholes" formula at approximately $925,000.
MEDGROWTH elected to receive 93,750 shares of Series D in exchange for the
Note's loan origination fee in the amount of $450,000, which was expensed as a
financing cost.
The following is a summary of the rights, preferences and terms of the
Company's outstanding series of Preferred Stock:
F-11
<PAGE>
POZEN, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Conversion
Each share of Series A, Series B, Series C, and Series D shall be convertible,
at the option of the holder thereof, at any time and from time to time, and
without the payment of additional consideration by the holder thereof, into
such number of fully paid and nonassessable shares of common stock as is
determined by dividing $3.15, $4.00, $4.05, and $4.80 respectively, by the
conversion price in effect at the time of conversion. The conversion prices
adjusted for the stock split as described in Note 10 are $2.34, $2.97, $3.00,
and $3.56 for holders of Series A, Series B, Series C, and Series D,
respectively. The conversion prices are subject to adjustment for issuances of
equity investments at prices below the conversion price of a specific series of
preferred stocks, with certain exceptions.
The Series A, Series B, Series C, and Series D will automatically be converted
into such number of fully paid and nonassessable shares of common stock as is
determined by dividing $3.15, $4.00, $4.05, and $4.80 respectively, by the
conversion price in effect at the time of conversion upon the occurrence of the
closing of an underwritten public offering.
Dividends
Dividends on the Series A, Series B, Series C, and Series D are payable when
and if declared by the Board of Directors. No dividend shall be paid on the
common stock in any year unless equivalent dividends for such year have been
declared and paid on the Series A, Series B, Series C, and Series D. No
dividend shall be paid on the Series A, Series B, Series C, and Series D unless
equivalent dividends are paid on the Series E. Through June 30, 2000, no
dividends have been declared or paid by the Company.
Voting
Each holder of the Series A, Series B, Series C, and Series D is entitled to
the number of votes equal to the number of shares of common stock into which
such holder's shares are convertible.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company, the
holders of the Series A, Series B, Series C, and Series D are entitled to
receive, subject to the senior rights of the Series E, an amount equal to their
initial purchase price per share plus any accrued and unpaid dividends on such
shares, if any. Any assets of the Company remaining after the payments
specified above shall be distributed pro rata with respect to the outstanding
shares of common stock.
At June 30, 2000, shares of common stock reserved for future issuance are as
follows:
<TABLE>
<S> <C>
Shares available for grant under stock option plan........... 87,746
Shares issuable pursuant to options granted under stock
option plan................................................. 1,459,055
Series A Convertible Preferred Stock......................... 2,840,901
Series B Convertible Preferred Stock......................... 1,537,020
Series C Convertible Preferred Stock......................... 759,546
Series D Convertible Preferred Stock......................... 3,498,969
Series E Convertible Preferred Stock......................... 3,493,812
Warrants..................................................... 470,255
----------
Total reserved............................................... 14,147,304
==========
</TABLE>
F-12
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. REDEEMABLE PREFERRED STOCK
On March 24, 2000, the Company completed a private placement of 2,589,927
shares of Series E Convertible Preferred Stock ("Series E") and received cash
of $16,875,115, net of offering costs. The terms of the Series E provide for
similar conversion, voting and dividend rights and liquidation preference as
those provided to the Series A, Series B, Series C, and Series D. The Series E
holders are entitled to receive cumulative dividends at an annual rate of 8% of
the original purchase price payable in cash or shares of Series E at the option
of the holder. Dividends are payable when declared by the Board of Directors
and upon conversion, liquidation or redemption. Cumulative and unpaid dividends
were $390,575 at June 30, 2000. In addition, the terms of conversion provide
for a decrease in conversion price from $6.95 to $5.73 if the Company is unable
to complete by September 15, 2000 a qualified public offering or to effect a
merger or acquisition of the Company that would entitle the holders of the
Series E to receive $10.43 or more per share. At the date of issuance, the
Company believes the per share price of $6.95 represented the fair value of the
preferred stock and was in excess of the deemed fair value of its common stock.
Subsequent to the commencement of the Company's initial public offering
process, the Company re-evaluated the deemed fair market value of its common
stock as of March 2000 and determined it to be $22.48 per share (on a pre-split
basis). Accordingly, the incremental fair value is deemed to be the equivalent
of a preferred stock dividend. The Company recorded the non-cash preferred
stock charge at the date of issuance by offsetting charges and credits to
additional paid-in capital of $16,875,115, without any effect on total
stockholders' equity. The non-cash charge was limited to the net proceeds
received from the Series E offering. The conversion price adjusted for the
stock split discussed in Note 10 is $5.15 unless reduced to $4.25 pursuant to
the terms of the Series E convertible preferred stock on September 15, 2000.
The terms of the Series E also provide for a mandatory redemption commencing on
March 23, 2005, March 23, 2006 and March 23, 2007, respectively, and continuing
for a period of 60 days after each such date or at a earlier date as a majority
or more of the capital stock is sold in a single transaction or a series of
related transactions when the holders of 75% of the issued and outstanding
shares of the Series E elect to cause a redemption. The redemption price is the
greater of the appraised value as defined or the original purchase price of the
Series E plus any accrued but unpaid dividends. Default in the payment of any
required redemption of Series E entitles the holders of Series E to elect a
majority of the Board of Directors and receive special voting rights.
In conjunction with the issuance of the Series E, the Company issued warrants
to purchase 23,217 shares of Series E at an initial exercise price of $6.95 per
share to certain key advisors for their services related to financing
activities. These warrants have since been modified to provide for an
additional per share payment upon exercise, equal to the difference between the
exercise price otherwise applicable and the initial public offering price per
share of common stock. The warrants have been accounted for as offering costs
related to the issuance of Series E at a value calculated under the "Black
Scholes" formula at approximately $261,000.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------- -----------
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Clinical trial contract costs........... $1,127,177 $1,832,551 $1,009,363
Other................................... 97,759 168,376 488,536
---------- ---------- ----------
$1,224,936 $2,000,927 $1,497,899
========== ========== ==========
</TABLE>
F-13
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. INCOME TAXES
At December 31, 1998 and 1999 and June 30, 2000, the Company had federal and
state net operating loss carryforwards of approximately $11 million, $22
million and $30 million, respectively, for income tax purposes. At December 31,
1998 and 1999 and June 30, 2000, the Company had research and development
credit carryforwards of approximately $490,000, $685,000 and $930,000,
respectively. The federal net operating loss carryforwards and research and
development credit carryforwards begin to expire in 2012. State net operating
loss carryforwards begin to expire in 2001. For financial reporting purposes, a
valuation allowance has been recognized to offset the deferred tax assets
related to the carryforwards. When, and if recognized, the tax benefit for
those items will be reflected in current operations of the period in which the
benefit is recorded as a reduction of income tax expense. The utilization of
the loss carryforwards to reduce future income taxes will depend on the
Company's ability to generate sufficient taxable income prior to the expiration
of the net operating loss carryforwards. In addition, the maximum annual use of
net operating loss carryforwards is limited in certain situations where changes
occur in stock ownership.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
------------------------ ------------
1998 1999 2000
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward... $ 4,719,000 $ 9,040,000 $ 11,800,000
Research and development costs.... 490,000 685,000 930,000
----------- ----------- ------------
Total deferred tax assets........... 5,209,000 9,725,000 12,730,000
Valuation allowance................. (5,209,000) (9,725,000) (12,730,000)
----------- ----------- ------------
Net deferred tax asset.............. $ -- $ -- $ --
=========== =========== ============
</TABLE>
6. STOCK OPTION PLAN
On November 20, 1996, the Company established a Stock Option Plan and
authorized the issuance of options for up to 1,605,310 shares of common stock
to attract and retain quality employees and to allow such employees to
participate in the growth of the Company. Awards may be made to participants in
the form of incentive and nonqualified stock options. Eligible participants
under the Plan include executive and key employees of the Company. The vesting
period ranges from immediate vesting at issuance to three years or immediately
upon a significant change in ownership as defined by the plan document. The
exercise price for incentive stock options may not be less than 100% of the
fair market value of the common stock on the date of grant (110% with respect
to incentive stock options granted to optionees who are 10% or more
stockholders of the Company).
F-14
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of the Company's stock option activity, and related information is as
follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Options granted...................................... 88,562 $0.19
--------- -----
Balance at December 31, 1996......................... 88,562 0.19
Options granted.................................... 470,127 0.19
Forfeited.......................................... (10,118) 0.19
--------- -----
Balance at December 31, 1997......................... 548,571 0.19
Options granted.................................... 194,593 0.33
Exercised.......................................... (29,977) 0.19
Forfeited.......................................... (104,923) 0.19
--------- -----
Balance at December 31, 1998......................... 608,264 0.23
Options granted.................................... 612,221 1.12
Exercised.......................................... (3,373) 0.19
Forfeited.......................................... (105,222) 0.88
--------- -----
Balance at December 31, 1999......................... 1,111,890 0.66
Options granted.................................... 379,069 2.11
Exercised.......................................... (25,159) 0.19
Forfeited.......................................... (6,745) 1.48
--------- -----
Balance at June 30, 2000 (unaudited)................. 1,459,055 $1.04
========= =====
</TABLE>
Exercise prices for options outstanding as of December 31, 1997, 1998 and 1999
were $0.19-$1.48. The weighted-average fair value of options granted for all
periods presented is $4.27 per share. The weighted-average remaining
contractual life of the options is nine years. At December 31, 1997, 1998 and
1999, 69,826, 174,628 and 351,730 options were exercisable, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
APB 25 and related interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123 requires use of option valuation models that were not
developed for use in valuing employee stock options.
During the year ended December 31, 1999, in connection with the grant of
certain share options to employees, the Company recorded deferred compensation
of $3.0 million, representing the excess of the fair value of the common stock
on the date of grant over the exercise price. Deferred compensation is included
as a reduction of stockholders' equity and is being amortized to expense
according to the vesting method. During the year ended December 31, 1999, the
Company recorded amortization of deferred compensation of $612,909.
During the period June 30, 2000, in connection with the grant of certain share
options to employees, the Company recorded deferred compensation of $5.3
million, representing the difference between the exercise price and the deemed
fair value of the Company's common stock on the date such stock options were
granted. During the period ended June 30, 2000, the Company recorded
amortization of deferred compensation of approximately $1,303,844. As of June
30, 2000, the Company anticipates recording amortization of deferred
compensation of $2,949,117, $2,812,157, $2,576,726 and $289,269 for the years
ended December 31, 2000, 2001, 2002 and 2003, respectively.
F-15
<PAGE>
POZEN, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma information regarding net income is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using the minimum value option pricing model
with the following weighted-average assumptions: risk-free interest rates of
6.4%; dividend yields of 0%; and a weighted-average expected life of the option
of 10 years.
The minimum value option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The Company's pro forma
net loss information is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss attributable to common
stockholders--as reported............ $(3,803,030) $(8,737,631) $(12,145,446)
=========== =========== ============
Net loss attributable to common
stockholders--SFAS No. 123 pro
forma................................ $(4,065,704) $(9,139,807) $(12,823,763)
=========== =========== ============
Net loss per common share--SFAS No.
123 pro forma........................ $ (0.70) $ (1.57) $ (2.19)
=========== =========== ============
</TABLE>
7. LEASES
The Company leases its office space and certain equipment under cancelable and
noncancelable operating lease agreements. Rent expense incurred by the Company
was approximately $95,000, $116,000, $107,000 and $413,000 and for the years
ended December 31, 1997, 1998 and 1999 and for the period September 25, 1996
(inception) through December 31, 1999, respectively. The following is a
schedule of future minimum lease payments for operating leases at December 31,
1999:
<TABLE>
<S> <C>
2000............................................................. $114,554
2001............................................................. 117,523
2002............................................................. 120,492
2003............................................................. 50,720
--------
$403,289
========
</TABLE>
8. LICENSE AGREEMENT
In September 1999, the Company entered into a licensing agreement with F.
Hoffmann-La Roche, Ltd and Syntex ("Roche") in which the Company is granted
certain patent rights and know how to develop, manufacture and commercialize
Roche's MT 500 compound. The agreement provides for a
F-16
<PAGE>
POZEN, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
product option during two discrete periods whereby Roche would re-acquire all
of the rights granted to the Company as well as any data, documentation, know
how and additional intellectual property generated, owned or controlled by the
Company. Depending upon the development period at which the product option is
exercised, Roche would make specified one-time payments upon exercise of the
product option and upon NDA approval. In addition, Roche would make royalty
payments based upon net sales. In general, either party may terminate the
agreement in the event of an uncured material breach by the other party, or in
the event of the bankruptcy of the other party. In either case all rights to
the product will revert to the terminating party. Additionally, the Company,
prior to exercise of the option by Roche, or Roche, following exercise of the
option by Roche, may terminate the agreement without cause by providing the
other party with 180 days' written notice, in which case all rights to the
product will revert to the non-terminating party. All royalty and other payment
obligations of the parties survive any termination of the agreement.
The Company made a one-time non refundable payment of $1 million to enter into
this agreement. If the collaborative agreement continues for the full term, the
Company will pay Roche royalties on net sales and a portion of all payments
owed by the Company's sublicensees less the Company's development cost. The
product has not completed the clinical development process. As the Company is
required to advance the product through the clinical development process, it
has charged the $1 million payment to research and development.
9. RETIREMENT SAVINGS PLAN
In July 1997, the Company began a defined contribution 401(k) pension plan (the
"Plan") covering substantially all employees who are at least 21 years of age.
Based upon management's discretion, the Company may elect to make contributions
to the Plan. For the years ended December 31, 1997, 1998 and 1999, and for the
period September 25, 1996 (inception) through December 31, 1999, the Company
did not make any contributions to the Plan.
10. SUBSEQUENT EVENTS
In April 2000, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed Initial Public Offering (the
"Offering"). If the Offering is consummated, the preferred stock outstanding as
of the closing date will be converted into shares of the Company's common
stock. The unaudited pro forma stockholders' equity in the accompanying balance
sheet as of June 30, 2000 reflects conversion of all preferred stock
outstanding as of June 30, 2000 into 12,909,256 shares of common stock. Pro
forma net loss per common share is computed as if the outstanding preferred
stock had been converted into common stock on the date of issuance.
In May 2000, the Board of Directors adopted, and in June 2000 the stockholders
approved, the POZEN Inc. 2000 Equity Compensation Plan under which the Company
has authorized the issuance of equity based awards for up to 3,000,000 shares
of common stock. This Plan will become effective upon the consummation of the
Offering.
On August 28, 2000 and September 14, 2000, the Board of Directors and the
stockholders, respectively, of the Company approved a 1.349-for-1 common stock
split to be effective prior to the effectiveness of the Offering. An amendment
to the Company's Certificate of Incorporation effecting the stock split was
filed with the State of Delaware on October 6, 2000. All common share and per
common share amounts
F-17
<PAGE>
POZEN, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
for all periods presented in the accompanying financial statements have been
restated to reflect the effect of this common stock split.
On August 28, 2000, the Company completed a private placement of 1,597,285
shares of Series F and received cash of $10,742,000, net of offering costs. The
terms of the Series F are substantially similar to those of Series E. The
Company will record a non-cash preferred stock charge at the date of issuance
by offsetting charges and credits to additional paid-in capital of $10,742,000,
without any effect on total stockholders' equity.
In addition, the Board of Directors and stockholders have approved an amendment
to the certificate of incorporation to take effect as of the effective date of
the registration statement, increasing the authorized capital stock to
90,000,000 shares of common stock and reducing the number of authorized
preferred stock to 10,000,000, each with a par value of $0.001.
F-18
<PAGE>
POZEN PRODUCT PORTFOLIO
STAGES OF DEVELOPMENT
Product table Diagram
indicating the product
candidates and their
respective indication
with current clinical
states.
[LOGO OF POZEN, INC.]
<PAGE>
5,000,000 Shares
POZEN INC.
Common Stock
[POZEN INC. LOGO]
---------------------
PROSPECTUS
---------------------
Until , all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
U.S. Bancorp Piper Jaffray
Prudential Vector Healthcare
a unit of Prudential Securities
Pacific Growth Equities, Inc.
, 2000
<PAGE>
PART II
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 24,288
National Association of Securities Dealers, Inc. fee........... $ 9,000
Nasdaq Stock Market listing fee................................ $ 95,000
Accountants' fees and expenses................................. $ 400,000
Legal fees and expenses........................................ $ 500,000
Blue Sky fees and expenses..................................... $ 10,000
Transfer Agent's fees and expenses............................. $ 10,000
Printing and engraving expenses................................ $ 320,000
Miscellaneous.................................................. $ 131,712
----------
Total Expenses............................................. $1,500,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation permits indemnification to the
fullest extent permitted by Delaware law and require the Registrant to
indemnify any person who was or is an authorized representative of the
Registrant, and who was or is a party or is threatened to be made a party to
any corporate proceeding, by reason of the fact that such person was or is an
authorized representative of the Registrant, against expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such third party proceeding if such
person acted in good faith and in a manner such person reasonably believed to
be in, or not opposed to, the best interests of the Registrant and, with
respect to any criminal third party proceeding (including any action or
investigation which could or does lead to a criminal third party proceedings
had no reasonable cause to believe such conduct was unlawful. The Registrant
shall also indemnify any person who was or is an authorized representative of
the Registrant and who was or is a party or is threatened to be made a party to
any corporate proceeding by reason of the fact that that such person was or is
an authorized representative of the Registrant, against expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such corporate action if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Registrant unless and only to the extent that the Delaware Court
of Chancery or the court in which such corporate proceeding was pending shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such authorized representative is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper. Such indemnification is
mandatory as to expenses actually and reasonably incurred to the extent that an
authorized representative of the Registrant had been successful on the merits
or otherwise in defense of any third party or corporate proceeding or in
defense of any claim, issue or matter therein. The determination of whether an
individual is entitled to indemnification may be made by a majority of
disinterested directors, independent legal counsel in a written legal opinion
or the stockholders. Delaware law also permits indemnification in connection
with a proceeding brought by or in the right of the Registrant to procure a
judgment in its favor. Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable.
II-1
<PAGE>
The Underwriting Agreement provides that the underwriter is obligated, under
certain circumstances, to indemnify directors, officers, and controlling
persons of the Registrant against certain liabilities, including liabilities
under the Act. Reference is made to Section 6 of the form of Underwriting
Agreement which is filed as Exhibit 1.1 hereto.
Item 15. Recent Sales of Unregistered Securities
The share numbers presented below are provided with respect to our shares of
common stock and series A convertible preferred stock, series B convertible
preferred stock, series C convertible preferred stock, series D convertible
preferred stock, series E convertible preferred stock and series F convertible
preferred stock and reflect the conversion of our series A convertible
preferred stock, series B convertible preferred stock, series C convertible
preferred stock, series D convertible preferred stock and series E convertible
preferred stock into common stock, which will occur immediately prior to
completion of this offering. Any references to common stock in this Item 15
reflect a 1.349-for-1 split of our common stock to holders of record prior to
the effectiveness of this offering.
Except as described below, there have been no securities sold by us within the
last three years that were not registered under the Securities Act.
(a) Issuances of Securities
On August 28, 2000, we issued an aggregate of 1,597,285 shares of series F
convertible preferred stock to 3 large institutional accredited investors
and 3 foreign institutional accredited investors, each of whom was an
existing stockholder, at an aggregate offering price of $11,101,130.
On March 24, 2000, we issued an aggregate of 2,589,927 shares of series E
convertible preferred stock to 10 accredited institutional and 5 accredited
individual investors, 2 of whom were existing stockholders, at an aggregate
offering price of $18,000,000. In connection with this transaction, we also
issued warrants to purchase 24,485 shares of series E convertible preferred
stock at an initial exercise price of $6.59 per share to U.S. Bancorp Piper
Jaffray for services as placement agents for the offering of our series E
convertible preferred stock. Immediately prior to the consummation of this
offering, these warrants will become warrants to purchase 33,030 shares of
our common stock in exchange for payment to us of an amount per share equal
to the initial public offering price per share of the common stock.
On March 1, 1999, we issued a convertible promissory note to a foreign
institutional accredited investor in the principal amount of $3,000,000,
which was converted into a total of 625,000 shares of series D convertible
preferred stock in July 1999. In connection with this transaction, we also
issued warrants to purchase 200,000 shares of series D convertible
preferred stock at an exercise price of $3.15 per share to an institution
affiliated with this foreign investor. In July and September 1999, we sold
an aggregate of 1,968,750 additional shares of series D convertible
preferred stock to 2 accredited individual investors and to the holder of
the convertible promissory note, at an aggregate offering price of
$9,450,000.
In March 1998, we issued an aggregate of 563,044 shares of our series C
convertible preferred stock to 2 accredited institutional investors, one of
whom was an existing stockholder, at an aggregate offering price of
$2,280,328. In connection with this transaction, we also issued warrants to
purchase 8,884 shares of series C convertible preferred stock at an
exercise price of $0.001 per share to Burton Advisors Ltd. for services as
placement agent for this offering.
In December 1997 and March 1998, we issued an aggregate of 1,139,377 shares
of series B convertible preferred stock to 8 institutional and 1 individual
accredited investors, 4 of whom were existing stockholders, at an aggregate
offering price of $4,557,508. In connection with these transactions, we
also issued warrants to purchase 36,450 shares of series B convertible
preferred stock at an exercise price of $0.001 per share to Burton Advisors
Ltd and 2 of its agents for services as placement agent for this offering.
II-2
<PAGE>
Between November 1996 and August 28, 2000, we have issued options to certain
employees, consultants and others to purchase an aggregate of 1,791,787 shares
of common stock. As of August 28, 2000, 58,509 of such options have been
exercised, 227,008 of such options have been terminated and 1,506,270 of such
options remain outstanding at a weighted average exercise price of $1.12 per
share.
(b) U.S. Bancorp Piper Jaffray Inc. served as placement agent in connection
with the offer and sale by us of our series E convertible preferred stock and
has received a commission in the amount of $995,867 and warrants for such
services. In addition, U.S. Bancorp Piper Jaffray Inc. will receive a
commission in connection with the offer and sale by us of our series F
convertible preferred stock. Punk Ziegel was engaged as placement agent in
connection with the offer and sale by us of our series D convertible preferred
stock but has not earned any commissions or discounts in connection with the
offering. Burton Advisors Ltd. served as placement agent in connection with the
offer and sale by us of our series A, B and series C convertible preferred
stock and has received commissions in the aggregate amount of $278,516 and
warrants to purchase an aggregate of 45,334 shares of series A, series B, or
series C convertible preferred stock at an exercise price of $0.001 per share
for such services. No affiliation exists between these placement agents. Except
as so noted, no underwriters were involved in connection with the sales of
securities referred to in paragraph (a) of this Item 15.
(c) The convertible promissory note, the warrants and the shares of common
stock, series A convertible preferred stock, series B convertible preferred
stock, series C convertible preferred stock, series D convertible preferred
stock, series E convertible preferred stock and series F convertible preferred
stock described in paragraph (a) of this Item 15 were issued to a combination
of foreign and United States investors in reliance on the exemption provided by
Section 4(2) and/or Rule 506 of Regulation D promulgated pursuant to the
Securities Act, to the extent an exemption from such registration was required.
The convertible promissory note, the shares of convertible preferred stock and
the placement agent warrants issued to foreign persons and entities were issued
pursuant to offers and sales made outside the United States under conditions
that ensured that the securities came to rest abroad. All purchasers of the
securities described in paragraph (a) of this Item 15 represented to us in
connection with their purchase that they were accredited investors and were
acquiring the shares for investment and not distribution, that they could bear
the risks of the investment and could hold the securities for an indefinite
period of time. The purchasers received written disclosures that the securities
had not been registered under the Securities Act and that any resale must be
made pursuant to a registration or an available exemption from such
registration.
All certificates representing the securities issued in the transactions
described above in this paragraph (c) included appropriate legends setting
forth that the securities had not been registered and the applicable
restrictions on transfer.
The issuances of stock options and the shares of common stock issuable upon the
exercise of the options as described in paragraph (a) of this Item 15 were
issued pursuant to written compensatory plans or arrangements with our
employees, directors and consultants, in reliance on the exemption provided by
Section 3(b) of the Securities Act and Rule 701 promulgated thereunder, as well
as Section 4(2) of the Securities Act. Appropriate legends are affixed to the
stock certificates issued in the aforementioned transactions. All recipients
either received adequate information about us or had access, through employment
or other relationships, to such information.
II-3
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.!
3.2 Amended and Restated Bylaws of the Registrant.!
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of
Incorporation and Amended and Restated Bylaws of the Registrant
defining rights
of the holders of Common Stock of the Registrant.!
5.1 Opinion of Morgan, Lewis & Bockius LLP as to the legality of the
offered shares.*
10.1 Sublease Agreement between Quintiles, Inc. and the Registrant,
dated April 7, 1997.!
10.2 Stock Option Plan of the Registrant.!
10.3 First Amendment to Stock Option Plan dated February 14, 1997.!
10.4 Executive Employment Agreement with John R. Plachetka dated April
1, 1999.!
10.5 License Agreement dated September 24, 1999 between the Registrant
and F. Hoffman-La Roche Ltd.! **
10.6 Investor Rights Agreement dated July 28, 1999 between the
Registrant and the holders of the Series D Preferred Stock.!
10.7 Investor Rights Agreement dated March 24, 2000 between the
Registrant and the holders of the Series E Preferred Stock.!
10.10 2000 Equity Compensation Plan!
10.11 Investor Rights Agreement dated August 28, 2000 between the
Registrant and the holders of the Series F Preferred Stock.!
21.1 List of Subsidiaries.!
23.1 Consent of Ernst & Young LLP, Independent Auditors*
23.2 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1).*
24.1 Powers of Attorney (included on signature page of the original
filing of the registration statement).!
27.1 Financial Data Schedule.!
</TABLE>
-------------------------------
* Filed herewith.
** Confidential Treatment requested
# To be filed by amendment.
! Filed previously.
II-4
<PAGE>
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters
to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chapel Hill, State of
North Carolina on the 10th day of October, 2000.
POZEN Inc.
/s/ John R. Plachetka
By: _________________________________
John R. Plachetka
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board October 10, 2000
______________________________________
Jacques F. Rejeange
* President, Chief Executive October 10, 2000
______________________________________ Officer and Director
John R. Plachetka
* Chief Financial Officer October 10, 2000
______________________________________
Matthew E. Czajkowski
* Vice President, Finance October 10, 2000
______________________________________ and Administration
John E. Barnhardt (Principal Accounting
Officer)
* Director October 10, 2000
______________________________________
Ted G. Wood
* Director October 10, 2000
______________________________________
Peter J. Wise
* Director October 10, 2000
______________________________________
Bruce A. Tomason
</TABLE>
/s/ Matthew E. Czajkowski
*By: ____________________________
Matthew E. Czajkowski
Attorney-in-Fact
II-6
