<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 2000
REGISTRATION NO. 333-32370
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
AMENDMENT NO. 2
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PAIN THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7841 91-1911336
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
250 EAST GRAND AVENUE, SUITE 70
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(650) 624-8200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
REMI BARBIER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
250 EAST GRAND AVENUE, SUITE 70
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(650) 624-8200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. O'DONNELL, ESQ. PETER T. HEALY, ESQ.
MARTIN J. WATERS III, ESQ. O'MELVENY & MYERS LLP
WILSON SONSINI GOODRICH & ROSATI EMBARCADERO CENTER WEST
PROFESSIONAL CORPORATION 275 BATTERY STREET, SUITE 2600
650 PAGE MILL ROAD SAN FRANCISCO, CA 94111-3305
PALO ALTO, CA 94304-1050 (415) 984-8833
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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, 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, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER 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 SUCH SECTION 8(A),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 20, 2000
PROSPECTUS
LOGO
5,000,000 Shares
Common Stock
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This is an initial public offering of shares of common stock of Pain
Therapeutics, Inc. We are offering 5,000,000 shares in this offering. No public
market currently exists for our common stock. We anticipate that the initial
public offering price will be between $11 and $13 per share.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "PTIE."
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds, before expenses, to us $ $
</TABLE>
The underwriters have an option to purchase 750,000 additional shares of common
stock from us at the initial public offering price, less underwriting discounts
and commissions, to cover any over-allotments of shares at any time until 30
days after the date of this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
THOMAS WEISEL PARTNERS LLC
CIBC WORLD MARKETS
TUCKER ANTHONY CLEARY GULL
The date of this prospectus is , 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............ 1
Risk Factors.................. 6
Cautionary Note On Forward-
Looking Statements.......... 13
Use of Proceeds............... 14
Dividend Policy............... 14
Capitalization................ 15
Dilution...................... 16
Selected Financial Data....... 17
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................. 19
Business...................... 25
Management.................... 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Relationships and
Related Transactions........ 47
Principal Stockholders........ 48
Description of Capital
Stock....................... 50
Shares Eligible for Future
Sale........................ 54
U.S. Tax Consequences to Non-
U.S. Holders................ 56
Underwriting.................. 59
Legal Matters................. 62
Experts....................... 62
Where You Can Find More
Information................. 62
Index to Financial
Statements.................. F-1
</TABLE>
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors" and the consolidated financial statements, before
you decide to buy our common stock.
PAIN THERAPEUTICS, INC.
Pain Therapeutics is developing a new generation of opioid painkillers.
Opioids are drugs derived from the poppy plant. We use our technology to
reformulate opioid drugs, such as morphine, into new painkillers with improved
clinical benefits. We currently have four opioid painkillers in Phase II
clinical trials. We believe our drugs offer enhanced pain relief, fewer adverse
side effects and reduced tolerance and addiction compared to existing opioid
painkillers. If approved by the Food and Drug Administration, or FDA, we believe
our proprietary drugs could replace many commonly used opioid painkillers. Our
product candidates are combinations of FDA-approved drugs. For this reason, we
believe we will encounter fewer clinical and regulatory hurdles than if we were
developing new chemical entities.
OPIOID PAINKILLERS
The clinical use of opioid painkillers is widely accepted throughout the
world. Despite their widespread clinical use, opioid painkillers have
significant adverse side effects including respiratory depression, nausea,
vomiting, dizziness, sedation, mental clouding, constipation, urinary retention
and severe itching. Chronic use leads to tolerance and, potentially, addiction.
Adverse side effects limit the usefulness of opioid painkillers. In many cases,
patients voluntarily take less than the prescribed dosage to avoid adverse side
effects. Some patients even prefer to endure pain rather than to suffer from
adverse side effects. As a result, many patients are seriously under-treated and
may be suffering from pain unnecessarily.
To date, innovations in the field of opioid painkillers have largely
focused on changing the convenience of opioid drugs. In contrast, we are
focusing on improving clinical benefits. Based on clinical and pre-clinical
data, we believe our painkillers address the shortcomings of existing opioids.
OUR MARKET
Medical economists estimate the direct and indirect costs associated with
pain to be $100 billion annually in the United States. Drugs are the key element
in the treatment of pain. In the United States and Western Europe, the market
for pain drugs totaled nearly $12 billion in 1997. This market has grown by
approximately 15% annually over the past five years. In 1999, U.S. opioid
painkiller sales were approximately $2.5 billion.
OUR PRODUCTS
Each of our product candidates consists of two components: an opioid
agonist, such as morphine, and a low-dose opioid antagonist, such as naltrexone
or naloxone. An opioid agonist is a drug that blocks pain, and an opioid
antagonist is a compound that blocks pain relief. Normally, combining an
antagonist with an agonist cancels out the effects of the agonist. Studies
indicate, however, that with opioids, combining a low-dose antagonist with an
agonist actually improves the performance of the agonist. By
1
<PAGE> 5
combining low-dose opioid antagonists, such as naltrexone or naloxone, with
opioid agonists such as morphine, we believe our drugs will:
- enhance pain relief;
- minimize adverse side effects; and
- reduce tolerance and addiction.
Clinical results from four studies involving a total of over 750 patients
support our technology. For example, we recently completed a 200 patient Phase
II clinical trial of our oral morphine product candidate. Results of this trial
indicate that an optimal dose of our painkiller provided patients with 50% more
pain relief than morphine alone during the first four hours after
administration. This result is statistically significant at the level of
p=0.058, which means the likelihood that this result occurred by chance is less
than 1 in 17.
We have worldwide exclusive rights to our technology. We have five issued
U.S. patents, one U.S. Notice of Allowance, two pending U.S. patent applications
and ten corresponding pending foreign patent applications or issued patents
relating to our technology.
OUR STRATEGY
Our goal is to build a speciality pharmaceutical company focused on pain
management. We plan to achieve this goal by:
- Developing products with reduced clinical and regulatory risks compared
to the development of new chemical entities. We believe this approach may
enable us to commercialize our drugs rapidly and cost effectively.
- Focusing on clinical development and late-stage products. We believe this
focus will enable us to generate product revenues earlier than if we were
discovering new chemical entities.
- Retaining significant rights. In general, we intend to independently
develop our product candidates through late-stage clinical trials. As a
result, we expect to capture a greater percentage of the profits from
drug sales than we would have if we had outlicensed our drugs earlier in
the development process.
- Using our technology to develop multiple drugs for both pain and non-pain
indications. We are initially focusing our efforts on developing four
opioid painkillers. However, we believe our technology can be broadly
applied to other indications.
- Outsourcing key functions. We intend to outsource preclinical studies,
clinical trials, formulation and manufacturing. We believe outsourcing
will produce significant time savings and allow for more efficient
deployment of our resources.
OTHER INFORMATION
We incorporated in Delaware in May 1998. Our principal executive office is
located at 250 East Grand Avenue, Suite 70, South San Francisco, California
94080. Our telephone number at this location is (650) 624-8200. Pain
Therapeutics and our logo are trademarks of Pain Therapeutics, Inc. This
prospectus also contains trademarks and tradenames of other parties.
2
<PAGE> 6
THE OFFERING
Common stock offered by
Pain Therapeutics, Inc. ... 5,000,000 shares
Common stock to be
outstanding after this
offering................. 25,827,142 shares
Use of proceeds............ Working capital and general corporate purposes,
including the continued development of existing
product candidates, clinical research and
development, formulation and manufacturing and
commercialization activities.
Proposed Nasdaq National
Market symbol............ PTIE
The number of shares to be outstanding after this offering is based on
20,827,142 shares outstanding as of March 31, 2000. This number excludes:
- 1,757,970 shares of common stock issuable upon exercise of options then
outstanding, at a weighted average exercise price of $0.50 per share;
- 190,000 shares of common stock issuable upon exercise of warrants then
outstanding at a weighted average exercise price of $3.53 per share;
- 150,000 shares of series A convertible preferred stock issuable upon
exercise of warrants then outstanding at an exercise price of $1.00 per
share;
- 223,800 shares of common stock then available for issuance, under our
1998 Stock Plan, as amended; and
- 500,000 additional shares of common stock which will be available for
issuance under our 2000 Employee Stock Purchase Plan immediately
following the offering.
Except as otherwise indicated, all information in this prospectus assumes:
- the automatic conversion of all shares of series A, B and C preferred
stock into an aggregate 11,108,912 shares of common stock upon completion
of this offering; and
- no exercise of the underwriters' over-allotment option.
3
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the accompanying financial statements and related notes which
are included in this prospectus. The following table presents summary financial
information for Pain Therapeutics, Inc. The pro forma balance sheet data gives
effect to:
- the conversion of all of our convertible preferred and redeemable
convertible preferred stock outstanding as of March 31, 2000 into
11,108,912 shares of common stock upon completion of the offering; and
- the sale of 5,000,000 shares of common stock in the offering at an
assumed initial offering price of $12 per share, after deducting
estimated underwriting discounts, commissions and offering expenses.
The summary statement of operations data for the period from May 4, 1998
(inception) through December 31, 1998, the year ended December 31, 1999 and the
period from May 4, 1998 (inception) through December 31, 1999 and the summary
balance sheet data as of December 31, 1999 are derived from our audited
financial statements. The summary statement of operations data for the three
months ended March 31, 1999 and 2000 and the period from May 4, 1998 (inception)
through March 31, 2000 and the summary balance sheet data as of March 31, 2000
are derived from our unaudited financial statements.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM THREE MONTHS ENDED
MAY 4, 1998 MAY 4, 1998 MARCH 31,
(INCEPTION) THROUGH YEAR ENDED (INCEPTION) THROUGH --------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 1999 1999 2000
------------------- ----------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses
Licensing fees............. $ 100,000 $ -- $ 100,000 $ -- $ --
Research and development... 200,000 2,092,119 2,292,119 -- 1,433,268
General and
administrative........... 122,168 2,567,355 2,689,523 118,257 4,619,719
--------- ----------- ----------- --------- ------------
Total operating
expenses............... 422,168 4,659,474 5,081,642 118,257 6,052,987
--------- ----------- ----------- --------- ------------
Operating loss........... (422,168) (4,659,474) (5,081,642) (118,257) (6,052,987)
Interest income.............. 33,961 160,689 194,650 27,407 245,050
Income tax expense........... 800 800 1,600 200 200
--------- ----------- ----------- --------- ------------
Net loss................. (389,007) (4,499,585) (4,888,592) (91,050) (5,808,137)
Return to series C preferred
shareholders for beneficial
conversion feature......... -- -- -- -- (14,231,595)
--------- ----------- ----------- --------- ------------
Loss available to common
shareholders............... $(389,007) $(4,499,585) $(4,888,592) $ (91,050) $(20,039,732)
========= =========== =========== ========= ============
Basic and diluted loss per
share...................... $ (0.06) $ (0.48) $ (0.01) $ (2.10)
========= =========== ========= ============
Weighted average shares used
in computing basic and
diluted loss per share..... 6,948,637 9,322,441 9,000,000 9,528,957
========= =========== ========= ============
<CAPTION>
PERIOD FROM
MAY 4, 1998
(INCEPTION) THROUGH
MARCH 31, 2000
-------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses
Licensing fees............. $ 100,000
Research and development... 3,725,387
General and
administrative........... 7,309,242
------------
Total operating
expenses............... 11,134,629
------------
Operating loss........... (11,134,629)
Interest income.............. 439,700
Income tax expense........... 1,800
------------
Net loss................. (10,696,729)
Return to series C preferred
shareholders for beneficial
conversion feature......... (14,231,595)
------------
Loss available to common
shareholders............... $ 24,928,324
============
Basic and diluted loss per
share......................
Weighted average shares used
in computing basic and
diluted loss per share.....
</TABLE>
4
<PAGE> 8
<TABLE>
<CAPTION>
AT MARCH 31, 2000
----------------------------
PRO FORMA
DECEMBER 31, 1999 ACTUAL AS ADJUSTED
----------------- ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 9,339,669 $ 22,179,362 $ 76,879,362
Working capital.................................... 9,095,831 21,795,444 76,495,444
Total assets....................................... 9,441,173 22,864,799 77,564,799
Series C redeemable convertible preferred
stock(1)......................................... -- 14,231,595 --
Series B redeemable convertible preferred stock.... 9,703,903 9,703,903 --
Series A convertible preferred stock............... 2,660 2,660 --
Common stock....................................... 9,445 9,718 25,827
Additional paid-in capital......................... 9,367,750 17,697,759 96,319,808
Deferred compensation.............................. (4,980,180) (8,448,370) (8,448,370)
Deficit accumulated during the development stage... (4,888,592) (10,696,729) (10,696,729)
Total stockholders' equity (deficit)............... (563,317) (1,558,362) 77,077,136
</TABLE>
-------------------------
(1) See Note 7 to the Financial Statements
5
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following information about these risks, together
with the other information contained in this prospectus, before you decide
whether to buy our common stock. If any of the events described in the following
risks actually occurs, the market price of our common stock could decline, and
you may lose all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
OUR BRIEF OPERATING HISTORY MAY MAKE IT DIFFICULT FOR YOU TO EVALUATE THE
SUCCESS OF OUR BUSINESS TO DATE AND TO ASSESS ITS FUTURE VIABILITY.
We were founded in May 1998 and we are still in the development stage. Our
operations to date have been limited to organizing and staffing our company,
acquiring, developing and securing our technology and undertaking preclinical
studies and clinical trials. We have not yet demonstrated our ability to obtain
regulatory approval, formulate and manufacture product or conduct sales and
marketing activities. Consequently, any predictions you make about our future
success or viability may not be as accurate as they could be if we had a longer
operating history.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR SUBSTANTIAL LOSSES AND NEGATIVE
OPERATING CASH FLOWS FOR THE FORESEEABLE FUTURE.
Since our inception, we have incurred significant net losses, including net
losses of $389,000 in the period from May 4, 1998 (inception) through December
31, 1998, $4.5 million in the year ended December 31, 1999 and $5.8 million in
the three months ended March 31, 2000. As a result of ongoing operating losses,
we had an accumulated deficit of $10.7 million as of March 31, 2000. We are not
currently profitable. Even if we succeed in developing and commercializing one
or more of our drugs, we expect to incur substantial losses for the foreseeable
future and may never become profitable. We also expect to continue to incur
significant operating and capital expenditures and anticipate that our expenses
will increase substantially in the foreseeable future as we:
- continue to undertake preclinical and clinical trials for our product
candidates;
- seek regulatory approvals for our product candidates;
- develop, formulate, manufacture and commercialize our drugs;
- implement additional internal systems and infrastructure; and
- hire additional personnel.
We also expect to experience negative cash flow for the foreseeable future
as we fund our operating losses and capital expenditures. As a result, we will
need to generate significant revenues to achieve and maintain profitability. If
we cannot successfully develop and commercialize our products, we will not be
able to generate such revenues or achieve profitability in the future. Our
failure to achieve or maintain profitability could negatively impact the market
price of our common stock.
IF WE CANNOT RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, WE MAY BE UNABLE TO
COMPLETE PLANNED CLINICAL TRIALS OF ANY OF OUR PRODUCT CANDIDATES.
Until we receive regulatory approval and commercialize one or more of our
products, we will have to fund all of our operations and capital expenditures
from the net proceeds of this offering and cash on hand. We expect that the
assumed net proceeds of 54.7 million from this offering and cash on hand will
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<PAGE> 10
be sufficient to meet our working capital and capital expenditure needs for at
least the next twelve months. However, if we experience unanticipated cash
requirements, we may need to raise additional funds much sooner and additional
financing may not be available on favorable terms, if at all. Even if we succeed
in selling additional equity securities to raise funds, our existing
stockholders' ownership percentage would be reduced and new investors may demand
rights, preferences or privileges senior to those of existing stockholders. If
we do not succeed in raising additional funds, we may be unable to complete
planned clinical trials or obtain FDA approval of our product candidates, and we
could be forced to discontinue product development, reduce sales and marketing
efforts and forego attractive business opportunities.
IF WE ARE UNABLE TO DESIGN, CONDUCT AND COMPLETE CLINICAL TRIALS SUCCESSFULLY,
WE WILL NOT BE ABLE TO SUBMIT A NEW DRUG APPLICATION TO THE FDA.
In order to obtain FDA approval of any of our product candidates, we must
submit to the FDA a New Drug Application, or NDA, which demonstrates that the
product candidate is safe for humans and effective for its intended use. This
demonstration requires significant research and animal tests, which are referred
to as pre-clinical studies, as well as human tests, which are referred to as
clinical trials. Our four product candidates are still in the early stages of
clinical trials and we will have to commit substantial time and additional
resources to conducting further pre-clinical and clinical studies in several
types of pain before we can submit NDAs with respect to any of these product
candidates. Our first clinical trials for our PTI-555, PTI-501 and PTI-601
product candidates were completed only recently, in the past six months. We
intend to continue to conduct Phase II trials for these and our PTI-701 product
candidate. We will not be able to proceed to Phase III trials for any product
candidate until we determine appropriate dosages and submit such data to the
FDA. Our other product candidates are at a much earlier stage of development and
will require extensive pre-clinical testing before we can make any decision to
proceed to clinical trials. In addition, before we can commence human clinical
trials of these product candidates, we may have to submit an Investigational New
Drug, or IND, application to the FDA.
Human clinical trials are very expensive and difficult to design and
implement, in part because they are subject to rigorous requirements. The
clinical trial process is also time consuming. We estimate that clinical trials
of our four leading product candidates will take a minimum of three years to
complete and may take longer. Furthermore, failure can occur at any stage of the
trials, and we could encounter problems that cause us to abandon clinical trials
or to repeat clinical studies.
Even if our clinical trials are completed as planned, their results may not
support our product claims. Success in pre-clinical testing and early clinical
trials does not ensure that later clinical trials will be successful, and the
results of later clinical trials may not replicate the results of prior clinical
trials and pre-clinical testing. The clinical trial process may fail to
demonstrate that our product candidates are safe for humans and effective for
indicated uses. Such failure would cause us to abandon a product candidate and
may delay development of other product candidates.
IF WE FAIL TO OBTAIN THE NECESSARY REGULATORY APPROVALS, WE WILL NOT BE ALLOWED
TO COMMERCIALIZE OUR DRUGS AND WILL NOT GENERATE PRODUCT REVENUES.
Satisfaction of all regulatory requirements typically takes many years, is
dependent upon the type, complexity and novelty of the product candidate and
requires the expenditure of substantial resources for research and development
and testing. Our research and clinical approaches may not lead to drugs that the
FDA considers safe for humans and effective for indicated uses. The FDA may
require us to conduct additional clinical testing or to commit to perform
post-marketing studies, in which cases we would have to expend additional
unanticipated time and resources. The approval process may also be delayed by
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<PAGE> 11
changes in government regulation, future legislation or administrative action or
changes in FDA policy that occur prior to or during our regulatory review.
Even if we comply with all FDA requests, the FDA may ultimately deny one or
more of our NDAs. We cannot be sure that we will ever obtain regulatory
clearance for any of our product candidates. Failure to obtain FDA approval of
any of our leading product candidates will severely undermine our business plan
by reducing our number of salable products and corresponding product revenues.
In foreign jurisdictions, we must receive marketing authorizations from the
appropriate regulatory authorities before we can commercialize our drugs.
Foreign regulatory approval processes generally include all of the risks
associated with the FDA approval procedures described above.
IF OUTSIDE RESEARCHERS FAIL TO DEVOTE SUFFICIENT TIME AND RESOURCES TO OUR DRUG
DEVELOPMENT PROGRAMS, OR IF THEIR PERFORMANCE IS SUBSTANDARD, THE SUBMISSION OF
OUR FDA APPLICATIONS AND OUR PRODUCT INTRODUCTIONS MAY BE DELAYED.
We depend on independent investigators and collaborators, such as
universities and medical institutions, to conduct our clinical trials under
agreements with us. These collaborators are not our employees and we cannot
control the amount or timing of resources that they devote to our programs.
These investigators may not assign as great a priority to our programs or pursue
them as diligently as we would if we were undertaking such programs ourselves.
If outside collaborators fail to devote sufficient time and resources to our
drug development programs, or if their performance is substandard, the approval
of our FDA applications and our introductions of new drugs will be delayed.
These collaborators may also have relationships with other commercial entities,
some of whom may compete with us. If outside collaborators assist our
competitors at our expense, our competitive position could be harmed.
IF THIRD-PARTY MANUFACTURERS OF OUR PRODUCT CANDIDATES FAIL TO DEVOTE SUFFICIENT
TIME AND RESOURCES TO OUR CONCERNS, OR IF THEIR PERFORMANCE IS SUBSTANDARD, OUR
CLINICAL TRIALS AND PRODUCT INTRODUCTIONS MAY BE DELAYED AND OUR COSTS MAY RISE.
We have no manufacturing facilities and no experience in drug formulation
or manufacturing. We lack the resources and expertise to formulate or
manufacture our own product candidates. We currently rely on a single contract
manufacturer to supply, store and distribute drug supplies for our clinical
trials. Our reliance on a single third-party manufacturer exposes us to the
following risks, any of which could delay our clinical trials, the approval of
our product candidates by the FDA, or the commercialization of our products,
result in higher costs or deprive us of potential product revenues:
- Contract manufacturers often encounter difficulties in achieving volume
production, quality control and quality assurance, as well as shortages
of qualified personnel. Accordingly, our manufacturer might not be able
to meet our clinical schedules.
- Switching manufacturers may be difficult because the number of potential
manufacturers is limited. It may be difficult or impossible for us to
find a replacement manufacturer on acceptable terms quickly, or at all.
- Our contract manufacturers may not perform as agreed or may not remain in
the contract manufacturing business for the time required to successfully
produce, store and distribute our products.
- Drug manufacturers are subject to ongoing periodic unannounced inspection
by the FDA, the U.S. Drug Enforcement Agency, or DEA, and corresponding
state agencies to ensure strict compliance with good manufacturing
practice and other government regulations and corresponding foreign
standards. We do not have control over third-party manufacturers'
compliance with these regulations and standards.
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<PAGE> 12
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OUR COMPETITORS COULD
DEVELOP AND MARKET PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR
PRODUCTS.
Our success, competitive position and potential future revenues will depend
in part on our ability to protect our intellectual property. If either we or
Albert Einstein College of Medicine fails to file, prosecute or maintain any of
our existing patents, our competitors could market products that contain
features and clinical benefits similar to those of our products, and demand for
our products could decline as a result. We intend to file additional patent
applications relating to our technology, products and processes. We may direct
Albert Einstein College of Medicine to file additional patent applications
relating to the licensed technology or we may do so ourselves. However, our
competitors may challenge, invalidate or circumvent any of these or future
patents. These patents may also fail to provide us with meaningful competitive
advantages.
We expect that we will rely upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
our competitive position. Others may independently develop substantially
equivalent proprietary information or be issued patents that may prevent the
sale of our products or know-how or require us to license such information and
pay significant fees or royalties in order to produce our products. Moreover,
our technology could infringe upon claims of patents owned by others. If we were
found to be infringing on a patent held by another, we might have to seek a
license to use the patented technology. In that case, we might not be able to
obtain such a license on terms acceptable to us, or at all. If a legal action
were to be brought against us or our licensors, we could incur substantial
defense costs, and any such action might not be resolved in our favor. If such a
dispute were to be resolved against us, we could have to pay the other party
large sums of money and our use of our technology and the testing, manufacture,
marketing or sale of one or more of our proposed products could be restricted or
prohibited. Despite the use of confidentiality agreements, which may be of
limited effectiveness, we may not be able to protect our trade secrets.
COMPETITION FOR QUALIFIED PERSONNEL IN THE PHARMACEUTICAL INDUSTRY IS INTENSE,
AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING QUALIFIED PERSONNEL, WE
COULD EXPERIENCE DELAYS IN COMPLETING NECESSARY CLINICAL TRIALS AND THE
REGULATORY APPROVAL PROCESS OR IN FORMULATING, MANUFACTURING, MARKETING AND
SELLING OUR POTENTIAL PRODUCTS.
We will need to hire additional qualified personnel with expertise in
clinical research, preclinical testing, government regulation, formulation and
manufacturing and sales and marketing. We compete for qualified individuals with
numerous biopharmaceutical companies, universities and other research
institutions. Competition for such individuals, particularly in the San
Francisco Bay area, is intense, and we cannot be certain that our search for
such personnel will be successful. Attracting and retaining qualified personnel
will be critical to our success.
THE DEA LIMITS THE AVAILABILITY OF THE ACTIVE INGREDIENTS IN OUR CURRENT PRODUCT
CANDIDATES AND, AS A RESULT, OUR QUOTA MAY NOT BE SUFFICIENT TO COMPLETE
CLINICAL TRIALS OR MEET COMMERCIAL DEMAND.
The DEA regulates chemical compounds as Schedule I, II, III, IV or V
substances, with Schedule I substances considered to present the highest risk of
substance abuse and Schedule V substances the lowest risk. The active
ingredients in our current product candidates, including morphine and
hydrocodone, are listed by the DEA as Schedule II or III substances under the
Controlled Substances Act of 1970. Consequently, their manufacture, shipment,
storage, sale and use are subject to a high degree of regulation. For example,
all Schedule II drug prescriptions must be signed by a physician and may not be
refilled without a new prescription. Furthermore, the amount of Schedule II
substances we can obtain for clinical trials and commercial distribution is
limited by the DEA and our quota may not be sufficient to complete clinical
trials or meet commercial demand. There is a risk that DEA regulations
9
<PAGE> 13
may interfere with the supply of the drugs used in our clinical trials, and in
the future, our ability to produce and distribute our products in the volume
needed to meet commercial demand.
WE MAY INCUR SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT
COMMERCIALIZATION OF OUR PRODUCTS IN RESPONSE TO PRODUCT LIABILITY LAWSUITS.
The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product
liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. We
currently carry clinical trial insurance but do not carry product liability
insurance. We, or any corporate collaborators, may not be able to obtain
insurance at a reasonable cost, if at all. Even if our agreements with any
future corporate collaborators entitle us to indemnification against losses,
such indemnification may not be available or adequate should any claim arise.
DEVELOPMENTS BY COMPETITORS MAY RENDER OUR PRODUCTS OR TECHNOLOGIES OBSOLETE OR
NON-COMPETITIVE.
Alternative technologies and products are being developed to improve or
replace the use of opioids for pain management, several of which are in clinical
trials or are awaiting approval from the FDA. Such alternatives include Elan's
SNX-111, as well as combination products from Endo Pharmaceuticals. In addition,
companies that sell generic opioid drugs represent substantial competition. Many
of these organizations competing with us have substantially greater capital
resources, larger research and development staffs and facilities, greater
experience in drug development and in obtaining regulatory approvals and greater
manufacturing and marketing capabilities than we do. These organizations also
compete with us to attract qualified personnel, parties for acquisitions, joint
ventures or other collaborations.
RISKS RELATED TO THE OFFERING
OUR STOCK PRICE COULD BE VOLATILE WHICH MAY LEAD TO LOSSES BY INVESTORS.
Before this offering, there was no public market for our common stock. An
active public market for our common stock may not develop or be sustained after
this offering. We will determine the initial public offering price of our common
stock based on negotiations between the representatives of the underwriters and
our management concerning the valuation of our common stock, and such price may
not be indicative of future market prices. The public market may not agree with
or accept this valuation. After this offering, you may not be able to resell
your shares at or above the initial public offering price. The trading price of
our common stock is likely to be volatile.
The stock market in general, and the market prices for securities of
biotechnology companies in particular, has experienced extreme volatility and
may continue to be highly volatile in the future. The following factors, in
addition to other risk factors described in this section, may have a significant
impact on the market price of our common stock:
- publicity regarding actual or potential clinical results relating to
products under development by our competitors or us;
- announcements of technological innovations or new commercial products by
our competitors or us;
- developments concerning proprietary rights, including patents;
10
<PAGE> 14
- developments concerning our collaborations;
- regulatory developments in the United States and foreign countries;
- litigation;
- economic or other crises and other external factors; or
- period to period fluctuations in our financial results.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Due to the expected volatility of our stock price, we may be the
target of securities litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and resources from
our business.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PERSONS AFFILIATED WITH OUR DIRECTORS WILL
RETAIN SIGNIFICANT CONTROL OVER US AFTER THIS OFFERING, WHICH MAY LEAD TO
CONFLICTS WITH OTHER STOCKHOLDERS ON CORPORATE GOVERNANCE ISSUES.
We anticipate that our executive officers, directors and individuals or
entities affiliated with our directors will beneficially own approximately 41%
of our outstanding common stock as a group after this offering closes. Acting
together, these stockholders would be able to exercise significant influence
over all matters that our stockholders vote upon, including the election of
directors and the approval of significant corporate transactions. This
concentration of ownership may also delay, deter or prevent a change in our
control and may make some transactions more difficult or impossible to complete
without the support of the stockholders.
THE PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT POTENTIAL
ACQUISITION BIDS THAT A STOCKHOLDER MAY BELIEVE ARE DESIRABLE, AND THE MARKET
PRICE OF OUR COMMON STOCK MAY BE LOWER AS A RESULT.
Upon completion of this offering, our board of directors will have the
authority to issue up to 10,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions of
the preferred stock without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction. As a result, the market price of our common stock and the voting
and other rights of our stockholders may be adversely affected. The issuance of
preferred stock may result in the loss of voting control to other stockholders.
We have no current plans to issue any shares of preferred stock.
In addition to the foregoing, our charter documents contain the following
anti-takeover devices:
- only one of the three classes of directors is elected each year;
- the ability of our stockholders to remove directors without cause is
limited;
- the right of stockholders to act by written consent has been eliminated;
- the right of stockholders to call a special meeting of stockholders has
been eliminated; and
- a requirement of advance notice to nominate directors or submit proposals
for consideration at stockholder meetings.
11
<PAGE> 15
In addition, upon completion of this offering, we will be subject to the
anti-takeover provisions of the Delaware General Corporation Law, which regulate
corporate acquisitions. Delaware law will prevent us from engaging, without the
approval of our board of directors or a large majority of our stockholders, in
certain transactions with any stockholder who controls, alone or together with
affiliates, 15% or more of our outstanding common stock for three years
following the date on which the stockholder first acquired 15% or more of our
outstanding common stock. Although we may opt out of these anti-takeover
provisions, we do not intend to do so.
The anti-takeover provisions of our charter documents and of the Delaware
General Corporation Law could discourage potential acquisition proposals and
could delay or prevent a change in control transaction. They could also have the
effect of discouraging others from making tender offers for our common stock. As
a result, these provisions may prevent the market price of our common stock from
increasing substantially in response to actual or rumored takeover attempts.
These provisions may also prevent changes in our management.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE OUR STOCK
PRICE TO DECLINE.
Sales of a substantial number of shares of our common stock after this
offering, or the perception that these sales could occur, could adversely affect
the market price of our common stock and impair our ability to raise capital
through the sale of additional equity securities. After this offering, based
upon the number of shares outstanding at March 31, 2000, we will have 25,827,142
shares of our common stock outstanding. All of the shares sold in the offering
will be freely transferable without restriction or further registration, except
for any shares purchased by our "affiliates," as defined in Rule 144. 20,969,091
shares of common stock outstanding after this offering will be subject to lock
up agreements between our shareholders and Thomas Weisel Partners LLC
restricting the sale of these shares for 180 days after the date of this
prospectus. In addition, these shares are "restricted securities" as defined in
Rule 144 and may be sold in absence of registration in accordance with Rule 144
or Rule 701 under the Securities Act or another exemption from registration.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION BECAUSE THE NET TANGIBLE BOOK
VALUE OF SHARES PURCHASED IN THIS OFFERING WILL BE SUBSTANTIALLY LOWER THAN THE
INITIAL PUBLIC OFFERING PRICE.
The initial public offering price of the shares of common stock in this
offering will significantly exceed the net tangible book value per share of our
common stock. Any shares of common stock that investors purchase in this
offering will have a post-closing net tangible book value per share of $9.02 per
share less than the initial public offering price paid, assuming an initial
public offering price per share of $12 and based on our pro forma net tangible
book value as of March 31, 2000. If outstanding options or warrants are
exercised, you will incur additional dilution.
12
<PAGE> 16
CAUTIONARY NOTE ON 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:
- anticipated operating losses and capital expenditures;
- our clinical development efforts;
- the success of our technology;
- the timing of regulatory processes for our product candidates;
- the future growth of markets for our products;
- our intention to rely on third parties for key functions such as
formulation and manufacturing and sales and marketing;
- anticipated increases in our expenses;
- the sufficiency of the net proceeds of this offering, together with our
cash on hand, to fund our operations for the next 12 months; and
- the lack of a material impact of the adoption of Statement of Financial
Accounting Standards No. 133 and Financial Accounting Standards Board
Interpretation No. 44, which is discussed in detail under the caption
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Recent Accounting Pronouncements."
When used in this prospectus, the words "believe," "anticipate,"
"estimate," "expect," "seek," "intend," "may," "will," "plan" and similar
expressions are generally intended to identify "forward-looking statements." The
matters discussed in our forward-looking statements are subject to known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements, or industry results, to be materially
different from the results, performance or achievements expressed or implied by
our forward-looking statements. These factors are discussed 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." Because of these uncertainties, you
should not place undue reliance on our forward-looking statements.
Market data and forecasts used in this prospectus, including, for example,
estimates of the size and growth rates of the pain management market, have been
obtained from independent industry sources, and we have not independently
verified such data.
13
<PAGE> 17
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock we are
offering are estimated to be $54.7 million ($63.1 million if the underwriters
exercise their over-allotment option in full) assuming a public offering price
of $12 per share and after deducting the underwriting discounts and commissions
and our estimated offering expenses.
We will retain broad discretion in the allocation of the net proceeds of
this offering. We currently anticipate using the net proceeds from this offering
for working capital and general corporate purposes, including the continued
development of existing product candidates, clinical research and development,
formulation and manufacturing and commercialization activities. We may also, as
opportunities arise, use a portion of the net proceeds to acquire or invest in
businesses, products or technologies that are complementary to our own. While we
periodically engage in preliminary discussions with respect to acquisitions, we
are not currently a party to any agreements or commitments, and we have no
understandings with respect to any acquisitions.
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;
- market acceptance of any of our drugs;
- marketing and sales activities;
- future revenue growth, if any; and
- the amount of cash, if any, we generate from operations.
The precise uses to which we will apply the net proceeds of this offering
will be selected by management, under the supervision of our board of directors,
in light of future circumstances and our business prospects. Pending the use of
the net proceeds, we intend to invest the net proceeds in short-term, investment
grade, interest bearing instruments in reliance on a non-statutory exemption
from the Investment Company Act of 1940. If this exemption were not available,
our investments in non-government securities could not constitute more than
forty percent of our total assets.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
expect to retain our future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Any future declaration and payment of dividends will be
subject to the discretion of our board of directors, will be subject to
applicable law and will depend on our results of operations, earnings, financial
condition, contractual limitations, cash requirements, future prospects and
other factors deemed relevant by our board of directors.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000.
This table should be read in conjunction with the "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes appearing
elsewhere in this prospectus. This information is presented:
- on an actual basis derived from our financial statements;
- on a pro forma basis to give effect to the conversion of all of our
convertible preferred and redeemable convertible preferred stock
outstanding as of March 31, 2000 into 11,108,912 shares of common stock
upon completion of the offering;
- on a pro forma as adjusted basis to give effect to the sale of 5,000,000
shares of common stock in the offering at an assumed initial offering
price of $12 per share, after deducting estimated underwriting discounts,
commissions and offering expenses, and our amended and restated
certificate of incorporation to be filed upon closing of this offering.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------- -------------
<S> <C> <C> <C>
Redeemable convertible preferred stock, $0.001 par value:
Series C, 3,200,000 shares authorized and 3,044,018 issued
and outstanding actual; none issued and outstanding, pro
forma and pro forma as adjusted (See Note 7 to the
Financial Statements)..................................... 14,231,595 -- --
Series B, 5,405,405 shares authorized, issued and
outstanding actual; none issued and outstanding pro forma
and pro forma as adjusted................................. $ 9,703,903 $ -- $ --
------------ ------------ ------------
Total redeemable convertible preferred stock....... 23,935,498 -- --
------------ ------------ ------------
Stockholders' equity:
Convertible preferred stock: series A, $0.001 par value;
3,500,000 shares authorized and 2,659,489 issued and
outstanding actual; none issued and outstanding pro forma
and pro forma as adjusted................................. 2,660 -- --
Preferred stock 10,000,000 shares authorized, none issued
and outstanding pro forma as adjusted..................... -- -- --
Common stock, $0.001 par value; 22,000,000 shares
authorized, 9,718,230 shares issued and outstanding
actual; 20,827,142 shares issued and outstanding pro
forma; 120,000,000 shares authorized, 25,827,142 issued
and outstanding pro forma as adjusted..................... 9,718 20,827 25,827
Additional paid-in-capital.................................. 17,697,759 41,624,808 96,319,808
Deferred compensation....................................... (8,448,370) (8,448,370) (8,448,370)
Notes receivable............................................ (123,400) (123,400) (123,400)
Deficit accumulated during the development stage............ (10,696,729) (10,696,729) (10,696,729)
------------ ------------ ------------
Total stockholders' equity (deficit)............... (1,558,362) 22,377,136 77,077,136
------------ ------------ ------------
Total capitalization............................... $ 22,377,136 $ 22,377,136 $ 77,077,136
============ ============ ============
</TABLE>
-------------------------
The data in the table above excludes:
- 1,757,970 shares of common stock issuable upon exercise of options
outstanding as of March 31, 2000, at a weighted average exercise price of
$0.50 per share;
- 223,800 shares of common stock available for issuance at March 31, 2000,
under our 1998 Stock Plan, as amended;
- 70,000 shares of common stock issuable upon exercise of warrants
outstanding as of March 31, 2000 at an exercise price of $1.00 per share;
- 150,000 shares of series A convertible preferred stock issuable upon
exercise of warrants outstanding at March 31, 2000 at an exercise price
of $1 per share; and
- 120,000 shares of common stock issuable upon exercise of warrants issued
in conjunction with the February 2000 sale of series C redeemable
convertible preferred stock at an exercise price of $5 per share.
See Notes 3 and 7 to the Financial Statements.
15
<PAGE> 19
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. Our pro forma net tangible book value as
of March 31, 2000 was $22,377,136, or $1.07 per share of common stock. Pro forma
net tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the pro forma number of shares of
common stock outstanding at March 31, 2000 and assumes the conversion of all
outstanding shares of preferred stock into an aggregate 11,108,912 shares of
common stock automatically upon completion of this offering.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of our common stock
immediately after the completion of this offering. After giving effect to the
sale of the shares of our common stock in this offering at an assumed public
offering price of $12 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, our pro forma as adjusted net
tangible book value as of March 31, 2000 would have been $77,077,136, or $2.98
per share. This represents an immediate increase in pro forma net tangible book
value of $1.91 per share to existing stockholders and an immediate dilution of
$9.02 per share to new investors, or approximately 75% of the assumed offering
price of $12 per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................ $12.00
Pro forma net tangible book value per share at March 31,
2000................................................... $1.07
Increase per share attributable to new investors.......... 1.91
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.98
------
Dilution per share to new investors......................... $ 9.02
======
</TABLE>
If the underwriters exercise their over-allotment option in full, the pro
forma and as adjusted net tangible book value per share to existing stockholders
will be $3.22 per share, the increase in the net tangible book value per share
to existing stockholders will be $2.15 per share and the dilution in net
tangible book value to new investors will be $8.78 per share.
The following table summarizes, on a pro forma basis as of March 31, 2000
after giving effect to the automatic conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering, the total
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid to us by existing stockholders and by
new investors before deducting the underwriting discounts and commissions and
estimated offering expenses, at an assumed initial public offering price of $12
per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 20,827,142 81% $26,730,539 32% $ 1.33
New investors........................... 5,000,000 19 60,000,000 68 $12.00
---------- ----- ----------- ------
Total................................. 25,827,142 100.0% $87,693,779 100.0%
========== ===== =========== ======
</TABLE>
The foregoing discussion assumes no exercise of any stock options or
warrants to purchase common stock outstanding as of March 31, 2000. As of March
31, 2000, there were options and warrants outstanding to purchase 2,097,970
shares of common stock at a weighted average exercise price of $0.81 per share.
To the extent any of these options are exercised, there will be further dilution
to investors. In addition, there were 223,800 shares available for issuance upon
the exercise of options which may be granted under our 1998 stock plan, as
amended after March 31, 2000.
16
<PAGE> 20
SELECTED FINANCIAL DATA
The selected statement of operations data for the period from May 4, 1998
(inception) through December 31, 1998, for the year ended December 31, 1999 and
the period from May 4, 1998 (inception) through December 31, 1999 and the
selected balance sheet data as of December 31, 1998 and 1999 are derived from
our audited financial statements and notes appearing elsewhere in this
prospectus. The selected statements of operations data for the three months
ended March 31, 1999 and 2000 and for the period from May 4, 1998 (inception)
through March 31, 2000, and the selected balance sheet data as of March 31, 2000
are derived from our unaudited financial statements appearing elsewhere in this
prospectus which reflect, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for these periods and the financial condition as of
that date. Historical results are not necessarily indicative of results that may
be expected for any future period. You should read the following selected
financial data in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 20 and the financial
statements and related notes beginning on page F-1.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM THREE MONTHS ENDED
MAY 4, 1998 MAY 4, 1998 MARCH 31,
(INCEPTION) THROUGH YEAR ENDED (INCEPTION) THROUGH --------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 1999 1999 2000
------------------- ----------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Licensing fees............. $ 100,000 $ -- $ 100,000 $ -- $ --
Research and development... 200,000 2,092,119 2,292,119 -- 1,433,268
General and
administrative........... 122,168 2,567,355 2,689,523 118,257 4,619,719
--------- ----------- ----------- --------- ------------
Total operating
expenses............... 422,168 4,659,474 5,081,642 118,257 6,052,987
--------- ----------- ----------- --------- ------------
Operating loss........... (422,168) (4,659,474) (5,081,642) (118,257) (6,052,987)
Interest income.............. 33,961 160,689 194,650 27,407 245,050
Income tax expense........... 800 800 1,600 200 200
--------- ----------- ----------- --------- ------------
Net loss................. (389,007) (4,499,585) (4,888,592) (91,050) (5,808,137)
Return to series C preferred
shareholders for beneficial
conversion feature......... -- -- -- -- (14,231,595)
--------- ----------- ----------- --------- ------------
Loss available to common
shareholders............... $(389,007) $(4,499,585) $(4,888,592) $ (91,050) $(20,039,732)
========= =========== =========== ========= ============
Basic and diluted loss per
share...................... $ (0.06) $ (0.48) $ (0.01) $ (2.10)
========= =========== ========= ============
Weighted average shares used
in computing basic and
diluted loss per share..... 6,948,637 9,322,441 9,000,000 9,528,957
========= =========== ========= ============
<CAPTION>
PERIOD FROM
MAY 4, 1998
(INCEPTION) THROUGH
MARCH 31, 2000
-------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Licensing fees............. $ 100,000
Research and development... 3,725,387
General and
administrative........... 7,309,242
------------
Total operating
expenses............... 11,134,629
------------
Operating loss........... (11,134,629)
Interest income.............. 439,700
Income tax expense........... 1,800
------------
Net loss................. (10,696,729)
Return to series C preferred
shareholders for beneficial
conversion feature......... (14,231,595)
------------
Loss available to common
shareholders............... $(24,928,324)
============
Basic and diluted loss per
share......................
Weighted average shares used
in computing basic and
diluted loss per share.....
</TABLE>
See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted-average common shares used to compute basic and
diluted loss per share.
17
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,333,512 $ 9,339,669 $22,179,362
Working capital............................................. 2,264,038 9,095,831 21,795,444
Total assets................................................ 2,382,600 9,441,173 22,864,799
Series C redeemable convertible preferred stock(1).......... -- -- 14,231,595
Series B redeemable convertible preferred stock............. -- 9,703,903 9,703,903
Series A convertible preferred stock........................ 2,660 2,660 2,660
Common stock................................................ 9,000 9,445 9,718
Additional paid-in-capital.................................. 2,686,839 9,367,750 17,697,759
Deferred compensation....................................... -- (4,980,180) (8,448,370)
Deficit accumulated during the development stage............ (389,007) (4,888,592) (10,696,729)
Total stockholders' equity (deficit)........................ 2,274,492 (563,317) (1,558,362)
</TABLE>
(1) See Note 7 to the Financial Statements
18
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the financial statements and related notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements. Please see "Risk Factors" and "Cautionary Note on Forward-Looking
Statements."
OVERVIEW
Pain Therapeutics is a clinical stage specialty pharmaceutical company
engaged in the development of a new generation of opioid painkillers. We use our
technology to reformulate opioid drugs, such as morphine, into new painkillers
with improved clinical benefits. We currently have four opioid painkillers in
Phase II clinical trials. We believe our drugs offer enhanced pain relief, fewer
adverse side effects and reduced tolerance and addiction compared to existing
opioid painkillers.
We have yet to generate any revenues from product sales. We have not been
profitable and, since our inception, we have incurred a cumulative deficit of
approximately $10.7 million through March 31, 2000. These losses have resulted
principally from costs incurred in connection with research and development
activities, including costs of clinical trials associated with our four product
candidates and general and administrative expenses.
Product revenue will depend on our ability to receive regulatory approvals
for, and successfully market, our product candidates. In the event that our
development efforts result in regulatory approval and successful
commercialization of our product candidates, we will generate revenue from
direct sales of our products and/or, if we license our products to future
collaborators, from the receipt of license fees and royalties from licensed
products.
Sources of revenue for the foreseeable future may also include payments
from potential collaborative arrangements, including license fees, funded
research payments and milestone payments and royalties based on revenues
received from products commercialized under such arrangements.
We expect to incur additional operating losses for the next several years.
We also expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase substantially in the
foreseeable future as we:
- continue to undertake preclinical and clinical trials for our product
candidates;
- seek to obtain regulatory approvals for our product candidates;
- develop, manufacture and market our product candidates and products;
- implement additional internal systems and infrastructure; and
- hire additional personnel.
Deferred Non-Cash Compensation
During the three month period ended March 31, 2000 and the year ended
December 31, 1999 we granted stock options to employees and non-employee
consultants for which we recorded deferred compensation of approximately $4.7
million and $6.5 million, respectively. No options were granted in 1998.
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<PAGE> 23
For employees, deferred compensation represents the difference between the
exercise price of the option and the fair value of our common stock on the date
of grant in accordance with Accounting Principles Board Opinion No. 25 and its
related interpretations. For non-employees, deferred compensation is recorded at
the fair value of the options granted in accordance with Statement of Financial
Accounting Standards No. 123 and Emerging Issues Task Force No. 96-18.
Compensation expense is being recognized over the vesting period for
employees and the service period for non-employees in accordance with Financial
Accounting Standards Board Interpretation No. 28 as that methodology most
closely approximates the way in which our options are earned by the option
holder. For the three month period ended March 31, 2000 and the year ended
December 31, 1999, amounts amortized to the statement of operations as
compensation expense for both employees and non-employees totalled $1.2 million
and $1.5 million, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Licensing Fees
In May 1998, we entered into an exclusive, worldwide license agreement with
Albert Einstein College of Medicine for all patents and pending patent
applications relating to low-dose opioid antagonist technology. Pursuant to the
terms of the license, we paid Albert Einstein College of Medicine a one time
licensing fee and are required to pay clinical milestone payments and royalties
based on a percentage of net sales. If a product is combined with a drug or
other substance for which we are paying an additional royalty, the royalty rate
we pay to Albert Einstein College of Medicine is generally reduced by one-half
of the amount of such additional royalty. The licensing fee payments made
through March 31, 2000 have been charged to licensing fees in accordance with
Statement of Financial Accounting Standards No. 2, Accounting for Research and
Development Costs, as this technology has no alternative future use. No such
payments were made during the three month periods ended March 31, 2000 and 1999.
Research and Development
Research and development expense consists of drug development work
associated with product candidates, including costs of clinical trials and
clinical supplies, and research payments to the Albert Einstein College of
Medicine. Research and development expenses were $1.4 million for the three
months ended March 31, 2000. For the three months ended March 31, 1999 no
research and development was incurred as clinical trial activity was initiated
during the second quarter of 1999.
General and Administrative
General and administrative expense consists primarily of amortization of
deferred compensation for options granted to employees and consultants, charges
resulting from stock issuances pursuant to restricted stock purchase agreements,
salaries and related benefit costs, facilities expenses, consulting and
professional services expenses, travel and other general corporate expenses.
General and administrative expenses increased to $4.6 million for the three
months ended March 31, 2000 from $118,000 for the three months ended March 31,
1999. This increase was primarily attributable to the hiring of additional
personnel and related expenses, the amortization of deferred compensation,
charges resulting from stock issuances pursuant to restricted stock purchase
agreements and increased consulting and professional services expenses. There
will be future non-cash charges for options granted to employees and
consultants.
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<PAGE> 24
Interest Income
Interest income increased to approximately $245,000 for the three months
ended March 31, 2000 from $27,000 for the period ended March 31, 1999. This
increase resulted from higher average balances of cash and cash equivalents
following the sale of our series B and series C redeemable convertible preferred
stock.
Return to Series C Preferred Stockholders for Beneficial Conversion Feature
We determined that our series C preferred stock was issued with a
beneficial conversion feature. The beneficial conversion feature has been
recognized by allocating a portion of the preferred stock proceeds equal to the
intrinsic value of that feature, limited to the net proceeds received
(approximately $14.2 million), to additional paid-in capital. The intrinsic
value is calculated at the date of issue as the difference between the
conversion price of the preferred stock and the fair value of our common stock,
into which the preferred stock is convertible, multiplied by the number of
common shares into which the preferred stock is convertible, limited to the net
proceeds received. As our series C preferred stock is convertible into common
stock at the option of the holder, at the issuance date of the preferred stock
the entire $14.2 million discount resulting from the allocation of proceeds to
the beneficial conversion feature has been treated as a dividend and recognized
as a return to the preferred stockholders for purposes of computing basic and
diluted loss per share in the three months ended March 31, 2000.
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM MAY 4, 1998 (INCEPTION) THROUGH
DECEMBER 31, 1998
Licensing Fees
The licensing fee payments made pursuant to the terms of the license
agreement with the Albert Einstein College of Medicine have been charged to
licensing fees in accordance with Statement of Financial Accounting Standards
No. 2, Accounting for Research and Development Costs, as this technology has no
alternative future use.
Research and Development
Research and development expenses increased to $2.1 million for the year
ended December 31, 1999 from $200,000 for the period ended December 31, 1998.
This increase was attributable to the initiation of clinical trials during 1999.
General and Administrative
General and administrative expenses increased to $2.6 million for the year
ended December 31, 1999 from $122,000 for the period ended December 31, 1998.
This increase was primarily attributable to the hiring of additional personnel,
the amortization of deferred compensation, increased professional services
expenses and the longer period over which general corporate expenses were
incurred in 1999. There will be future non-cash charges for options granted to
employees and consultants.
Interest Income
Interest income increased to approximately $161,000 for the year ended
December 31, 1999 from $34,000 for the period ended December 31, 1998. This
increase resulted from higher average balances of cash and cash equivalents
following the sale of our series B redeemable convertible preferred stock.
Income Taxes
We have incurred net operating losses since inception and, consequently,
have not recorded any federal or state income taxes other than the minimum
California state franchise tax. Our deferred tax
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<PAGE> 25
assets primarily consist of net operating loss carryforwards and research and
development tax credits. We have recorded a valuation allowance for the full
amount of our deferred tax asset as the future realization of the tax benefit is
not assured.
As of December 31, 1999, we had net operating loss carryforwards of
approximately $3.3 million for federal and state income tax purposes. These
federal and state tax loss carryforwards are available to reduce future taxable
income. If not utilized, the net operating loss carryforwards expire at various
dates through 2019 for federal purposes and 2006 for state purposes. Annual
limitations may result in the expiration of net operating loss and credit carry
forwards before they are used. Under the provisions of the Internal Revenue
Code, substantial changes in our ownership may limit the amount of net operating
loss carryforwards that could be utilized annually in the future to offset
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from the net proceeds generated
from sales of our preferred stock. Through the date of this filing we have
received total net proceeds of approximately $27.5 million from the sales of:
- an aggregate 2,659,489 shares of our series A convertible preferred stock
in August and October 1998 raising total net proceeds of approximately
$2.6 million;
- an aggregate 5,405,405 shares of our series B redeemable convertible
preferred stock in October and November 1999 raising total net proceeds
of approximately $9.7 million; and
- an aggregate 3,044,018 shares of our series C redeemable convertible
preferred stock in February 2000 raising total net proceeds of
approximately $15.2 million. We have allocated approximately $14.2
million of these proceeds to a beneficial conversion feature which we
have treated as a dividend to the preferred shareholders.
All of these shares of preferred stock will convert 1-for-1 into common
stock upon completion of this offering. As of the date of this offering, there
are warrants outstanding to purchase a total of 190,000 shares of our common
stock at a weighted average exercise price of $3.53 per share and 150,000 shares
of our series A convertible preferred stock at an exercise price of $1.
As of March 31, 2000, cash and cash equivalents were $22.2 million, up from
$9.3 million at the end of 1999 and $2.3 million at the end of 1998.
For the three months ended March 31, 2000 we used approximately $1.8
million of cash for operations principally as a result of the net loss of $5.8
million offset by non-cash compensation of approximately $1.2 million, non-cash
charges resulting from stock issuances pursuant to restricted stock purchase
agreements of $2.6 million and the increase in accounts payable of $187,000. In
the year ended December 31, 1999 we used approximately $2.7 million of cash for
operations principally as a result of the net loss of $4.5 million offset by
non-cash compensation of approximately $1.5 million and the increase in accounts
payable of $162,000. We used approximately $300,000 of cash for operations in
the 1998 period.
Our investing activities used cash of approximately $83,000 in the three
months ended March 31, 2000. For the year ended December 31, 1999 our investing
activities used cash of approximately $39,000 compared to approximately $11,000
in the 1998 period. These activities consisted of purchases of property and
equipment. We expect to continue to make investments in our infrastructure,
including the purchase of property and equipment to support our operations.
Financing activities provided cash of $14.7 million in the three months
ended March 31, 2000. Our financing activities in the year ended December 31,
1999 and for the period ended December 31, 1998 generated approximately $9.7
million and $2.7 million, respectively. These amounts are primarily from the
private sales of preferred stock. The 2000 period also includes approximately
$460,000 of deferred charges related to our initial public offering. Our series
B and C redeemable convertible preferred stock have
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<PAGE> 26
redemption features that may require us to make cash payments in the absence of
certain events at set future dates in amounts equal to their purchase price plus
unpaid, declared dividends.
We currently occupy approximately 3,250 square feet of leased space, for
which the operating lease expires in September 2000. We are searching for
additional space to meet our requirements as we implement internal systems and
infrastructure and hire additional personnel. The combination of our need for
additional square footage and increased rents in the San Francisco Bay Area will
likely result in a significantly higher occupancy expense going forward.
We expect our cash requirements to increase significantly in 2000, as we
continue our research and development efforts, hire and expand our product
development personnel, grow our administrative support activities and expand our
leased facilities. Additionally, as our clinical development efforts grow we
anticipate a significant cash requirement for working capital growth, capital
expenditures and investment in infrastructure. The amount and timing of cash
requirements will depend on regulatory and market acceptance of our products, if
any, and the resources we devote to researching and developing, formulating,
manufacturing, commercializing and supporting our products. We believe that the
net proceeds from this offering together with our current cash and cash
equivalents should be sufficient to fund our operations for at least the next 12
months. However, we may require additional financing within this timeframe and
such additional funding, if needed, will may not be available on terms
acceptable to us or at all. Further, any additional equity financing may be
dilutive to current stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133, as recently amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. Management believes the adoption of
SFAS No. 133 will not have a material effect on our financial position, results
of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN No. 44, Accounting for Certain Transactions
Involving Stock Compensation. This Interpretation clarifies the application of
APB Opinion No. 25, Accounting for Stock Issued to Employees and is generally
effective July 1, 2000, with certain conclusions in this Interpretation covering
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. Management believes the adoption of FIN No.
44 will not have a material impact on our financial position, results of
operations or cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the value of the investment to fluctuate. For example, if we purchase
a security that was issued with a fixed interest rate and the prevailing
interest rate later rises, the value of our investment will probably decline. To
minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities including
commercial paper, money market funds and government and non-government debt
securities. In general, money market funds are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing
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<PAGE> 27
interest rate. As of March 31, 2000, we neither had any holdings of derivative
financial or commodity instruments, nor any foreign currency denominated
transactions, and all of our cash and cash equivalents were in money market and
checking funds.
Our series B and C redeemable convertible preferred stock is carried at its
redemption value which approximates fair value and it is not subject to interest
rate risk.
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<PAGE> 28
BUSINESS
Pain Therapeutics, Inc. is developing a new generation of opioid
painkillers with improved clinical benefits. We use our technology to
reformulate existing opioid painkillers into new drugs, which we believe offer
enhanced pain relief, fewer adverse side effects and reduced tolerance and
addiction compared to existing opioid painkillers. If approved by the FDA, we
believe our proprietary drugs could replace many existing opioid painkillers
commonly used to treat moderate to severe pain. We believe our products will
encounter fewer clinical and regulatory hurdles than new chemical entities,
because they consist of drugs that, individually, are already FDA approved.
BACKGROUND
Clinical Pain
Clinical pain is any unpleasant sensation that occurs as a result of injury
or disease. Pain can have a protective role by warning of imminent or actual
tissue damage, which can help prevent additional injury. Pain can also trigger a
biological response that helps to preserve or regenerate damaged tissue. In this
respect, pain is usually a normal, predictable response to events such as
surgery, trauma and illness.
Types of Pain and Pain Relief
Drugs are often used to reduce or eliminate pain, especially when the pain
is severe. The type of drug used to relieve pain depends on both the severity
and the duration of the pain. Pain can be classified into three categories of
severity:
- Mild Pain. Almost everyone experiences mild pain, such as headaches or
joint pain, at one time or another. People typically treat mild pain with
over-the-counter drugs such as aspirin and acetaminophen.
- Moderate Pain. Pain resulting from minor surgery or arthritis are
examples of moderate pain. Physicians typically prescribe opioid
painkillers to treat moderate pain. Opioid painkillers come in three
varieties: weak opioids, strong opioids and synthetic opioids. Weak
opioids such as hydrocodone or codeine are generally used to treat
patients with moderate pain.
- Severe Pain. Patients experiencing severe pain often suffer from a
serious underlying illness, such as AIDS or cancer. Severe pain can also
result from major surgery, nerve damage or undetermined causes. Patients
experiencing severe pain often require a strong opioid, such as morphine
or fentanyl, to achieve adequate pain relief.
Pain can also be classified in terms of its duration as either acute or
chronic. Acute pain, such as pain resulting from knee surgery, is brief and
rarely results in long-term consequences. Most acute pain subsides within hours,
days or weeks. Chronic pain persists long after an injury has healed, and
typically results from a chronic illness or appears spontaneously and persists
for undefined reasons. Examples of chronic pain include chronic lower back pain,
and pain resulting from bone cancer or advanced arthritis. The effect of chronic
pain tends to be more pervasive than that of acute pain. Chronic pain often
affects a patient's mood, personality and social relationships. As a result, a
patient with chronic pain commonly suffers from both their state of physical
pain as well as a general decline in their quality of life.
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In general, the more severe or chronic the pain, the more likely an opioid
painkiller will be prescribed to treat the pain. The following diagram
illustrates the types of pain which physicians typically treat with opioid
painkillers:
[GRAPHIC]
Pain Management Market
The medical effort to treat pain, known as pain management, addresses a
large market. Clinical pain is a worldwide problem with serious health and
economic consequences. For example, in the United States:
- medical economists estimate that the effects of pain result in
approximately $100 billion of costs annually, including costs associated
with an estimated 515 million lost work days;
- according to the National Institutes of Health, approximately 40 million
Americans are unable to find relief from their pain;
- more than 30 million Americans suffer chronic pain for which they visit a
doctor;
- approximately one million cancer patients suffer from severe pain at any
given time; and
- an estimated 10% of the more than 200,000 AIDS patients suffer severe
pain.
Drugs are the key element in the treatment of pain. The worldwide market
for pain drugs totaled over $16 billion in 1997. In the United States and
Western Europe the corresponding market for pain drugs totaled nearly $12
billion. The pain management market has grown significantly in recent years and
is expected to continue to grow significantly. The pain market has grown by
approximately 15% per year during the past five years due to a number of
factors, including:
- a rapidly aging population;
- patients' demand for effective pain relief;
- increasing recognition of the therapeutic and economic benefits of
effective pain management by physicians and healthcare providers and
payers; and
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- longer survival times for patients with painful chronic conditions, such
as cancer and AIDS.
This accelerating growth rate appears to be attributable in part to recent
innovations in the treatment of mild pain. For example, in 1999, Monsanto, which
is now part of Pharmacia, and Merck, all of which are large pharmaceutical
companies, launched non-opioid prescription pain relievers called COX-2
inhibitors. These drugs achieved first-year sales exceeding $1.0 billion in the
United States. COX-2 inhibitors have fewer side effects than aspirin, and sell
for more than twenty times the price of aspirin. The success of COX-2 inhibitors
demonstrates the potential for rapid market acceptance and premium pricing of
pain products that offer reduced side effects.
There has been little innovation in the area of opioid painkillers. Sales
of opioid painkillers in the United States are primarily of older off-patent
pain drugs, such as morphine and oxycodone. Notwithstanding the lack of novel
drugs, U.S. opioid painkiller sales were approximately $2.5 billion in 1999.
Approximately 90% of U.S. patients who receive opioids are treated on an
outpatient basis. A portion of these patients receive care at one of the 3,400
specialty pain programs. The relatively low number of pain treatment centers
allows for focused distribution channels for pain management products. This
market structure permits midsize pharmaceutical companies to market and sell
pain products cost-effectively.
OPIOID DRUGS
The history of opium use dates back more than 3,000 years. Today, the use
of opioid drugs to treat patients with moderate to severe pain is widely
accepted throughout the world. Opioids are the drugs of preference for many
caregivers because they have an extensive clinical history, are easy to use and
are available in a variety of doses and formulations. In the United States,
Europe and Japan, physicians use a variety of strong, weak and synthetic opioids
to manage patients' pain.
OPIOID DRUG SEGMENTS
<TABLE>
<CAPTION>
MARKET SEGMENT TYPICAL USE EXAMPLES REPRESENTATIVE BRAND 1999 U.S. SALES
-------------- ----------- --------------- -------------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Strong Opioids Cancer pain Morphine MS Contin and others $ 700
Weak Opioids Outpatient Hydrocodone and Vicodin and others
surgery oxycodone $1,300
Synthetic Opioids Back pain Tramadol Ultram $ 450
---------------
Total $2,450
===============
</TABLE>
Source: IMS HEALTH, Retail & Provider Perspectives 1999
Patients experiencing acute pain require fast acting, short-lived opioids
and rapid delivery. The most common acute use of opioids is post-surgical pain.
Opioid drugs used to treat acute pain include intravenous morphine, hydrocodone
and oxycodone, which provide rapid pain relief.
In contrast, patients experiencing chronic severe pain often require
long-term, regular use of opioid drugs. Because rapid dose adjustments are not
necessary, patients experiencing chronic pain typically use opioid drugs in
sustained release formulations. Such formulations include fentanyl patches and
sustained release morphine. Although curing chronic pain is possible, it is
infrequent. The aim of using opioid drugs for patients with chronic pain is to
decrease pain and suffering while improving overall physical and mental
functions.
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SHORTCOMINGS OF CURRENT PAIN MANAGEMENT
Despite widespread clinical use of opioids, pain management remains less
than optimal. At all doses, opioid painkillers have significant adverse side
effects that limit their usefulness. Adverse side effects include: respiratory
depression, nausea, vomiting, dizziness, sedation, mental clouding,
constipation, urinary retention and severe itching. In addition, chronic use of
opioid painkillers can lead to the need for increasing dosage, and potentially,
addiction. Concerns about addiction often influence clinicians to prescribe less
than adequate doses of opioids. Many patients dislike the adverse side effects
of opioid treatment and voluntarily take less than the prescribed dosage. In all
cases, however, patients and clinicians must reach an appropriate balance
between pain relief and adverse side effects. In addition, patients often use a
process of trial and error with different opioids to identify an opioid that
yields the optimal balance between pain relief and adverse side effects. Some
patients may even prefer to endure pain rather than to withstand the side
effects of opioid therapy. As a result, many patients are seriously
under-treated and may be suffering from pain unnecessarily. In particular,
infants and children receive disproportionately fewer and lower doses of opioid
painkillers than adults.
Historically, there has been little innovation in the opioid painkillers
used to treat moderate to severe pain. To date, product innovations have focused
on increasing convenience, rather than improving clinical benefits. For example,
novel dosing or delivery systems make it more convenient for patients to use
opioid drugs, but neither enhance pain relief or reduce adverse side effects.
OUR SOLUTION
We are developing a new generation of drugs that address the shortcomings
of existing opioid painkillers. We believe our drugs will:
- enhance pain relief;
- minimize adverse side effects; and
- reduce tolerance and addiction.
If approved by the FDA, we believe our drugs could replace many commonly
used opioid painkillers. We also believe our drugs could be used in chronic pain
cases where physicians have been reluctant to prescribe opioid painkillers due
to concerns about adverse side effects or addiction.
We have clinical results from four completed Phase II trials involving 750
patients, including two company-sponsored trials and two independent clinical
trials. We believe the results of these clinical trials demonstrate that our
product candidates offer superior pain relief as compared to equivalent dose
levels of an opioid painkiller alone.
Our product candidates use a novel technology developed at Albert Einstein
College of Medicine. Our technology combines very low doses of opioid inhibitors
with standard opioid painkillers. We believe that the addition of a low dose of
an opioid antagonist to opioid painkillers has an unexpected and beneficial
effect. We believe that this effect includes enhancing potency, minimizing
adverse side effects and attenuating tolerance and addiction.
Our technology has the added advantage of combining components which the
FDA has individually approved for human use. We believe that we may encounter
fewer clinical and regulatory hurdles than if we were developing new chemical
entities because the safety and therapeutic profiles of these individual
components are well-established.
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STRATEGY
Our goal is to build a leading specialty pharmaceutical company in pain
management. We intend to achieve this goal by:
Developing Products with Reduced Clinical and Regulatory Hurdles. We intend
to develop drugs that we believe may have lower clinical and regulatory risks
compared to the development of new chemical entities. Our technology combines
separate drugs, each independently approved by the FDA, whose safety and
pharmacology are well established. We believe this approach will enable us to
commercialize our drugs rapidly and cost effectively.
Focusing on Clinical Development and Late Stage Products. We continue to
focus on managing clinical trials. All four of our current product candidates
are in Phase II clinical trials. The conduct of human trials is a complex,
highly regulated and highly specialized effort. We believe that our clinical
development focus will enable us to generate product revenues earlier than if we
were discovering new chemical entities.
Retaining Significant Rights. We currently retain worldwide
commercialization rights to all of our technology and pain management product
candidates in all markets and indications. In general, we intend to
independently develop our product candidates through late-stage clinical trials.
As a result, we expect to capture a greater percentage of the profits from drug
sales than we would if we outlicensed our drugs earlier in the development
process. In market segments that require large or specialized sales forces, such
as the market for morphine products, we may seek sales and marketing alliances
with third parties. We believe that such alliances will enable us to
commercialize our drugs rapidly and cost-effectively.
Using Our Technology to Develop Multiple Drugs for Both Pain and Non-Pain
Indications. We are initially focusing our efforts on developing four opioid
painkillers. However, we believe our technology can be broadly applied to
additional segments of the pain market, as well as non-pain indications.
Outsourcing Key Functions. We intend to continue to outsource preclinical
studies, clinical trials, formulation and manufacturing. We believe outsourcing
will produce significant time savings and allow for more efficient deployment of
our resources.
PRODUCTS IN DEVELOPMENT
We have four painkillers in Phase II clinical trials. Each painkiller is a
proprietary combination of opioids. The first component is an opioid agonist,
such as morphine. The second component is an opioid antagonist, such as
naltrexone or naloxone. Normally, adding an antagonist to an agonist blocks the
action of the agonist. This effect is clinically useful, for example, to reverse
heroin overdose. At a very low-dose, however, studies indicate that this effect
is reversed: a very low-dose of an opioid antagonist can enhance pain relief,
reduce adverse side-effects and attenuate the development of tolerance and
addiction. Our technology takes advantage of this effect by combining opioid
agonists with low doses of opioid antagonists. The two individual components of
our combination drugs have the advantage of having been previously approved by
the FDA for human use at high dose. However, the use of both components in
combination, or the use of low-dose opioid antagonist alone, has not been
approved by the FDA.
Our trials are designed to produce clinical information about how our
painkillers perform compared to placebo and existing opioid painkillers. We plan
to test each of our painkillers in several clinical models of pain in order to
support a broad approval by the FDA for use of the drug for the relief of
moderate to severe acute and chronic pain. FDA guidelines recommend that we
demonstrate efficacy of our new painkillers in more than one clinical model of
pain, typically including dental pain. Other
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<PAGE> 33
acceptable clinical models of pain include post-operative pain, cancer pain and
various types of trauma and arthritis pain. Because clinical models differ in
their sensitivity to detect pain, we expect to complete Phase II studies in
multiple clinical models of pain. We have designed all of our clinical trials to
date as randomized, double-blind, placebo-controlled, dose-ranging studies. A
randomized study is one in which patients are randomly assigned to the various
study arms. A double-blind study is one in which the patient, the physician and
the company's monitor are unaware if the patient is receiving placebo or study
drug in order to preserve the integrity of the trial. A placebo-controlled study
is one in which a subset of patients is purposefully not given study drug. Our
initial clinical goals are to obtain regulatory approval of the following four
combination opioid painkillers:
<TABLE>
<CAPTION>
PRODUCT STAGE OF DEVELOPMENT FORMULATION
------- -------------------- -----------
<S> <C> <C>
PTI-555 Phase II Oral morphine/low-dose naltrexone
PTI-501 Phase II Injectable morphine/low-dose naloxone
PTI-601 Phase II Tramadol/low-dose naltrexone
PTI-701 Phase II Hydrocodone-acetaminophen/low-dose naltrexone
</TABLE>
PTI-555: oral morphine
PTI-555 is our proprietary substitute for oral morphine. We are developing
this combination drug to treat moderate to severe pain in an acute or chronic
setting. PTI-555 is a combination of oral morphine and low-dose naltrexone. If
the FDA approves PTI-555, we believe it could be an effective substitute for
oral morphine. The principal use of oral morphine is the treatment of patients
suffering from chronic moderate to severe pain, such as cancer pain.
Clinical Results
In August 1999, we initiated a 200 patient Phase II clinical trial of
PTI-555. This trial compared three different doses of PTI-555 with placebo and
with oral morphine. Each dose of PTI-555 consisted of a fixed dose of morphine
with a different low dose of naltrexone. The trial enrolled patients
experiencing moderate to severe pain following dental surgery, in which two or
more teeth were extracted. We completed patient enrollment on schedule in
November 1999.
In December 1999 we completed the analysis of this Phase II clinical study.
In this trial we demonstrated the following results:
- PTI-555 is safe in humans;
- three different doses of PTI-555 clearly provide patients with three
different levels of pain relief;
- an optimal dose of PTI-555 provides patients with meaningful pain relief
compared to placebo; this result is statistically significant at the
level of pl0.001, which means the likelihood that this result could have
occurred by chance is less than 1 in 1,000; and
- an optimal dose of PTI-555 provides patients with 50% more pain relief
than morphine alone in the first four hours of the study period; this
result is statistically significant at the level of p=0.058, which means
the likelihood that this result could have occurred by chance is less
than 1 in 17.
Based on these encouraging results, in January 2000 we initiated a new
Phase II clinical trial with PTI-555. This trial is designed to confirm the
safety, the efficacy and the optimal dose of PTI-555 in 300 patients suffering
from moderate to severe pain following dental surgery. We expect to complete
patient enrollment for this Phase II clinical trial by the third quarter of
2000.
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PTI-501: injectable morphine
PTI-501 is our proprietary substitute for injectable morphine. We are
developing this combination drug to treat moderate to severe pain in an acute or
chronic setting. PTI-501 consists of a pre-mixed combination of injectable
morphine and low-dose naloxone. If the FDA approves PTI-501, we believe it could
be an effective substitute for injectable morphine. The principal use of
injectable morphine is the treatment of patients with acute severe pain, such as
trauma pain.
Clinical Results
Our clinical data on PTI-501 includes a company-sponsored Phase II clinical
trial, as well as an independent clinical trial. The company-sponsored Phase II
clinical trial enrolled 120 patients suffering from moderate to severe
post-surgical pain. We completed patient enrollment for this clinical trial in
December 1999, and we expect to receive final clinical results by the third
quarter of 2000.
In 1997, independent researchers at Duke University Medical Center
conducted a physician-sponsored, randomized, double-blind, placebo-controlled,
dose-ranging clinical trial of 60 patients suffering from post-surgical pain.
Published results of this trial indicated an approximate 50% reduction in
certain morphine-related adverse side effects in patients who received an
optimal dose of study drug compared to patients who received morphine without
low-dose naloxone. This result is statistically significant at the level of
p<0.05, which means the likelihood that this result could have occurred by
chance is less than 1 in 20.
PTI-601: tramadol
PTI-601 is our proprietary substitute for tramadol. In 1999, U.S. sales of
tramadol exceeded $450 million. We are developing this combination drug to treat
patients with moderate pain in an acute or chronic setting. PTI-601 is a
combination of tramadol and low-dose naltrexone. If the FDA approves PTI-601, we
believe it could be an effective substitute for tramadol. Tramadol is
principally used to treat patients with acute or chronic moderate pain, such as
arthritis pain. Ortho-McNeil Pharmaceutical currently markets proprietary
tramadol hydrochloride tablets under the brand name Ultram. The relevant patents
for Ultram expire in 2001.
Clinical Results
In August 1999, we initiated a 250 patient Phase II trial of PTI-601. This
trial compared three different doses of PTI-601 with placebo and with tramadol.
Each dose of PTI-601 consisted of a fixed dose of tramadol combined with a
different low dose of naltrexone. The trial enrolled patients suffering from
moderate to severe pain following dental surgery, in which three or more teeth
were extracted. We completed patient enrollment on schedule in December 1999.
In January 2000 we completed the analysis of this Phase II clinical study.
In this trial we demonstrated the following results:
- PTI-601 is safe in humans;
- different doses of PTI-601 clearly provide patients with different levels
of pain relief; and
- an optimal dose of PTI-601 provides patients with meaningful pain relief
compared to placebo; this result is statistically significant at the
level of p<0.008, which means the likelihood that this result could have
occurred by chance is less than 1 in 125. By contrast patients who
received tramadol alone did not achieve statistically meaningful pain
relief compared to placebo.
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PTI-701: hydrocodone
PTI-701 is our proprietary substitute for hydrocodone, oxycodone and
similar weak opioids. In 1999, U.S. sales of such drugs exceeded $1.3 billion.
We are developing PTI-701 to treat moderate to severe pain in an acute or
chronic setting. PTI-701 is a combination of hydrocodone, acetaminophen and low-
dose naltrexone. If the FDA approves PTI-701, we believe it could be an
effective substitute for hydrocodone/acetaminophen. In the United States, all
hydrocodone is sold in combination with acetaminophen. The principal use of
hydrocodone is the treatment of patients with chronic moderate to severe pain,
such as cancer pain. Hydrocodone combination products are currently sold under
various trade names, including Knoll Laboratories' Vicodin, Forest
Pharmaceuticals' Lorcet and Watson Laboratories' Norco.
In January 2000, we initiated a Phase II clinical trial with PTI-701. This
trial is designed to demonstrate the safety, the efficacy and the optimal dose
of PTI-701 in 300 patients suffering from moderate to severe pain following
dental surgery. We expect to complete patient enrollment for this trial by the
third quarter of 2000.
Other Product Candidates
We believe the use of low-dose opioid antagonists, either alone or in
combination with existing opioid drugs, may have commercial applications beyond
our four current product candidates. We believe that our technology can be
broadly applied to additional segments of the pain market, as well as non-pain
indications. Examples include certain drugs used in anesthesiology and those
used to treat opioid and alcohol addiction. Until we undertake preclinical
studies and clinical trials, we cannot be certain that our technology will have
such additional applications.
We anticipate initiating several Phase I/II pilot studies in an effort to
assess the clinical utility of our proprietary low-dose antagonist technology
within and outside the field of pain management. In particular, we may explore
the use of our technology in patients undergoing methadone maintenance treatment
and in patients suffering from irritable bowel syndrome.
MANUFACTURING
We have no manufacturing facilities. We have entered into an agreement with
a qualified third party for the formulation and manufacture of our clinical
supplies. These supplies and the manufacturing facilities must comply with DEA
regulations and current good manufacturing practices, or GMPs, reviewed by the
FDA. We plan to continue to outsource formulation and manufacturing.
TECHNOLOGY OVERVIEW
According to the current understanding of pain mediation, opioid
painkillers produce their pain relieving effect by activating an inhibitory
pathway in the nervous system. Inhibitory pathways inhibit the transmission of
pain signals into the brain. Scientists at Albert Einstein College of Medicine
have published results suggesting that opioids also stimulate an excitatory
pathway in the nervous system. The excitatory pathway partially counteracts pain
inhibition and is believed to be a major cause of adverse side effects
associated with opioid use, including the development of tolerance and
addiction. In vitro studies on isolated nerve cells have helped researchers
detect and analyze the unique properties of the inhibitory and excitatory
pathways. At the normal clinical doses, the activation of the excitatory pathway
was previously undetected probably due to masking by the inhibitory pathway.
Published results suggest that the selective blockade of the excitatory
pathway promotes the pain relieving potency of morphine in mice by blocking the
excitatory pain-enhancing effect. In addition,
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preclinical studies have demonstrated that co-treatment with a very low dose of
an opioid antagonist, such as naloxone or naltrexone, preferentially blocks the
excitatory pathway over the inhibitory pathway, thereby enhancing morphine's
ability to inhibit pain.
We believe that the excitatory pathway plays an important role in
modulating the adverse side effects of opioid use. After repeated administration
of morphine or other opioid painkillers, increasing doses of opioids are
required in order to obtain the same level of pain relief, a process known as
tolerance. If chronic opioid treatment is terminated abruptly, withdrawal
symptoms rapidly appear. Continued administration of opioids prevents the
appearance of withdrawal symptoms, at which point a patient is considered
dependent, and, potentially addicted. Published results also show that tolerance
and dependence in mice are due to sustained activation of the excitatory
pathway, and that tolerance and dependence can be prevented by co-administration
of low-dose naltrexone, a pure opioid antagonist. At very low concentrations, we
believe such opioid antagonists preferentially block excitatory pathways. These
results provided the rationale for our human clinical trials.
The low-dose effect is the most important component of our technology
wherein a very low dose of an opioid antagonist is combined with an opioid
painkiller. Optimal dose ratios of low-dose opioid antagonist to opioid
painkiller depend on their specific pharmacology and the mode of administration.
Published preclinical and clinical dose response studies provide guidance in
formulating optimal ratios of low-dose opioid antagonist to opioid painkiller
for clinical development.
Upon our formation in May 1998, we licensed our technology from Albert
Einstein College of Medicine. We have worldwide exclusive rights to the
technology. Our rights terminate upon the expiration of the patents used to
protect the technology between 2013 and 2015. Pursuant to the terms of the
license, we paid Albert Einstein College of Medicine a one time licensing fee
and are required to pay clinical milestone payments and royalties based on a
percentage of net drug sales. If a product is combined with a drug or other
substance for which we are paying an additional royalty, the royalty that we pay
to Albert Einstein College of Medicine will be reduced by one-half of the amount
of such additional royalty.
Albert Einstein College of Medicine originally received grants from the
U.S. federal government to research some of the technology that we license. The
terms of these grants provide the U.S. federal government with a non-exclusive,
non-transferable paid-up license to practice inventions made with federal funds.
Thus, our licenses are non-exclusive to the extent of the U.S. government's
license. If the U.S. government exercises its rights under this license, it
could make use of the same technology that we license and the size of our
potential market could thereby be reduced.
We seek to protect our technology by, among other methods, filing and
prosecuting U.S. and foreign patents and patent applications with respect to our
technology and products and their uses. The issued patents expire between 2013
and 2015. We plan to prosecute and defend our patent applications, issued
patents and proprietary information. We have an exclusive, worldwide license for
five issued U.S. patents, one U.S. Notice of Allowance and two pending U.S.
patent applications relating to the low-dose opioid antagonist technology under
our license agreement with Albert Einstein College of Medicine, and ten
corresponding pending foreign patent applications or issued patents.
The focus of our patent strategy is to secure and maintain intellectual
property rights to technology for the following categories of our business:
- the clinical use of a low-dose opioid antagonist, either alone or in
combination with an opioid painkiller, for pain management and opioid and
other addiction;
- the use of a low-dose opioid antagonist to render opioid-based anesthesia
products, such as fentanyl or fentanyl analogs, more effective; and
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- the clinical use of a low-dose opioid antagonist, either alone or in
combination with any opioid painkiller, for the treatment of other
conditions.
GOVERNMENT REGULATION
Our product candidates will be subject to rigorous FDA regulation. The
process of completing clinical trials and obtaining FDA approvals for any of our
product candidates is likely to take a number of years and require the
expenditure of substantial resources. We cannot be certain that any of our
product candidates will receive FDA approval on a timely basis, if at all.
Regulation of Combination Products
Applicable FDA regulations treat our combination of opioid painkillers,
such as morphine, and low-dose opioid antagonists, such as naloxone, as new
drugs and require the filing of a NDA and approval by the FDA prior to
commercialization in the U.S. Our clinical trials seek to demonstrate that an
opioid painkiller/low-dose opioid antagonist combination produces greater
beneficial effects than either drug alone. Because each drug has been separately
approved for human use by the FDA, we believe that we may encounter fewer
regulatory hurdles than if we were developing new chemical entities.
The Drug Approval Process
We will be required to take several steps before we can market any of our
drugs for human use in the United States, including:
- preclinical studies;
- submission to the FDA of an IND which must become effective before human
clinical trials commence;
- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product candidate;
- submission to the FDA of a NDA; and
- FDA approval of the NDA prior to any commercial sale or shipment of the
drug.
Preclinical studies consist of conducting animal studies to assess the
potential safety and efficacy of the product candidate. We must submit the
results of the preclinical studies to the FDA as a part of an IND for review by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to, or otherwise responds to, an IND, the IND becomes effective 30 days
following its receipt by the FDA.
We will continue to conduct human clinical trials in several phases that
may overlap:
- Phase I: We initially introduce the product candidate into healthy human
subjects or patients and test for safety, dosage tolerance, absorption,
metabolism, distribution and excretion. In addition, we may, to the
extent feasible, assess pain relief in our Phase I trials.
- Phase II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of
the product candidate and to determine optimal dosage.
- Phase III: Once Phase II evaluations demonstrate that a dosage range of
the product candidate is effective and has an acceptable safety profile,
we can undertake Phase III trials to evaluate
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dosage and clinical efficacy further, and to test for safety in an
expanded patient population at geographically dispersed clinical study
sites.
The FDA publishes industry guidelines specifically for the clinical
evaluation of painkillers. We rely in part on these guidelines to design a
clinical strategy for the approval of each of our product candidates. In
particular, FDA guidelines recommend that we demonstrate efficacy of our new
painkillers in more than one clinical model of pain, typically including dental
pain. Other acceptable clinical models of pain include post-operative pain,
cancer pain and various types of trauma and arthritis pain. Since models differ
in their pain intensity and their sensitivity to detect pain, we expect to
complete several Phase II studies in multiple clinical models of pain. Upon a
clear demonstration of the safety and efficacy of painkillers in multiple
clinical models of pain, the FDA has historically approved pain killers with
broad indications. Such general purpose labeling often takes the form of "for
the management of moderate to severe pain."
Phase II efficacy studies have sometimes served as pivotal studies for
painkiller product candidates. Phase III studies for these products normally
focus greater attention on safety in larger patient populations rather than on
efficacy. We cannot be certain that we will successfully complete Phase I, Phase
II or Phase III testing within any specified time period, or at all, with
respect to any of our product candidates. Furthermore, the FDA may suspend
clinical trials at any time in response to concerns that we are exposing
participants to an unacceptable health risk.
We must submit the results of pharmaceutical development, preclinical
studies, and clinical trials to the FDA in the form of a NDA for approval of the
marketing and commercial shipment of the subject drug. The FDA may require
additional testing or information before approving the NDA. The FDA may deny a
NDA approval if we fail to satisfy safety, efficacy, or other regulatory
requirements. Even if the FDA approves the drug, it may require post-marketing
testing and surveillance to monitor the safety of the drug or may impose
limitations on the indicated uses for which we may market the drug. In addition,
the FDA may withdraw its approval if we fail to maintain compliance with
regulatory standards or if problems occur following our initial marketing of the
drug.
Other Regulatory Requirements
The FDA mandates that drugs be manufactured in conformity with good
manufacturing practices regulations. If the FDA approves any of our product
candidates we will be subject to requirements for labeling, advertising, record
keeping and adverse experience reporting. Failure to comply with these
requirements could result, among other things, in suspension of regulatory
approval, recalls, injunctions or civil or criminal sanctions. We may also be
subject to regulations under other federal, state, and local laws, including the
Occupational Safety and Health Act, the Environmental Protection Act, the Clean
Air Act, national restrictions on technology transfer, and import, export, and
customs regulations. In addition, any of our products that contain narcotics
will be subject to DEA regulations relating to manufacturing, storage,
distribution and physician prescribing procedures. It is possible that any
portion of the regulatory framework under which we operate may change and that
such change could have a material adverse effect on our current and anticipated
operations.
Whether or not the FDA grants approval, we must obtain similar approvals by
comparable governmental regulatory authorities in foreign countries prior to the
commencement of clinical trials and subsequent sales and marketing efforts in
those countries. The approval procedure varies in complexity from country to
country, and the time required may be longer or shorter than that required for
FDA approval.
The Controlled Substances Act imposes various registration, record-keeping
and reporting requirements, procurement and manufacturing quotas, labeling and
packaging requirements, security controls
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and a restriction on prescription refills on certain pharmaceutical products. A
principal factor in determining the particular requirements, if any, applicable
to a product is its actual or potential abuse profile. The DEA regulates
chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I
substances considered to present the highest risk of substance abuse and
Schedule V substances the lowest risk. Any of our product candidates that
contains a scheduled substance will be subject to regulation as a drug of that
class.
COMPETITION
Our success will depend, in part, upon our ability to achieve market share
at the expense of existing and established and future products in the relevant
target markets. Existing and future products, therapies, technological
approaches or delivery systems will compete directly with our products.
Competing products may provide greater therapeutic benefits for a specific
indication, or may offer comparable performance at a lower cost. Companies that
currently sell generic or proprietary opioid formulations include Roxane
Laboratories, Purdue Pharma, Janssen Pharmaceutica, Knoll Laboratories, Abbott
Laboratories, Anesta, Endo Pharmaceuticals, Elkins-Sinn, Watson Laboratories,
Alza Pharmaceuticals, Ortho-McNeil Pharmaceutical, Forest Pharmaceuticals and
Astra Pharmaceutical. Alternative technologies are being developed to increase
opioid potency, as well as alternatives to opioid therapy for pain management,
several of which are in clinical trials or are awaiting approval from the FDA.
Such alternatives include Elan's SNX-111 and Endo Pharmaceuticals' Morphidex.
We compete with fully integrated pharmaceutical companies, smaller
companies that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have opioid painkiller products already
approved by the FDA or in development and operate larger research and
development programs in these fields than we do. In addition, many of these
competitors, either alone or together with their collaborative partners, have
substantially greater financial resources than we do, as well as significantly
greater experience in:
- developing drugs;
- undertaking preclinical testing and human clinical trials;
- obtaining FDA and other regulatory approvals of drugs;
- formulating and manufacturing drugs; and
- launching, marketing, distributing and selling drugs.
Developments by competitors may render our product candidates or
technologies obsolete or non-competitive.
EMPLOYEES
As of March 31, 2000, we had approximately 18 employees and seven executive
consultants, including five M.D./Ph.D.s, one M.D./D.D.S. and one Ph.D. We engage
additional consultants from time to time to perform services on a per diem or
hourly basis.
FACILITIES
Our executive office is located at 250 East Grand Avenue, Suite 70, South
San Francisco, California 94080. Our leased property consists of approximately
3,250 square feet of office space. We believe that our facilities are sufficient
to meet anticipated staffing up to the expiration of our lease in September
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2000. We are searching for additional space to meet our future requirements as
we implement internal systems and infrastructure and hire additional personnel.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information about our executive officers, key
employees and directors. Upon completion of this offering our board of directors
will be divided into three classes serving staggered three-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Remi Barbier......................... 40 President, Chief Executive Officer and Chairman
of the Board
Barry M. Sherman, M.D. .............. 59 Executive Vice President and Chief Medical
Officer
Edmon R. Jennings.................... 54 Chief Commercialization Officer
David L. Johnson..................... 46 Chief Financial Officer
Gert Caspritz, Ph.D.(1).............. 50 Director
Nadav Friedmann, M.D., Ph.D.(2)...... 57 Director
Wilfred R. Konneker, Ph.D.(1)........ 78 Director
Michael J. O'Donnell, Esq............ 42 Director and Secretary
Sanford R. Robertson(1)(2)........... 68 Director
</TABLE>
-------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Remi Barbier, our founder, has served as our President, Chief Executive
Officer and Chairman since our inception in May 1998. Prior to that time, Mr.
Barbier helped in the growth or founding of: Exelixis Inc., a functional
genomics company, ArQule, a chemistry company, and EnzyMed (now owned by Albany
Molecular Research), a chemistry company. Mr. Barbier served as Chief Operating
Officer of Exelixis from January 1996 to May 1998. Prior to that, he was Vice
President of Corporate Development and Clinical Project Manager of Xoma
Corporation, a biotechnology company, from October 1993 to December 1995. Mr.
Barbier received his B.A. from Oberlin College and his M.B.A. from the
University of Chicago. He is a Director of Mendel Biotechnology, Inc.
Barry M. Sherman, M.D. has served as our Executive Vice President and Chief
Medical Officer since April 1999. From April 1996 to February 1999, Dr. Sherman
was President and Chief Executive Officer of Anergen Inc., an immunology
biotechnology company. From 1985 until 1996, Dr. Sherman held various positions
at Genentech Inc., a biotechnology company, most recently serving as Senior Vice
President and Chief Medical Officer with responsibility for Genentech's overall
clinical development activities. Since 1986, Dr. Sherman has also been a
Clinical Professor of Internal Medicine at Stanford University. From 1971 to
1985, Dr. Sherman was a Professor of Internal Medicine and Director of the
Clinical Research Center at the University of Iowa College of Medicine. Dr.
Sherman received his M.D., with honors, from the University of Michigan.
Edmon R. Jennings joined Pain Therapeutics, Inc. in February 2000. Prior to
that time, Mr. Jennings held senior management positions at Genentech, including
Vice President of Corporate Development from December 1995 to January 2000, Vice
President of Sales and Marketing from January 1994 to December 1995 and Vice
President of Sales from December 1990 to December 1993. Prior to Genentech, Mr.
Jennings held positions with Bristol-Myers Oncology and Bristol Laboratories,
both of which were divisions of Bristol-Myers (now Bristol-Myers Squibb), a
pharmaceutical company, for approximately twelve years. Mr. Jennings received
his B.A. from the University of Michigan.
David L. Johnson, CPA joined Pain Therapeutics, Inc. in January 2000. From
November 1998 to December 1999, Mr. Johnson was an independent financial
consultant, and acted as Chief Financial Officer at Aradigm, a drug delivery
technology company. From October 1997 to November 1998, Mr. Johnson held
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positions as Vice President of Finance and Administration of Elan
Pharmaceuticals North America and Vice President of Finance and Chief Financial
Officer of Athena Neurosciences, both of which were divisions of Elan
Pharmaceuticals, a pharmaceutical company. From September 1996 to October 1997,
Mr. Johnson was Director of Finance at Gilead Sciences, a biopharmaceutical
company. From January 1995 to September 1996, Mr. Johnson was an independent
financial consultant and provided accounting services to Chiron, a biotechnology
company. From June 1993 to December 1994, Mr. Johnson was Director of Financial
Planning and Operational Analysis at Chiron. Mr. Johnson is a former member of
the audit staff of KPMG LLP, our auditors. Mr. Johnson received his B.S. in
Accounting from Oklahoma State University.
Gert Caspritz, Ph.D. has served as a director since November 1999. Dr.
Caspritz has been the Investment Manager of TVM-Techno Venture Management, an
international venture capital firm based in Germany, since June 1999. Prior to
joining TVM he was employed by Hoechst Marion Roussel, a pharmaceutical company,
for over 15 years, most recently as Vice President of New Technologies
Licensing. During his tenure at Hoechst Marion Roussel he was a member of
various strategy task forces, including the group that negotiated many of
Hoechst Marion Roussel's biotechnology collaborations. Dr. Caspritz serves on
the board of Coley Pharmaceutical Group, PhytoMedica and Epicept. Dr. Caspritz
received his undergraduate degree and his Ph.D. in Biology from the University
of Mainz, Germany.
Nadav Friedmann, M.D., Ph.D. has served as a director since September 1998.
Dr. Friedmann was President and Chief Executive Officer of Daiichi
Pharmaceutical Corporation, a pharmaceutical company, from 1997 to April 2000
and before that was a Consultant to the Board of Daiichi Pharmaceutical Co.,
Ltd. in Tokyo from 1995 to 1997. From 1992 to 1995, Dr. Friedmann served as Vice
President, Clinical Research at Xoma Corporation. From 1980 to 1991, Dr.
Friedmann held various leadership positions, with Johnson & Johnson, a
healthcare company, including Vice President and Head of Research of J&J
Biotechnology Center. Prior to that, Dr. Friedmann was Medical Director of
Abbott Laboratories. Dr. Friedmann is a graduate of Albert Einstein College of
Medicine, where he received an M.D., and of the University of California, San
Diego, where he received a Ph.D. degree in Biochemistry.
Wilfred Konneker, Ph.D. has served as a director since November 1999. Dr.
Konneker has been a private investor since retiring as Vice President of the
radio pharmaceuticals division of Mallinckrodt, Inc., a healthcare company, in
1973. He served as a director of Mallinckrodt from 1966 to 1975. Dr. Konneker
founded Nuclear Consultants, Inc., the first supplier of radio-isotopes to the
pharmaceutical industry, in 1950, and served as its President and Chief
Executive Officer until its merger with Mallinckrodt, Inc. in 1966. Dr. Konneker
sits on the Board of Trustees for Washington University and the Board of
Directors for Ohio University Foundation, the St. Louis Symphony, the Opera
Theatre of St. Louis and the Chautauqua Foundation. Dr. Konneker received his
Ph.D. in Nuclear Physics from Washington University and an undergraduate degree
from Ohio University.
Michael J. O'Donnell, Esq. has served as a director since June 1998. Mr.
O'Donnell has been a member of the law firm of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, our corporate counsel, since 1993. Mr. O'Donnell
serves as corporate counsel to numerous public and private biopharmaceutical and
life science companies. Mr. O'Donnell received a J.D. degree, cum laude, from
Harvard University and a B.A. degree from Bucknell University, summa cum laude.
Sanford R. Robertson has served as a director since September 1998. Mr.
Robertson has been a general partner of Francisco Partners, a technology
investment fund since January 2000. From October 1998 to December 1999 he was
President of Robertson and Co. Mr. Robertson is the founder and former chairman
of Robertson, Stephens & Company, an investment banking firm founded in October
1978, with which Mr. Robertson was associated through September 1998. Mr.
Robertson is also the founder of Robertson, Colman, Siebel & Weisel, later
renamed Montgomery Securities. He is also a former director of AIM Management
Group Inc. (now AMVESCAP) and BankAmerica Corporation. Mr. Robertson
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received his B.B.A. and M.B.A. degrees with distinction from the University of
Michigan. He is also a director of Big Vine.com, Inc.
BOARD OF DIRECTORS
Our board of directors currently consists of six members. Each director
holds office until his or her term expires or until his or her successor is duly
elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws will provide for a classified
board of directors. In accordance with the terms of our certificate, our board
of directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following directors:
- Class I consists of directors O'Donnell and Konneker, who will serve
until the annual meeting of stockholders to be held in 2001;
- Class II consists of directors Caspritz and Friedmann, who will serve
until the annual meeting of stockholders to be held in 2002; and
- Class III consists of directors Barbier and Robertson, who will serve
until the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
Committees
Our board of directors has an executive committee, an audit committee and a
compensation committee. The executive committee consists of directors Remi
Barbier, Sanford Robertson and Nadav Friedmann. The audit committee consists of
directors Gert Caspritz, Wilfred Konneker and Sanford Robertson. The audit
committee reviews our internal accounting procedures, consults with and reviews
the services provided by our independent accountants and makes recommendations
to the board of directors regarding the selection of independent accountants.
The compensation committee consists of directors Sanford Robertson and Nadav
Friedmann. The compensation committee reviews and recommends to the board of
directors the salaries, incentive compensation and benefits of our executive
officers and administers our stock plans and employee benefit plans.
Compensation Committee Interlocks and Insider Participation
Our board of directors established the compensation committee in September
1999. Prior to establishing the compensation committee, our board of directors
as a whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee. Since the formation of the compensation committee, none of its
members has been an officer or employee.
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Director Compensation
In March 2000, our board of directors approved guidelines for the grant of
stock options under our 1998 Stock Plan, as amended, to directors who are not
our officers or employees. These guidelines provide that such directors will
receive 20,000 shares vesting annually over four years which are to be granted
on the date of each annual stockholder meeting following the closing of this
offering at the fair market value of our common stock on the date of grant.
SCIENTIFIC AND MEDICAL ADVISORS
We have established a scientific and medical advisory board to provide
specific expertise in areas of research and development relevant to our
business. Our scientific and medical advisory board meets periodically with our
scientific and development personnel and management to discuss current and long-
term research and development activities and initiatives. Our scientific and
medical advisory board is comprised of:
<TABLE>
<S> <C>
Leslie Z. Benet, Ph.D. ................... Professor of Biopharmaceutical Sciences,
University of California, San Francisco
Stanley Crain, Ph.D. ..................... Professor of Neurosciences, Emeritus, Albert
Einstein College of Medicine
Nadav Friedmann, M.D., Ph.D. ............. Independent Consultant, former President &
Chief Executive Officer, Daiichi
Pharmaceuticals Corp.
Scott R. Hamann, M.D., Ph.D. ............. Department of Anesthesiology, University of
Kentucky College of Medicine
Don R. Mehlisch, M.D., D.D.S. ............ Independent Consultant, Co-founder, Scirex
Corporation
Fredrick L. Minn, M.D., Ph.D. ............ Independent Consultant, formerly at Johnson &
Johnson/Ortho-McNeil Pharmaceutical
Robert B. Raffa, Ph.D. ................... Associate Professor of Pharmacology, Temple
University
Patrick Scannon, M.D., Ph.D. ............. Chief Medical and Scientific Officer, Xoma
Corporation
Ke-Fei Shen, M.D., Ph.D. ................. Principal Associate, Albert Einstein College
of Medicine
Barry M. Sherman, M.D. ................... Executive Vice President & Chief Medical
Officer, Pain Therapeutics, Inc.
Eric J. Simon, Ph.D. ..................... Professor of Psychiatry and Pharmacology, New
York University School of Medicine
Frank Porreca, Ph.D. ..................... Professor of Pharmacology and Anesthesiology,
University of Arizona College of Medicine
</TABLE>
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed.
41
<PAGE> 45
Compensation
The following table sets forth all compensation accrued during the year
ended December 31, 1999 to our President and Chief Executive Officer, and our
only other executive officer who was employed during the period. In accordance
with the rules of the SEC, the compensation described in this table does not
include perquisites and other personal benefits received by the executive
officers named in the table below which do not exceed the lesser of $50,000 or
10% of the total salary and bonus reported for these officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION ($) SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS OTHER OPTIONS (#) COMPENSATION
---------------------------- -------- ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Remi Barbier............................ $176,042 -- -- -- --
President, Chief Executive
Officer and Chairman
Barry M. Sherman, M.D. ................. $132,275 -- -- 600,000 --
Executive Vice President
and Chief Medical Officer
</TABLE>
Option Grants in 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during 1999.
All options granted to these executive officers in 1999 were granted under the
1998 Stock Plan, as amended. Except as otherwise noted, one forty-eighth of the
shares subject to each option vests and becomes exercisable on the first month
after the vesting commencement date, and an additional one-forty-eighth of the
shares subject to each option vests each month thereafter. The percent of the
total options set forth below is based on an aggregate of 965,000 options
granted to employees during 1999. All options were granted at fair market value
as determined by our Board of Directors on the date of grant.
Potential realizable value represents hypothetical gains that could be
achieved for the options if exercised at the end of the option term assuming
that the initial public offering price of our common stock appreciates at 5% and
10% over the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with rules of the Securities and
Exchange Commission and do not represent our estimate or projection of our
future common stock price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM($)
UNDERLYING EMPLOYEES EXERCISE ------------------------
OPTIONS DURING PRICE EXPIRATION
NAME GRANTED PERIOD(%) PER SHARE($) DATE 5% 10%
---- ---------- ---------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Remi Barbier................ -- -- -- -- -- --
Barry M. Sherman, M.D....... 250,000 25.9 0.10 5/7/09 4,861,683 7,756,227
250,000 25.9 0.10 9/10/09 4,861,683 7,756,227
100,000 10.4 0.20 12/10/09 1,934,673 3,092,490
</TABLE>
42
<PAGE> 46
Aggregate Option Exercises in 1999 and Values at December 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at December 31, 1999. The value of unexercised in-the-money
options is based on an assumed initial offering price of $12 per share minus the
actual exercise prices. All options were granted under our 1998 Stock Plan, as
amended. Except as otherwise noted, these options vest over four years and
otherwise generally conform to the terms of our 1998 Stock Plan, as amended.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31,
SHARES AT DECEMBER 31, 1999(#) 1999($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Remi Barbier........................ -- -- -- -- -- --
Barry M. Sherman, M.D. ............. -- -- 52,083 547,917 619,787 6,510,212
</TABLE>
-------------------------
(1) Value is determined by subtracting the exercise price of an option from an
assumed $12 per share fair market value of our common stock.
EMPLOYMENT AGREEMENTS
In July 1998, we entered into an employment agreement with Mr. Barbier.
Under the terms of the agreement as amended by our board, Mr. Barbier receives
an annual salary of $275,000, and is eligible to receive an annual bonus in an
amount to be determined by the board of directors. The term of the agreement is
three years, and it automatically renews for consecutive one-year terms unless
we or Mr. Barbier terminate the agreement earlier on sixty days' notice. The
agreement entitles Mr. Barbier to serve on the board of directors for as long as
he is our President and Chief Executive Officer. Thereafter, he will remain a
member of our board of directors only if we terminate his employment without
cause. The agreement also provides that if we terminate Mr. Barbier without
cause, we must pay him his salary for twelve months following the date of his
termination and relinquish our right to repurchase any of his shares of our
common stock.
In March 1999, we executed an employment offer letter for Dr. Sherman.
Under the terms of the offer as amended by our Board, Dr. Sherman receives an
annual salary of $250,000. The offer letter provides that Dr. Sherman's
employment may be terminated at any time by either Dr. Sherman or us upon thirty
days' notice.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation to be filed upon
completion of this offering limits the liability of our directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
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<PAGE> 47
The limitation of our directors' liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether our bylaws would permit indemnification.
We have entered into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify such officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
STOCK PLANS
1998 Stock Plan
Our 1998 Stock Plan, as amended, was approved by our board of directors in
September 1998, and subsequently amended in May and September 1999 and February
2000. As of March 31, 2000, 223,800 shares were available for issuance under the
1998 Stock Plan.
The purpose of the 1998 Stock Plan is to provide us with an opportunity to
retain and attract employees, directors and consultants who are essential to our
future growth and success by providing such individuals with an opportunity to
acquire shares of our common stock. Our 1998 Stock Plan provides for the grant
of nonstatutory stock options to our (and our parent and subsidiary
corporations) employees, directors and consultants, and for the grant of
incentive stock options, within the meaning of Section 422 of the Internal
Revenue Code, to our employees and employees of our parent and subsidiary
corporations.
A total of 3,200,000 shares of our common stock are authorized for issuance
under the 1998 Stock Plan. On the effective date of our initial public offering
a total of 1,500,000 shares will be added to reserve of shares available for
issuance under the 1998 Stock Plan. In addition, on the first day of each fiscal
year during the term of the 1998 Stock Plan, beginning with our fiscal year
2001, the number of shares available for issuance under our 1998 Stock Plan will
increase by an amount of shares equal to the lesser of 5% of the outstanding
shares of our common stock on the last day of our immediately preceding fiscal
year, 2,000,000 shares or a lesser amount as our board may determine.
Our board of directors or a committee of our board administers the 1998
Stock Plan. In the case of options intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the Internal Revenue Code,
the committee will consist of two or more outside directors within the meaning
of Section 162(m) of the Internal Revenue Code. The administrator has the power
to determine the terms of the options granted, including the exercise price, the
number of shares subject to each option, the exercisability of the options and
the form of consideration payable upon exercise.
The administrator determines the exercise price of options granted under
the 1998 Stock Plan, but with respect to nonstatutory stock options intended to
qualify as performance-based compensation within
44
<PAGE> 48
the meaning of Section 162(m) of the Internal Revenue Code and all incentive
stock options, the exercise price must at least be equal to the fair market
value of our common stock on the date of grant. The term of an incentive stock
option may not exceed 10 years, except that with respect to any participant who
owns 10% of the voting power of all classes of our outstanding capital stock,
the term must not exceed five years and the exercise price must equal at least
110% of the fair market value on the grant date. The administrator determines
the term of all other options.
No optionee may be granted an option to purchase more than 1,000,000 shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted options to purchase up to an additional 1,000,000 shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
Our 1998 Stock Plan provides for the periodic automatic grant of options to
our nonemployee directors. Each option granted under this automatic grant
provision will have an exercise price per share equal to 100% of the fair market
value per share of our common stock on the date of grant, and will have a term
of 10 years, unless terminated earlier upon the optionee's termination of
service as a director.
Our 1998 Stock Plan generally does not allow for the transfer of options
and only the optionee may exercise an option during his or her lifetime. The
administrator may, however, allow options to be transferable.
Our 1998 Stock Plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option. If the outstanding options
are not assumed or substituted, the administrator will provide notice to the
optionee that he or she has the right to exercise the options as to all of the
shares subject to the option, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option
will terminate upon the expiration of the 15-day period.
Our 1998 Stock Plan will automatically terminate in 2008, unless we
terminate it sooner. In addition, our board of directors has the authority to
amend, suspend or terminate the 1998 Stock Plan provided it does not adversely
affect any option previously granted under our 1998 Stock Plan.
2000 Employee Stock Purchase Plan.
Our board of directors adopted the 2000 Employee Stock Purchase Plan in
April 2000 and our stockholders subsequently approved it. Our 2000 Employee
Stock Purchase Plan provides eligible employees the opportunity to purchase
shares of our common stock at a discount through payroll deductions.
A total of 500,000 shares of our common stock are authorized for issuance
under the 2000 Employee Stock Purchase Plan. In addition, the number of shares
authorized for issuance under the 2000 Employee Stock Purchase Plan will
increase annually on the first day of each fiscal year, beginning with our
fiscal year 2001, equal to the lesser of 1% of the outstanding shares of our
common stock on the last day of the immediately preceding fiscal year, 500,000
shares, or such other amount as may be determined by our board of directors.
45
<PAGE> 49
Our board of directors or a committee of our board administers the 2000
Employee Stock Purchase Plan. Our board of directors or its committee has full
and exclusive authority to interpret the terms of the 2000 Employee Stock
Purchase Plan.
All of our employees are eligible to participate if they are customarily
employed by us or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted an option to purchase stock under the 2000 Employee Stock Purchase Plan
if such employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans accrue at a rate that exceeds $25,000 worth of stock for each
calendar year.
Our 2000 Employee Stock Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code and contains consecutive, overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on or after May
1st and November 1st of each year, except for the first such offering period
which will commence on the first trading day on or after the effective date of
this offering and will end on the last trading day on or after May 1, 2002.
Our 2000 Employee Stock Purchase Plan permits participants to purchase
common stock through payroll deductions of up to 15% of their eligible
compensation which includes a participant's base straight time gross earnings. A
participant may purchase a maximum of 7,500 shares during a 6-month purchase
period.
Amounts deducted from a participant's eligible compensation and accumulated
during a six month purchase period are used to purchase shares of our common
stock at the end of the six-month purchase period. The price is 85% of the lower
of the fair market value of our common stock at the beginning of an offering
period or at the end of a purchase period. If the fair market value at the end
of a purchase period is less than the fair market value at the beginning of the
offering period, participants will be withdrawn from the current offering period
following their purchase of shares on the purchase date and will be
automatically re-enrolled in a new offering period. Participants may end their
participation at any time during an offering period, and will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
A participant may not transfer rights granted under the 2000 Employee Stock
Purchase Plan other than by will, the laws of descent and distribution or as
otherwise provided under the 2000 Employee Stock Purchase Plan.
In the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Our 2000 Employee Stock Purchase Plan will terminate in 2010. However, our
board of directors has the authority to amend or terminate our 2000 Employee
Stock Purchase Plan, except that, subject to certain exceptions described in the
2000 Employee Stock Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our 2000 Employee Stock Purchase
Plan.
46
<PAGE> 50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PREFERRED STOCK
In August and October 1998, we sold a total of 2,659,489 shares of our
series A convertible preferred stock at a price of $1.00 per share. In October
and November 1999, we sold a total of 5,405,405 shares of our series B
redeemable convertible preferred stock at a price of $1.85 per share. In
February 2000, we sold a total of 3,044,018 shares of our series C redeemable
convertible preferred stock at a price of $5.00 per share. The following
officers, directors and 5% stockholders purchased shares of our preferred stock
in these financings:
<TABLE>
<CAPTION>
PURCHASER SERIES A SERIES B SERIES C
--------- --------- --------- ---------
<S> <C> <C> <C>
John Griffin and entities and persons affiliated with
Blue Ridge Limited Partnership..................... 1,000,000 270,270 440,000
Cascade Investment, LLC.............................. -- -- 2,000,000
GMS Capital Partners, L.P............................ -- 1,000,000 146,070
TVM-Techno Venture Management III GmbH............... -- 1,459,449 184,655
Nadav Friedmann, M.D., Ph.D.......................... 20,000 -- --
Sanford R. Robertson................................. 200,000 -- --
Entities affiliated with Michael J. O'Donnell........ -- 12,838 1,876
</TABLE>
INVESTOR RIGHTS AGREEMENT
We have entered into an agreement pursuant to which these and other
preferred stockholders will have registration rights with respect to their
shares of common stock following this offering. For a description of these
registration rights, see "Description of Capital Stock." Concurrently with the
completion of this offering, all shares of our outstanding preferred stock will
be automatically converted into an equal number of shares of common stock.
INDEMNIFICATION
We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements require us to indemnify
our directors and officers to the fullest extent permitted by Delaware law. See
"Limitation on Directors' Liability and Indemnification."
SEVERANCE ARRANGEMENTS
We executed employment offer letters for Mr. Johnson and Mr. Jennings in
November and December 1999, respectively. Pursuant to these offer letters, Mr.
Johnson and Mr. Jennings receive annual base salaries of $155,000 and $195,000,
respectively. In addition, Mr. Johnson was permitted to purchase 190,000 shares
of our common stock at a per share exercise price of $0.20 subject to our
repurchase right, and Mr. Jennings received an option to purchase 225,000 shares
of our common stock at a per share exercise price of $1.00. We may terminate
either officer's employment at any time and for any reason or no reason.
However, if we terminate Mr. Johnson's employment without cause after November
23, 2000, or Mr. Jennings' employment without cause after December 3, 2000, we
must pay severance equal to the officer's base salary until the sooner of the
date that he secures new employment, or the date that is three months after the
date of his termination. Neither officer will receive any severance if we
terminate his employment within the first year, if he voluntarily terminates his
employment any time, or if we terminate him for cause at any time.
47
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 2000 and as adjusted to
reflect the sale of common stock offered hereby by the following:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our executive officers named in the compensation table above;
- each of our directors; and
- all directors and executive officers as a group.
As of March 31, 2000, there would have been 20,827,142 shares of our common
stock outstanding, assuming that all outstanding preferred stock has been
converted into common stock. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, on the information furnished
by such owners, have sole voting power and investment power with respect to such
shares. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percent ownership of that person, shares
of common stock subject to options or warrants held by that person that are
currently exercisable or that will become exercisable within 60 days after March
31, 2000 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percent ownership of any other person. Unless
otherwise indicated in the footnotes below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
address for those individuals for which an address is not otherwise indicated is
250 Grand Avenue, Suite 70, South San Francisco, California 94080.
<TABLE>
<CAPTION>
PERCENT OF SHARES
SHARES OUTSTANDING(2)
BENEFICIALLY -------------------------
OWNED PRIOR PRIOR TO
NAME OR GROUP OF BENEFICIAL OWNERS TO OFFERING(1) OFFERING AFTER OFFERING
---------------------------------- -------------- -------- --------------
<S> <C> <C> <C>
William H. Gates, III(3)............................... 2,000,000 9.6% 7.7%
2365 Carillon Point
Kirkland, WA 98033
TVM-Techno Venture Management III GmbH(4).............. 1,644,104 7.9 6.4
101 Arch Street, Suite 1950
Boston, MA 02110
John Griffin(5)........................................ 1,710,270 8.2 6.6
Blue Ridge Limited Partnership
660 Madison Avenue
New York, NY 10021
GMS Capital Partners, L.P.(6).......................... 1,146,070 5.5 4.4
405 Park Avenue, 16th Floor
New York, NY 10022
Remi Barbier(7)........................................ 8,180,000 39.3 31.7
Gert Caspritz, Ph.D.(8)................................ 1,644,104 7.9 6.4
101 Arch Street, Suite 1950
Boston, MA 02110
Sanford R. Robertson(9)................................ 258,333 1.2 1.0
One Maritime Plaza, Suite 2500
San Francisco, CA 94111
David L. Johnson(10)................................... 190,000 * *
Barry M. Sherman, M.D.(11)............................. 114,584 * *
</TABLE>
48
<PAGE> 52
<TABLE>
<CAPTION>
PERCENT OF SHARES
SHARES OUTSTANDING(2)
BENEFICIALLY -------------------------
OWNED PRIOR PRIOR TO
NAME OR GROUP OF BENEFICIAL OWNERS TO OFFERING(1) OFFERING AFTER OFFERING
---------------------------------- -------------- -------- --------------
<S> <C> <C> <C>
Nadav Friedmann, M.D., Ph.D.(12)....................... 128,333 * *
91 Bacon Court
Lafayette, CA 94549
Michael J. O'Donnell(13)............................... 65,756 * *
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Edmon R. Jennings(14).................................. 14,063 * *
Wilfred R. Konneker, Ph.D.............................. -- -- --
Konneker Development Corporation
142 Enchanted Parkway, Suite 200
Manchester, MO 63021
All directors and executive officers as a group
(9 persons)(15)...................................... 10,595,173 50.9% 41.0%
</TABLE>
-------------------------
* Represents beneficial ownership of less than one percent (1%) of the
outstanding shares of the Company's Common Stock.
(1) Beneficial ownership is determined with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to stock options and
warrants currently exercisable or exercisable within 60 days are deemed to
be outstanding for computing the percentage ownership of the person holding
such options and the percentage ownership of any group of which the holder
is a member, but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown beneficially owned by them.
(2) Applicable percentage of ownership is based on 20,827,142 shares of Common
Stock outstanding prior to this offering.
(3) Includes 2,000,000 shares held by Cascade Investment, LLC, which is
controlled by William H. Gates, III.
(4) TVM Techno Venture Management III GmbH is controlled by its two Managing
Directors, Helmut Schuhsler and Friedrich Bornikee.
(5) Includes 1,090,270 shares held by Blue Ridge Limited Partnership, 40,000
shares held by Blue Ridge Private Equity Fund, and 580,000 shares held by
John Griffin. All of the shares held by Blue Ridge Limited Partnership and
Blue Ridge Private Equity Fund are beneficially owned by John Griffin.
(6) GMS Capital Investments, L.L.C. is the general partner of GMS Capital
Partners, L.P. Joachim Gfeeller, David Meek and Andrew Stallman are the
managing members of GMS Capital Investments, L.L.C.
(7) All of these shares are subject to our right of repurchase which lapses
over time.
(8) Includes 1,644,104 shares held by TVM-Techno Venture Management III GmbH.
Dr. Caspritz, a Director of the Company, is the Investment Manager of
TVM-Techno Venture Management.
49
<PAGE> 53
Dr. Caspritz disclaims beneficial ownership of the shares held by
TVM-Techno Venture Management III GmbH, except to the extent of his
partnership interest in such shares.
(9) Includes 8,333 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
(10) All of these shares are subject to our right of repurchase which lapses
over time.
(11) Includes 114,584 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
(12) Includes 8,333 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
(13) Includes 45,000 shares held by WS Investment Company 98B, 12,162 shares
held by WS Investment Company 99B, 1,777 shares held by WS Investment
Company 2000A, 5,775 shares held by Michael J. O'Donnell and 1,042 shares
issuable to Mr. O'Donnell pursuant to options exercisable within 60 days of
March 31, 2000. Mr. O'Donnell, a Director of the Company, is a General
Partner of WS Investment Company. Mr. O'Donnell disclaims beneficial
ownership of the shares held by WS Investment Company, except to the extent
of his partnership interest in such shares. Mr. O'Donnell is also a partner
in Wilson Sonsini Goodrich & Rosati, our corporate counsel.
(14) Includes 14,063 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
(15) Includes 146,355 shares issuable pursuant to options exercisable within 60
days of March 31, 2000.
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
shares, $0.001 par value per share, to be divided into two classes to be
designated common stock and preferred stock. Of the shares authorized,
120,000,000 shares shall be designated as common stock and 10,000,000 shares
shall be designated as preferred stock. The following description of our capital
stock is only a summary. For a complete description of our capital stock, you
should refer to our certificate of incorporation and bylaws as in effect upon
the completion of this offering, which are included as exhibits to the
registration statement of which this prospectus forms a part, and to the
provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 2000, assuming the conversion of all outstanding shares of
preferred stock into common stock, there were 20,827,142 shares of common stock
outstanding which were held by approximately 85 stockholders. There will be
25,827,142 shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options after
March 31, 2000) after giving effect to the sale of our common stock in this
offering. In addition to 1,757,970 shares issuable upon exercise of outstanding
options, and 223,800 shares available for issuance under our 1998 Stock Plan, as
amended there are an aggregate of 500,000 shares reserved for issuance under our
2000 Employee Stock Purchase Plan. See "Management -- Stock Plans" for a
description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering, does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding.
Holders of our common stock have no preemptive or other subscription or
conversion rights. There are no redemption or sinking fund provisions applicable
to our common stock. All outstanding
50
<PAGE> 54
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon the completion of this offering will be fully
paid and non-assessable.
PREFERRED STOCK
Upon the completion of this offering and filing of our amended and restated
certificate of incorporation, we will not have any shares of preferred stock
outstanding, however, our board of directors will be authorized, without action
by the stockholders, to issue up to 10,000,000 shares of preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
of each series. These rights, preferences and privileges may include dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of any series, all or any of which may be greater than the
rights of the common stock.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and the likelihood that the holders of common stock will
receive dividend payments and payments upon liquidation. In addition, the
issuance of preferred stock could have the effect of delaying or preventing a
change in our control without further action by the stockholders. We have no
present plans to issue any shares of preferred stock.
WARRANTS TO PURCHASE COMMON STOCK
As of March 31, 2000, we had the following warrants outstanding to purchase
a total of 340,000 shares of our capital stock:
- 70,000 shares of our common stock at an exercise price of $1.00 per
share, terminating 2005;
- 120,000 shares of our common stock at an exercise price of $5.00 per
share terminating 2005; and
- 150,000 shares of our series A convertible preferred stock which are
convertible into 150,000 shares or our common stock at an exercise price
of $1.00 per share, terminating June 5, 2010.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement we entered into with holders of
11,108,912 shares of our common stock (assuming conversion of all outstanding
shares of preferred stock), the holders of these shares are entitled to certain
registration rights regarding these shares. The registration rights provide that
if we propose to register any securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, they are entitled to notice of the registration and are
entitled to include shares of their common stock in the registration. This right
is subject to conditions and limitations, including the right of the
underwriters in an offering to limit the number of shares included in the
registration. The holders of these shares may also require us to file up to two
registration statements under the Securities Act at our expense with respect to
their shares of common stock. We are required to use our best efforts to effect
this registration, subject to conditions and limitations. Furthermore, the
holders of these shares may require us to file additional registration
statements on Form S-3, subject to conditions and limitations. These rights
terminate on the earlier of five years after the effective date of this
offering, the date on which all securities subject to registration rights have
been sold, or when a holder is able to sell all its shares pursuant to Rule 144
under the Securities Action in any 90-day period.
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<PAGE> 55
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following transactions more difficult:
- the acquisition of us by means of a tender offer;
- the acquisition of us by proxy contest or other means; and
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to first negotiate with us.
We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure our company outweighs the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms. The amendment of any of the following
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
Election and Removal of Directors. Effective with the first annual meeting
of stockholders following completion of this offering, our amended and restated
bylaws provide for the division of our board of directors into three classes, as
nearly equal in number as possible, with the directors in each class serving for
a three-year term, and one class being elected each year by our stockholders.
This system of electing and removing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of us
and may maintain the incumbency of the board of directors, as it generally makes
it more difficult for stockholders to replace a majority of the directors.
Further, our amended and restated certificate of incorporation filed in
connection with this offering and restated bylaws do not provide for cumulative
voting in the election of directors.
Stockholder Meetings. Under our amended and restated certificate of
incorporation and amended and restated bylaws, only our board of directors,
chairman of the board or chief executive officer may call special meetings of
stockholders. Our restated bylaws establish advance notice procedures with
respect to stockholder proposals and the nomination of candidates for election
as directors, other than nominations made by or at the direction of the board of
directors or a committee thereof. In addition, our amended and restated
certificate of incorporation eliminates the right of stockholders to act by
written consent without a meeting and eliminates cumulative voting.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deterring or delaying hostile takeovers or delaying changes in control or
management.
Section 203. We are subject to Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons
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<PAGE> 56
who are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, LLC.
THE NASDAQ STOCK MARKET'S NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "PTIE."
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<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
After we complete this offering, based upon the number of shares outstanding at
March 31, 2000, there will be 25,827,142 shares of our common stock outstanding.
Of these outstanding shares, the 5,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, except that any shares purchased by our "affiliates", as that term
is defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.
LOCK-UP AGREEMENTS
20,967,091 shares of our common stock outstanding after this offering will
be subject to lock-up agreements which expire 180 days after the date of this
prospectus. Upon expiration of the 180-day lock-up period, all of these shares
will be eligible for sale in the public market subject to the provisions of Rule
144 or Rule 701 under the Securities Act. In the lock-up agreements, our
stockholders agreed that, for a period of 180 days after the date of this
prospectus, they will not sell, contract to sell or otherwise dispose of any
shares of our common stock, or any shares convertible into or exchangeable for
shares of our common stock, owned directly by them or with respect to which they
have the power of disposition, without the prior written consent of Thomas
Weisel Partners LLC.
SALES OF RESTRICTED SHARES
In addition to being subject to the lock-up agreements 20,967,091 shares
are deemed "restricted securities" under Rule 144. In general under Rule 144 a
stockholder, including one of our affiliates, who has beneficially owned his or
her restricted securities for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock (approximately 258,000 shares immediately after this
offering) or the average weekly trading volume in our common stock during the
four calendar weeks preceding the date on which notice of the sale was filed
under Rule 144, provided requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition, a
stockholder that is not one of our affiliates 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 is entitled to sell the shares immediately under
Rule 144(k) without compliance with the above described requirements of Rule
144.
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144.
STOCK OPTIONS
We intend to file registration statements on Form S-8 under the Securities
Act to register an aggregate of 5,200,000 shares of common stock issuable under
our 1998 Stock Plan and the 2000 Employee Stock Purchase Plan. Shares issued
upon exercise of stock options after the effective date of the Form S-8
registration statements will be eligible for resale in the public market without
restriction, subject to Rule 144 limitations applicable to affiliates and the
lock-up agreements noted above, if applicable.
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REGISTRATION RIGHTS
Upon completion of this offering, the holders of 11,108,912 shares of our
common stock and of warrants to purchase 150,000 shares of our series A
convertible preferred stock and warrants to purchase 120,000 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act even if the shares would have been subject
to Rule 144 restrictions. Please see "Description of Capital
Stock -- Registration Rights" for a more detailed description of these
registration rights. After registration, these shares will become freely
tradable without restriction under the Securities Act. Any sales of securities
by these shareholders could have a material adverse effect on the trading price
of our common stock.
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UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the acquisition, ownership and
disposition of our common stock by a Non-U.S. Holder. As used in this
prospectus, the term "Non-U.S. Holder" is a person who holds our common stock
other than:
- a citizen or resident of the United States,
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the United States,
- an estate the income of which is includable in gross income for United
States federal income tax purposes regardless of its source, or
- a trust subject to the primary supervision of a United States court and
the control of one or more United States persons, or a trust (other than
a wholly-owned grantor trust) that was treated as a domestic trust
despite not meeting the requirements described above.
This discussion does not consider:
- state, local or foreign tax consequences,
- specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position in light of their particular
circumstances,
- the tax consequences for the stockholders or beneficiaries of a Non-U.S.
holder,
- special tax rules that may apply to certain Non-U.S. Holders, including
without limitation, partnerships, banks, insurance companies, dealers in
securities and traders in securities, or
- special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."
The following discussion is based on provisions of the United States
Internal Revenue Code of 1986, as amended, also known as the Code, applicable
Treasury regulations and administrative and judicial interpretations, all as of
the date of this prospectus, and all of which are subject to change,
retroactively or prospectively. The following discussion assumes that our common
stock is held as a capital asset. The following summary is for general
information. Accordingly, each Non-U.S. Holder should consult a tax advisor
regarding the United States federal, state, local and foreign income and other
tax consequences of acquiring, holding and disposing of shares of our common
stock.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that dividends
are paid on shares of our common stock, dividends paid to a Non-U.S. Holder of
our common stock generally will be subject to withholding of United States
federal income tax at a 30% rate, or such lower rate as may be provided by an
applicable income tax treaty. Non-U.S. Holders should consult their tax advisors
regarding their entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, known as United
States trade or business income, are generally subject to United States federal
income tax on a net income basis at regular graduated rates, but are not
generally subject to the
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30% withholding tax if the Non-U.S. Holder files the appropriate United States
Internal Revenue Service form with the payor. Any United States trade or
business income received by a Non-U.S. Holder that is a corporation may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as specified by an applicable income tax treaty.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treat rate. For dividends paid after
2000, a Non-U.S. Holder of our common stock who clams the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements.
A Non-U.S. Holder of our common stock that is eligible for a reduced rate
of United States withholding tax under an income tax treaty may obtain a refund
or credit of any excess amounts withheld by filing an appropriate claim for a
refund with the United States Internal Revenue Services.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of our common stock
unless:
- the gain is United States trade or business income, in which case the
branch profits tax described above may apply to a corporate Non-U.S.
Holder,
- the Non-U.S. Holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Code, is present
in the United States for more than 182 days in the taxable year of the
disposition and meets certain other requirements,the Non-U.S. Holder is
subject to tax pursuant to the provisions of the United States tax law
applicable to certain United States expatriates, or
- we are or have been a United States real property holding corporation for
United States federal income tax purposes at any time during the shorter
of the five-year period ending on the date of disposition of the period
that the Non-U.S. Holder held our common stock.
Generally, a corporation is a United States real property holding
corporation if the fair market value of its United States real property
interest, such as interest in real property located in the United States or the
Virgin islands, and certain interests in other United States real property
holding corporations, equals or exceeds 50% of the sum of the fair market value
of its worldwide real property interests plus its other assets used or held for
use in a trade or business. We believe we have never been, are not currently and
are not likely to become a United States real property holding corporation for
United States federal income tax purposes.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for United States federal estate tax purposes, unless an applicable estate tax
or other treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the United States Internal Revenue Service and
to each Non-U.S. Holder the amount of dividends paid to that holder and the tax
withheld with respect to those dividends. Copies of the information returns
reporting those dividends and withholding may also be made available
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to the tax authorities in the country in which the Non-U.S. Holder is a resident
under the provisions of an applicable income tax treaty or agreement.
Under certain circumstances, United States Treasury Regulations require
information reporting and backup withholding at a rate of 31% on certain
payments on our common stock. Under currently applicable law, Non-U.S. Holders
of our common stock, generally will be exempt from these information reporting
requirements and from backup withholding on dividends paid prior to 2001 to an
address outside the United States. For dividends paid after 2000, however, a
Non-U.S. Holder of our common stock that fails to certify its Non-U.S. holder
status in accordance with applicable United States Treasury Regulations may be
subject to backup withholding at a rate of 31% of dividends.
The payment of the proceeds of the disposition of our common stock by a
holder to or through the United States office of a broker generally will be
subject to information reporting and backup withholding at a rate of 31% unless
the holder either certifies its status as a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the disposition by a Non-U.S. Holder of our common stock to or through a foreign
office of a foreign broker will not be subject to backup withholding or
information reporting unless the foreign broker will not be subject to backup
withholding or information reporting unless the foreign broker is a United
States related person. In the case of the payment of proceeds from the
disposition of our common stock by or through a foreign office of a broker that
is a United States person or a "United States related person," information
reporting, but currently not backup withholding, on the payment applies unless
the broker receives a statement from the owner, signed under penalty of perjury,
certifying its foreign status or the broker has documentary evidence in its
files that the holder is a Non-U.S. Holder and the broker has no actual
knowledge to the contrary. For this purpose, a United States related person is:
- a "controlled foreign corporation" for United States federal income tax
purposes,
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a United State trade or business,
- effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by United States persons, or (B) the partnership is
engaged in a United States trade or business, or
- certain U.S. branches of foreign banks or insurance companies.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a foreign office or a broker that is a United
States person or a United States related person unless certain certification
requirements are satisfied or an exemption is otherwise established and the
broker has no actual knowledge that the holder is a United States person.
Non-U.S. Holders should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to them, including
changes to these rules that will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's United States
federal income tax liability, if any, provided that the required information is
furnished to the United States Internal Revenue Service.
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UNDERWRITING
GENERAL
Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives, Thomas Weisel Partners LLC, CIBC World Markets Corp. and Tucker
Anthony Incorporated, has severally agreed to purchase from us the aggregate
number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Thomas Weisel Partners LLC..................................
CIBC World Markets Corp. ...................................
Tucker Anthony Incorporated.................................
---------
Total..................................................... 5,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to various conditions. The nature of the underwriters'
obligations commits them to purchase and pay for all of the shares of common
stock listed above if any are purchased.
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the Securities
Act or will contribute to payments that the underwriters may be required to make
relating to these liabilities.
Thomas Weisel Partners LLC expects to deliver the shares of common stock to
purchasers on , 2000.
OVER-ALLOTMENT OPTION
We have granted a 30-day over-allotment option to the underwriters to
purchase up to a total of 750,000 additional shares of our common stock from us
at the initial public offering price, less the underwriting discounts and
commissions, as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be separately committed, subject to conditions described in
the underwriting agreement, to purchase the additional shares of our common
stock in proportion to their respective commitments set forth in the table
above.
STOCK MARKET LISTING
We expect our common stock will be quoted on the Nasdaq National Market
under the symbol "PTIE."
DETERMINATION OF OFFERING PRICE
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between us and the representatives. In addition to prevailing market conditions,
the factors to be considered in determining the initial public offering price
will include:
- the valuation multiples of publicly-traded companies that the
representatives believe are comparable to us;
- our financial information;
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- our history and prospects and the outlook for our industry;
- an assessment of our management, our past and present operations, and the
prospects for, and timing of, our future revenues;
- the present state of our development and the progress of our business
plan; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for our shares may not develop. Even if an active
market does develop, the public price at which our shares trade in the future
may be below the offering price.
COMMISSIONS AND DISCOUNTS
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus, and at this price less a concession not in excess of $ per share
of common stock to other dealers specified in a master agreement among
underwriters who are members of the National Association of Securities Dealers,
Inc. The underwriters may allow, and the other dealers specified may reallow,
concessions, not in excess of $0.10 per share of common stock to these other
dealers. After this offering, the offering price, concessions and other selling
terms may be changed by the underwriters. Our common stock is offered subject to
receipt and acceptance by the underwriters and to other conditions, including
the right to reject orders in whole or in part.
The following table summarizes the compensation to be paid to the
underwriters by us and the expenses payable by us:
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
us............................................ $ $ $
Expenses payable by us.......................... $ $ $
</TABLE>
INDEMNIFICATION OF THE UNDERWRITERS
We will indemnify the underwriters against some civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of our representations and warranties contained in the underwriting
agreement. If we are unable to provide this indemnification, we will contribute
to payments the underwriters may be required to make in respect of those
liabilities.
RESERVED SHARES
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 250,000 shares of common stock to be sold in this
offering for sale to our employees and other persons designated by us. The
number of shares available for sale to the general public will be reduced to the
extent that any reserved shares are purchased. Any reserved shares not purchased
in this manner will be offered by the underwriters on the same basis as the
other shares offered in this offering.
NO SALES OF SIMILAR SECURITIES
Our directors, officers and securityholders holding a total of 20,967,091
shares of common stock have agreed or have a contractual obligation to agree,
subject to specified exceptions, not to offer, sell,
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agree to sell, directly or indirectly, or otherwise dispose of any shares of
common stock or any securities convertible into or exchangeable for shares of
common stock without the prior written consent of Thomas Weisel Partners LLC for
a period of 180 days after the date of this prospectus.
We have agreed that for a period of 180 days after the date of this
prospectus we will not, without the prior written consent of Thomas Weisel
Partners LLC, offer, sell, or otherwise dispose of any shares of common stock,
except for the shares of common stock offered in the offering and the shares of
common stock issuable upon exercise of outstanding options and warrants on the
date of this prospectus.
INFORMATION REGARDING THOMAS WEISEL PARTNERS LLC
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Thomas Weisel
Partners LLC has been named as a lead or co-manager on 164 filed public
offerings of equity securities, of which 120 have been completed, and has acted
as a syndicate member in an additional 95 public offerings of equity securities.
Thomas Weisel Partners LLC does not have any material relationship with us or
any of our officers, directors or controlling persons, except with respect to
its contractual relationship with us under the underwriting agreement entered
into in connection with this offering.
NASDAQ NATIONAL MARKET LISTING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock was
determined through negotiations between us and representatives of the
underwriters. Some of the factors considered in these negotiations included our
results of operations in recent periods, estimates of our prospects and the
industry in which we compete, an assessment of our management, the general state
of the securities markets at the time of this offering and the prices of similar
securities of generally comparable companies. We have applied to have our common
stock quoted on the Nasdaq National Market under the symbol "PTIE". We cannot
assure you that an active or orderly trading market will develop for our common
stock or that our common stock will trade in the public markets subsequent to
this offering at or above the initial offering price.
DISCRETIONARY ACCOUNTS
The underwriters do not expect sales of shares of common stock offered by
this prospectus to any accounts over which they exercise discretionary authority
to exceed five percent of the shares offered.
MARKET STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In order to facilitate this offering, persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of our common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in our common
stock for their own account by selling more shares of common stock than we have
sold to them. The underwriters may elect to cover any short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids. Under these penalty bids, selling concessions that are allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased, usually in order to stabilize the market. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. No representation is made
as to the magnitude or
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effect of any stabilization or other transaction. These transactions may be
effected on the Nasdaq National Market or otherwise and may be discontinued at
any time after they are commenced.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by O'Melveny
& Myers LLP, San Francisco, California. As of the date of this prospectus,
investment partnerships composed of certain members of and persons associated
with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to
individual members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, beneficially own an aggregate of 64,714 shares
of our preferred and common stock.
EXPERTS
The financial statements of Pain Therapeutics, Inc. (a development stage
enterprise) as of December 31, 1998 and 1999, and for the period from May 4,
1998 (inception) through December 31, 1998, the year ended December 31, 1999,
and the period from May 4, 1998 (inception) through December 31, 1999 have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, you should refer to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus that describe
the contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of the contract or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by this reference. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The public may obtain information on the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
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PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
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> 67
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pain Therapeutics, Inc.:
We have audited the accompanying balance sheets of Pain Therapeutics, Inc.
(a development stage enterprise) as of December 31, 1998 and 1999, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the period from May 4, 1998 (inception) through December 31, 1998, for the
year ended December 31, 1999 and for the period from May 4, 1998 (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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pain Therapeutics, Inc. (a
development stage enterprise) as of December 31, 1998 and 1999 and the results
of its operations and its cash flows for the period from May 4, 1998 (inception)
through December 31, 1998, for the year ended December 31, 1999 and for the
period from May 4, 1998 (inception) through December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
February 26, 2000, except as to note 7
which is as of March 9, 2000
F-2
<PAGE> 68
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, DECEMBER 31, EQUITY
1998 1999 ACTUAL (NOTE 1)
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $2,333,512 $ 9,339,669 $ 22,179,362
Interest receivable........................... 3,138 15,362 32,095
Prepaid expenses.............................. 35,496 41,387 71,650
---------- ----------- ------------
Total current assets........................ 2,372,146 9,396,418 22,283,107
Property and equipment, net..................... 10,454 44,755 121,513
Deferred financing costs........................ -- -- 460,179
---------- ----------- ------------
Total assets................................ $2,382,600 $ 9,441,173 $ 22,864,799
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable.............................. $ 108,108 $ 300,587 $ 487,663
---------- ----------- ------------
Total liabilities........................... 108,108 300,587 487,663
---------- ----------- ------------
Commitments and contingencies
Redeemable convertible preferred stock --
Series C $.001 par value; 3,044,018 shares
authorized; 3,200,000 shares designated,
issued and outstanding at March 31, 2000;
none pro forma; liquidation preference and
redemption value of $5 per share............ -- -- 14,231,595 --
Series B $.001 par value; 5,405,405 shares
authorized; 5,405,405 shares designated,
issued and outstanding in 1999 and 2000;
none pro forma; liquidation preference and
redemption value of $1.85 per share......... -- 9,703,903 9,703,903 --
---------- ----------- ------------ -----------
-- 9,703,903 23,935,498 --
---------- ----------- ------------ -----------
Stockholders' equity (deficit):
Convertible preferred stock -- Series A $.001
par value; 3,500,000 shares authorized;
2,659,489 shares issued and outstanding in
1998, 1999 and 2000; none pro forma;
liquidation preference of $1.00 per share... 2,660 2,660 2,660 --
Common stock, $.001 par value; 20,000,000
shares authorized and 9,000,000 and
9,445,000 issued and outstanding as of
December 31, 1998 and 1999, respectively;
22,000,000 shares authorized and 9,718,230
shares issued and outstanding as of March
31, 2000, 20,827,142 shares issued and
outstanding pro forma....................... 9,000 9,445 9,718 20,827
Additional paid-in-capital.................... 2,686,839 9,367,750 17,697,759 41,624,808
Deferred compensation......................... -- (4,980,180) (8,448,370) (8,448,370)
Notes receivable.............................. (35,000) (74,400) (123,400) (123,400)
Deficit accumulated during the development
stage....................................... (389,007) (4,888,592) (10,696,729) (10,696,729)
---------- ----------- ------------ -----------
Total stockholders' equity (deficit)........ 2,274,492 (563,317) (1,558,362) 22,377,136
---------- ----------- ------------ ===========
Total liabilities and stockholders' equity
(deficit)................................. $2,382,600 $ 9,441,173 $ 22,864,799
========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 69
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998 MAY 4, 1998
(INCEPTION) (INCEPTION) THREE MONTHS ENDED MAY 4, 1998
THROUGH YEAR ENDED THROUGH MARCH 31, (INCEPTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------------- THROUGH
1998 1999 1999 1999 2000 MARCH 31, 2000
------------ ------------ ------------ ----------- ------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Licensing fees.............. $ 100,000 $ -- $ 100,000 $ -- $ -- $ 100,000
Research and development.... 200,000 2,092,119 2,292,119 -- 1,433,268 3,725,387
General and
administrative............ 122,168 2,567,355 2,689,523 118,257 4,619,719 7,309,242
---------- ----------- ----------- ---------- ------------ ------------
Total expenses............ 422,168 4,659,474 5,081,642 118,257 6,052,987 11,134,629
---------- ----------- ----------- ---------- ------------ ------------
Operating loss............ (422,168) (4,659,474) (5,081,642) (118,257) (6,052,987) (11,134,629)
Other income:
Interest income............. 33,961 160,689 194,650 27,407 245,050 439,700
---------- ----------- ----------- ---------- ------------ ------------
Net loss before income
taxes................... (388,207) (4,498,785) (4,886,992) (90,850) (5,807,937) (10,694,929)
Income tax expense............ 800 800 1,600 200 200 1,800
---------- ----------- ----------- ---------- ------------ ------------
Net loss.................. (389,007) (4,499,585) (4,888,592) (91,050) (5,808,137) (10,696,729)
Return to series C preferred
shareholders for beneficial
conversion feature.......... -- -- -- -- (14,231,595) (14,231,595)
---------- ----------- ----------- ---------- ------------ ------------
Loss available to common
shareholders................ $ (389,007) $(4,499,585) $(4,888,592) $ (91,050) $(20,039,732) $(24,928,324)
========== =========== =========== ========== ============ ============
Basic and diluted loss per
share....................... $ (0.06) $ (0.48) $ (0.01) $ (2.10)
========== =========== ========== ============
Weighted-average shares used
in computing basic and
diluted loss per share...... 6,948,637 9,322,441 9,000,000 9,528,957
========== =========== ========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 70
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD MAY 4, 1998 (INCEPTION) THROUGH
DECEMBER 31, 1998, THE YEAR ENDED DECEMBER 31, 1999,
AND THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTE
--------------------- --------------------- PAID-IN DEFERRED RECEIVABLE
SHARES PAR VALUE SHARES PAR VALUE CAPITAL COMPENSATION FOR STOCK
--------- --------- --------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- May 4, 1998
(inception)...................... -- $ -- -- $ -- $ -- $ -- $ --
Common stock issued on June 22,
1998 at $.001 per share.......... -- -- 8,500,000 8,500 -- -- --
Series A convertible preferred
stock issued between August 14,
1998 and October 28, 1998 at
$1.00 per share
(net of issuance costs of
$19,490)......................... 2,659,489 2,660 -- -- 2,637,339 -- --
Common stock issued on September
23, 1998 at $.10 per share for
notes receivable................. -- -- 350,000 350 34,650 -- (35,000)
Common stock issued on September
23, 1998 at $.10 per share for
cash............................. -- -- 150,000 150 14,850 -- --
Net loss........................... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- ----------- ---------
Balance -- December 31, 1998....... 2,659,489 2,660 9,000,000 9,000 2,686,839 -- (35,000)
Payment on note receivable......... -- -- -- -- -- -- 5,000
Common stock issued between April 1
and May 3, 1999 at $.10 per share
for notes receivable............. -- -- 444,000 444 43,956 -- (44,400)
Issuance of common stock pursuant
to exercise of stock options..... -- -- 1,000 1 99 -- --
Issuance of warrants in connection
with lease in August 1999........ -- -- -- -- 33,810 -- --
Deferred compensation with respect
to options issuances during
1999............................. -- -- -- -- 6,515,027 (6,515,027) --
Amortization of deferred
compensation..................... -- -- -- -- -- 1,534,847 --
Compensation expense with respect
to non-employee option grants.... -- -- -- -- 88,019 -- --
Net loss........................... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- ----------- ---------
Balance -- December 31, 1999....... 2,659,489 2,660 9,445,000 9,445 9,367,750 (4,980,180) (74,400)
Common stock issued between January
1 and March 31, 2000 at $0.20 per
share for notes receivable
(unaudited)...................... -- -- 245,000 245 48,755 -- (49,000)
Issuance of common stock pursuant
to exercise of stock options
(unaudited)...................... -- -- 28,230 28 3,014 -- --
Issuance of warrants in connection
with the series C preferred stock
offering (unaudited)............. -- -- -- -- 963,240 -- --
Deferred compensation with respect
to option issuances
(unaudited)...................... -- -- -- -- 4,669,000 (4,669,000) --
Amortization of deferred
compensation (unaudited)......... -- -- -- -- -- 1,200,810 --
Charges related to stock purchase
rights (unaudited)............... -- -- -- -- 2,646,000 -- --
Beneficial conversion feature of
series C preferred stock
(unaudited)...................... -- -- -- -- 14,231,595 -- --
Return to series C preferred
shareholders for beneficial
conversion feature (unaudited)... -- -- -- -- (14,231,595) -- --
Net loss (unaudited)............... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- ----------- ---------
Balance -- March 31, 2000
(unaudited)...................... 2,659,489 $2,660 9,718,230 $9,718 $17,697,759 $(8,448,370) $(123,400)
========= ====== ========= ====== =========== =========== =========
<CAPTION>
DEFICIT
ACCUMULATED
DURING STOCKHOLDERS'
DEVELOPMENT EQUITY
STAGE (DEFICIT)
------------ -------------
<S> <C> <C>
Balance -- May 4, 1998
(inception)...................... $ -- $ --
Common stock issued on June 22,
1998 at $.001 per share.......... -- 8,500
Series A convertible preferred
stock issued between August 14,
1998 and October 28, 1998 at
$1.00 per share
(net of issuance costs of
$19,490)......................... -- 2,639,999
Common stock issued on September
23, 1998 at $.10 per share for
notes receivable................. -- --
Common stock issued on September
23, 1998 at $.10 per share for
cash............................. -- 15,000
Net loss........................... (389,007) (389,007)
------------ -----------
Balance -- December 31, 1998....... (389,007) 2,274,492
Payment on note receivable......... -- 5,000
Common stock issued between April 1
and May 3, 1999 at $.10 per share
for notes receivable............. -- --
Issuance of common stock pursuant
to exercise of stock options..... -- 100
Issuance of warrants in connection
with lease in August 1999........ -- 33,810
Deferred compensation with respect
to options issuances during
1999............................. -- --
Amortization of deferred
compensation..................... -- 1,534,847
Compensation expense with respect
to non-employee option grants.... -- 88,019
Net loss........................... (4,499,585) (4,499,585)
------------ -----------
Balance -- December 31, 1999....... (4,888,592) (563,317)
Common stock issued between January
1 and March 31, 2000 at $0.20 per
share for notes receivable
(unaudited)...................... -- --
Issuance of common stock pursuant
to exercise of stock options
(unaudited)...................... -- 3,042
Issuance of warrants in connection
with the series C preferred stock
offering (unaudited)............. -- 963,240
Deferred compensation with respect
to option issuances
(unaudited)...................... -- --
Amortization of deferred
compensation (unaudited)......... -- 1,200,810
Charges related to stock purchase
rights (unaudited)............... -- 2,646,000
Beneficial conversion feature of
series C preferred stock
(unaudited)...................... -- 14,231,595
Return to series C preferred
shareholders for beneficial
conversion feature (unaudited)... -- (14,231,595)
Net loss (unaudited)............... (5,808,137) (5,808,137)
------------ -----------
Balance -- March 31, 2000
(unaudited)...................... $(10,696,729) $(1,558,362)
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 71
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998 MAY 4, 1998 THREE MONTHS MAY 4, 1997
(INCEPTION) (INCEPTION) ENDED (INCEPTION)
THROUGH YEAR ENDED THROUGH MARCH 31, THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------ MARCH 31,
1998 1999 1999 1999 2000 2000
------------ ------------ ------------ ---------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $ (389,007) $(4,499,585) $(4,888,592) $ (91,050) $(5,808,137) $(10,696,729)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 518 4,244 4,762 549 6,454 11,216
Amortization of deferred
compensation......................... -- 1,534,847 1,534,847 17,083 1,200,810 2,735,657
Noncash expense for options and
warrants issued...................... -- 121,829 121,829 -- 2,646,000 2,767,829
Changes in operating assets and
liabilities:
Interest receivable.................. (3,138) (12,224) (15,362) (171) (16,733) (32,095)
Prepaid expenses..................... (35,496) (5,891) (41,387) (27,951) (30,263) (71,650)
Accounts payable..................... 108,108 162,479 270,587 (100,988) 187,076 457,663
---------- ----------- ----------- ---------- ----------- ------------
Net cash used in operating
activities....................... (319,015) (2,694,301) (3,013,316) (202,528) (1,814,793) (4,828,109)
---------- ----------- ----------- ---------- ----------- ------------
Cash flows used in investing
activities -- purchase of property and
equipment................................ (10,972) (38,545) (49,517) -- (83,212) (132,729)
---------- ----------- ----------- ---------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of series B
redeemable convertible preferred stock
(net of issuance costs of $296,096).... -- 9,733,903 9,733,903 -- -- 9,733,903
Proceeds from issuance of series C
redeemable convertible preferred stock
(net of cash issuance costs of
$25,255)............................... -- -- -- -- 15,194,835 15,194,835
Deferred financing costs................. -- -- -- -- (460,179) (460,179)
Stock subscription received.............. -- 5,000 5,000 5,000 -- 5,000
Proceeds from issuance of series A
convertible preferred stock (net of
issuance costs of $19,490)............. 2,639,999 -- 2,639,999 -- -- 2,639,999
Proceeds from issuance of common stock... 23,500 100 23,600 33,810 3,042 26,642
---------- ----------- ----------- ---------- ----------- ------------
Net cash provided by financing
activities....................... 2,663,499 9,739,003 12,402,502 38,810 14,737,698 27,140,200
---------- ----------- ----------- ---------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents.............................. 2,333,512 7,006,157 9,339,669 (163,718) 12,839,693 22,179,362
Cash and cash equivalents at beginning of
period................................... -- 2,333,512 -- 2,333,512 9,339,669 --
---------- ----------- ----------- ---------- ----------- ------------
Cash and cash equivalents at end of
period................................... $2,333,512 $ 9,339,669 $ 9,339,669 $2,169,794 $22,179,362 $ 22,179,362
========== =========== =========== ========== =========== ============
Supplemental cash flow information:
Cash paid for income taxes............... $ -- $ 1,600 $ 1,600
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 72
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Pain Therapeutics, Inc. (a development stage enterprise) is a
clinical-stage specialty pharmaceutical company which was incorporated on May 4,
1998. Since our inception in May 1998, we have licensed proprietary technology
from Albert Einstein College of Medicine and have devoted substantially all of
our resources to the development of a new generation of opioid painkillers with
improved clinical benefits, which are based on the acquired technology.
Our development activities involve inherent risks. These risks include,
among others, dependence on key personnel and determination of patentability of
our products and processes. In addition, we have product candidates which have
not yet obtained Food and Drug Administration approval. Successful future
operations depend on our ability to obtain approval for and commercialize these
products.
On March 9, 2000, our Board of Directors authorized our management to file
a Registration Statement with the Securities and Exchange Commission to sell
shares of our common stock to the public.
Interim Financial Statements
The financial information as of March 31, 2000 and for the three months
ended March 31, 1999 and 2000 and the period from May 4, 1998 (inception)
through March 31, 2000 is unaudited. This interim financial information has been
prepared on substantially the same basis as the audited financial statements and
in the opinion of management, contains all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial information set forth therein.
Cash and Cash Equivalents
We consider all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents. We maintain our cash
at one financial institution. Our balances are in excess of federal depository
insurance limitations.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation
F-7
<PAGE> 73
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
allowance when, in the opinion of management, it is more likely than not that
some or all of the deferred tax assets may not be realized.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, generally three to five years.
Fair Value of Financial Instruments
Interest and stock subscriptions receivables are considered to have
carrying amounts that approximate fair value because of the short maturity of
these financial instruments. Notes receivable are considered to have carrying
amounts that approximate fair value as they bear a market rate of interest. The
series B and series C redeemable, convertible preferred stock has a carrying
amount that approximates fair value as the redemption amount equals the carrying
amount (see note 7 regarding series C redeemable convertible preferred stock).
Research and Development Costs
Research and development costs and the costs of obtaining licenses used in
research and development are charged to expense as incurred.
Impairment of Long-Lived Assets
We review, as circumstances dictate, the carrying amount of our long-lived
assets. The purpose of these reviews is to determine whether the carrying
amounts are recoverable. Recoverability is determined by comparing the projected
undiscounted net cash flows of the long-lived assets against their respective
carrying amounts. The amount of impairment, if any, is measured based on the
excess of the carrying value over the fair value. No such events have occurred
with respect to the Company's long-lived assets.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, establishes a fair-value method of accounting for
stock options and similar equity instruments. The fair-value method requires
compensation cost to be measured at the grant date based on the value of the
award, and is recognized over the service period. SFAS No. 123 allows companies
to either account for stock-based compensation to employees under the provisions
of SFAS No. 123 or under the provisions of Accounting Principles Board (APB)
Opinion No. 25 and its related interpretations. We have elected to account for
our stock-based compensation to employees in accordance with the provisions of
APB Opinion No. 25 and provide the pro forma disclosures required under SFAS No.
123.
We have recorded deferred compensation for the difference between the
exercise price and the fair value of the common stock for financial reporting
purposes of stock options granted to employees.
We account for equity instruments issued to nonemployees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No.
96-18 Accounting for Equity
F-8
<PAGE> 74
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Instruments that Are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
The compensation expense related to all grants is amortized over the
vesting period of the related stock options in accordance with Financial
Accounting Standards Board Interpretation No. 28 (FIN 28), as that methodology
most closely approximates the way in which our options are earned by the option
holder.
Comprehensive Loss
We have no components of other comprehensive loss other than our net loss
and, accordingly, our comprehensive loss is equivalent to our net loss for all
periods presented.
Business Segments
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires an enterprise to report segment information based on how
management internally evaluates the operating performance of its business units
(segments). Our operations are confined to one business segment: the discovery
and development of new opioid painkillers.
Loss per Share
Basic loss per share is computed on the basis of the weighted-average
number of shares outstanding for the reporting period. Diluted loss per share is
computed on the basis of the weighted-average number of common shares plus
dilutive potential common shares outstanding using the treasury-stock method.
Potential dilutive common shares consist of convertible preferred stock, shares
issuable to holders of unexercised employee stock options and outstanding
warrants. Convertible preferred stock, options and warrants equivalent to, in
the aggregate, 2,809,489 and 9,580,094 shares of common stock as of December 31,
1998 and 1999 and 2,809,489 and 13,206,882 shares of common stock as of March
31, 1999 and 2000, respectively, were not included in the calculation of diluted
loss per share because the representative share increments would be
antidilutive.
Pro Forma Stockholders' Equity (Unaudited)
The unaudited pro forma stockholders' equity gives effect to the conversion
of 11,108,912 shares of series A convertible preferred stock and B and C
redeemable convertible preferred stock outstanding as of March 31, 2000 into
shares of common stock, at a conversion rate of 1 common share for each
preferred share of series A convertible preferred stock and each share of series
B and C redeemable convertible preferred stock, upon the closing of our initial
public offering.
F-9
<PAGE> 75
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Machinery and equipment..................................... $ 7,195 $14,703
Fixtures.................................................... 3,777 34,814
------- -------
10,972 49,517
Less accumulated depreciation............................... (518) (4,762)
------- -------
Property and equipment, net................................. $10,454 $44,755
======= =======
</TABLE>
(3) STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
On June 22, 1998, we issued 8,500,000 shares of common stock at $0.001 per
share. Of these shares, 8,480,000 were issued subject to a repurchase option.
The shares are released from our repurchase option over a four-year vesting
period at the rate of 1/48 at the end of each month from the date of purchase
until all shares are released. Our repurchase option is exercisable only within
90 days following the termination of the purchaser's employment, at which time
we are able to repurchase the unvested shares at the original purchase price of
$0.001 per share. As of December 31, 1999 4,416,667 shares of common stock were
not vested and, therefore, were subject to repurchase by us in the event of
termination of the purchaser's employment.
On September 23, 1998, under the terms of the 1998 Stock Plan (see below),
we granted stock purchase rights to and subsequently issued 500,000 shares of
common stock at $0.10 per share in exchange for $35,000 in promissory notes and
$15,000 in cash. Such shares were issued pursuant to a restricted stock purchase
agreement. The shares are released from our repurchase option over a four-year
vesting period at the rate of 1/48 at the end of each month from the date of
purchase until all shares are released. Our repurchase option is exercisable
only within 90 days following the termination of the purchaser's employment or
provision of services, at which time we are able to repurchase the unvested
shares at the original purchase price of $0.10 per share. As of December 31,
1999, 350,000 shares of common stock were not vested and, therefore, were
subject to repurchase by us in the event of termination of the purchaser's
employment or provision of services to us.
On February 25, 1999, under the terms of the 1998 Stock Plan (see below),
we granted stock purchase rights to and subsequently issued 444,000 additional
shares of common stock at $0.10 per share in exchange for promissory notes. Such
shares were issued pursuant to a restricted stock purchase agreement. The shares
are released from our repurchase option over a two-year vesting period at the
rate of 1/24 at the end of each month from the date of purchase until all shares
are released. Our repurchase option is exercisable only within 90 days following
the termination of the purchaser's employment or provision of services, at which
time we are able to repurchase the unvested shares at the original repurchase
price per share. As of December 31, 1999, 190,500 shares of common stock were
not vested and, therefore, subject to repurchase by us in the event of
termination of the purchaser's employment or provision of services to us.
F-10
<PAGE> 76
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock
We are authorized to issue 10,000,000 shares of preferred stock.
We issued 2,659,489 shares of series A convertible preferred stock at $1.00
per share during August and October 1998.
We issued 5,405,405 shares of series B redeemable convertible preferred
stock at $1.85 per share during October and November 1999.
A summary of the rights, preferences, privileges and restrictions relative
to the series A convertible preferred stock and series B redeemable convertible
preferred stock (Preferred Stock) follows:
Dividends. The holders of both the series A convertible preferred stock and
series B redeemable convertible preferred stock are entitled to receive
dividends, prior and in preference to holders of common stock and on a pari
passu basis, at the rate of $0.06 per annum, when and if declared by the Board
of Directors. Such dividends are not cumulative. No dividends have been declared
to date.
Liquidation. In the event that we liquidate, dissolve or wind up, the
holders of preferred stock shall be entitled to receive, prior and in preference
to the holders of common stock, an amount per share equal to (i) $1.00 per share
for each share of series A convertible preferred stock, plus declared but unpaid
dividends; and (ii) $1.85 per share for each outstanding share of series B
redeemable convertible preferred stock, plus declared but unpaid dividends. If,
upon the occurrence of such event, the assets and funds thus distributed are
insufficient to pay the full preferential amounts to all the holders of the
preferred stock, then our entire assets legally available for distribution shall
be distributed ratably among the holders of the preferred stock in proportion to
the preferential amount each such holder is otherwise entitled to receive. After
the liquidation preference has been paid to the holders of the preferred stock,
all remaining assets and funds shall be distributed ratably among the holders of
common stock. A merger, consolidation or sale of all or substantially all of our
assets, which will result in our stockholders immediately prior to such
transaction not holding at least 50% of the voting power of the surviving
corporation, shall be treated as a liquidation.
Conversion. Each share of preferred stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share into common stock. Each share of preferred stock shall be convertible into
the number of shares of common stock as is determined by dividing (i) $1.00 in
the case of series A convertible preferred stock; or (ii) $1.85 in the case of
series B redeemable convertible preferred stock by the conversion price
applicable to such shares. The initial conversion price is $1.00 per share of
series A convertible preferred stock and $1.85 per share of series B redeemable
convertible preferred stock. The preferred stock shall be automatically
converted into shares of common stock at the then applicable conversion rate
upon the Company's sale of its common stock in a firm commitment underwritten
public offering with a sales price per share (as adjusted) of at least $5.00 per
share and with aggregate gross proceeds to the Company of at least $15,000,000.
Antidilution Adjustments. The conversion price of each series of preferred
stock is subject to adjustment upon the occurrence of certain events described
in our Certificate of Incorporation, including the issuance of common stock for
a consideration per share less than the conversion price in effect for each
respective series of preferred stock, common stock dividends, common stock
splits and recapitalizations.
F-11
<PAGE> 77
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Redemption. The series A convertible preferred stock is not redeemable.
Each holder of series B redeemable convertible preferred stock has the right to
require us to redeem up to one-third of such series B redeemable convertible
preferred stock on each of October 1, 2005, October 1, 2006 and October 1, 2007,
with the right to carryforward such redemption onto subsequent anniversaries to
the extent it is not exercised in full on the applicable redemption date. The
redemption price per share shall be equal to the original series B redeemable
convertible preferred stock purchase price (subject to adjustment) plus all
declared but unpaid dividends.
Voting. Except as otherwise provided or required by law, the holders of
both series of preferred stock shall be entitled to vote on an as-converted
basis on all matters with the holders of common stock. Consent of more than 50%
of the holders of preferred stock, voting together as a class, shall be required
in order to (i) amend the Certificate of Incorporation or Bylaws; (ii)
liquidate, dissolve or wind up the Company; or (iii) sell or otherwise dispose
of all or substantially all of the Company's assets or merge into or consolidate
with another entity, as a result of which the holders of the outstanding shares
of the Company prior to the transaction hold less than 50% of the voting power
of the surviving corporation and which generates gross proceeds to the Company
and its stockholders of $50,000,000 or more. Consent of two-thirds of the
holders of series B redeemable convertible preferred stock, voting as a class,
is required to consummate a change of control involving gross proceeds to us and
our stockholders of less than $50,000,000.
Registration Rights. The holders of both series of preferred stock have
certain registration rights with respect to the preferred stock and the common
stock into which the preferred stock is convertible.
Piggyback Registration Rights. The holders of both series of preferred
stock have the right to request that shares of common stock issued or issuable
upon conversion of said preferred stock be included in any registration of
common stock that we perform. In any such registration, the underwriters may,
for marketing reasons, exclude all or part of the shares requested to be
registered on behalf of the holder. Notwithstanding the foregoing, we have the
right to terminate any such registration prior to its effectiveness regardless
of any request for inclusion by a holder.
Warrants
In June 1998, we issued a warrant to purchase 150,000 shares of series A
convertible preferred stock at an exercise price of $1.00 per share to one of
the holders of the series A convertible preferred stock, in consideration of
such holder's advance of funds to us prior to the closing of the series A
convertible preferred stock financing. The warrant expires on June 5, 2010. The
shares of Series A convertible preferred stock underlying this warrant are
entitled to the benefits of the registration rights granted by us to the holders
of series A convertible preferred stock.
In August 1999, we issued a warrant to purchase 70,000 shares of common
stock at an exercise price of $1.00 per share to the Company's landlord in
connection with the commercial lease of the Company's facilities. The warrant
will expire on the fifth anniversary of the Company's initial public offering
(or sooner under certain circumstances). The shares of common stock underlying
this warrant are not entitled to any registration rights. The fair value of
these warrants of $33,810 was estimated using a Black-Scholes model and the
following assumptions: estimated volatility of 60%, a risk-free interest rate of
5.27%, no dividend yield, and an expected life of 5 years. This fair value is
being amortized to rent expense over the lease term.
F-12
<PAGE> 78
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1998 Stock Plan
Pursuant to approval by the board of directors, effective September 23,
1998 we adopted the 1998 Stock Plan, allowing issuance of up to 1,500,000 shares
of common stock. The board of directors subsequently amended the 1998 Stock Plan
to increase the number of shares of common stock reserved for issuance under the
1998 Stock Plan to 2,500,000. The 1998 Stock Plan will terminate on September
23, 2008 or an earlier date as determined by the board of directors.
Under the 1998 Stock Plan, employees, directors and consultants (Service
Providers) may be granted options that allow for the purchase of shares of our
common stock. Nonstatutory stock options and stock purchase rights (see above)
may be granted to all Service Providers. Incentive stock options may only be
granted to employees.
Nonstatutory stock options may be granted under the 1998 Stock Plan at a
price not less than 110% and 85% of the fair value of the stock on the date the
option is granted where (a) the options are granted to Service Providers who, at
the time of grant, own stock representing more than 10% of the voting power of
all classes of stock, and (b) the options are granted to any other Service
Provider, respectively. Incentive stock options may be granted under the 1998
Stock Plan at a price not less than 110% and 100% of the fair market value of
the stock on the date the option is granted where (a) the options are granted to
employees who, at the time of the grant, own stock representing more than 10% of
the voting power of all classes of stock, and (b) the options are granted to any
other employee, respectively. The term of the nonstatutory and incentive stock
options granted is ten years or less from the date of the grant, as provided for
in the individual option agreement.
Vesting provisions of individual options may vary, except in the case of
options granted to officers, directors and consultants where vesting is at a
rate of no less than 20% per year over five years from the date of grant.
Forfeited options become available for reissuance under the 1998 Stock Plan.
There were no options granted during the period from May 4, 1998
(inception) through December 31, 1998.
The following table summarizes option activity under the 1998 Stock Plan:
<TABLE>
<CAPTION>
WEIGHTED-
RANGE OF NUMBER AVERAGE
EXERCISE OF EXERCISE
PRICES OPTIONS PRICE
----------- --------- ---------
<S> <C> <C> <C>
Options outstanding as of December 31, 1998......... $ -- -- $ --
Granted........................................... 0.10 - 0.20 1,361,200 0.12
Exercised......................................... 0.10 (1,000) 0.10
Forfeited......................................... 0.10 (65,000) 0.10
----------- --------- -----
Options outstanding as of December 31, 1999......... $0.10 - 0.20 1,295,200 $0.12
----------- --------- -----
Total number of shares exercisable as of December
31, 1999.......................................... $0.10 - 0.20 133,213 $0.11
=========== ========= =====
</TABLE>
As of December 31, 1999, 14,800 shares of common stock were available for
issuance under the 1998 Stock Plan either under stock options or stock purchase
rights.
F-13
<PAGE> 79
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, we are
required to disclose the pro forma effects on net loss and net loss per share as
if we had elected to use the fair value approach to account for all of our
employee stock-based compensation plans. Had compensation cost of our plans been
determined in a manner consistent with the fair value approach of SFAS No. 123,
our pro forma net loss and pro forma net loss per share would have been reduced
to the pro forma amounts indicated below:
Pro forma net loss:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
-------- -----------
<S> <C> <C>
Net loss as reported................................... $389,007 $ 4,499,585
Adjusted pro forma net loss............................ 389,007 4,505,402
Net loss per share basic and diluted as reported....... 0.06 0.48
Adjusted pro forma..................................... 0.06 0.48
</TABLE>
The per share weighted-average fair value of stock options granted during
1999 was $4.90 on the date of grant using the minimum value method with the
following weighted-average assumptions for grants during the period ended
December 31, 1999:
<TABLE>
<S> <C>
Expected dividend yield..................................... 0%
Risk-free interest rate range............................... 5.49 - 6.20%
Expected life............................................... 5 years
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- NUMBER WEIGHTED-
NUMBER CONTRACTUAL AVERAGE OF AVERAGE
EXERCISE OF LIFE EXERCISE VESTED EXERCISE
PRICES OPTIONS (YEARS) PRICE OPTIONS PRICE
-------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.10.. 992,200 9.48 $0.10 124,588 $0.10
0.20.. 303,000 9.94 0.20 8,625 0.20
--------- ---- ----- ------- -----
1,295,200 9.59 $0.12 133,213 $0.11
--------- ---- ----- ------- -----
</TABLE>
During the year ended December 31, 1999 we granted stock options under the
1998 Stock Plan to employees and non-employee consultants for which we recorded
deferred compensation of $2,283,565 and $4,231,462, respectively. No options
were granted in 1998.
For employees, deferred compensation represents the difference between the
exercise price of the option and the fair value of our common stock on the date
of grant in accordance with APB No. 25 and its related interpretations. For
non-employees, deferred compensation is recorded at the fair value of the
options granted in accordance with SFAS No. 123 and EITF 96-18. The fair value
for non-employee options was determined using a Black-Scholes model and the
following assumptions: estimated volatility of 60%, a risk free interest rate
ranging from 5.54 - 6.28%, no dividend yield, and an expected life of the option
equal to the options contractual life of ten years from the date of grant.
F-14
<PAGE> 80
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Compensation expense is being recognized over the vesting period for
employees and the service period for non-employees in accordance with FIN No.
28. For the year ended December 31, 1999, amounts amortized to the statement of
operations as compensation expense for employees and non-employees was $187,621
and $1,347,226, respectively.
(4) INCOME TAXES
Income tax expense for the period from May 4, 1998 (inception) through
December 31, 1998 and for the year ended December 31, 1999 is comprised of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1998:
Federal................................................ $ -- -- $ --
State.................................................. 800 -- 800
---- ---- ----
$800 -- $800
==== ==== ====
1999:
Federal................................................ $ -- -- $ --
State.................................................. 800 -- 800
---- ---- ----
Total............................................... $800 -- $800
==== ==== ====
</TABLE>
Tax expense differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax income for the period from May 4, 1998
(inception) through December 31, 1998 and for the year ended December 31, 1999
as a result of the following:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Computed "expected" tax expense (benefit).................. $(131,990) $(1,529,587)
Current NOLs for which no benefit was realized............. 130,098 1,528,441
Permanent differences...................................... 1,892 1,146
State taxes................................................ 800 800
--------- -----------
$ 800 $ 800
========= ===========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Intangible assets.................................... $ 11,275 $ 8,817
Issuance of options and warrants..................... -- 634,542
Net operating loss carryforward...................... 141,451 1,323,944
State taxes.......................................... 272 571
Research and development credit...................... 13,000 120,247
--------- -----------
Gross deferred tax assets......................... 165,998 2,088,121
Valuation allowance.................................. (165,998) (2,088,121)
--------- -----------
Net deferred tax assets........................... $ -- $ --
========= ===========
</TABLE>
F-15
<PAGE> 81
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
We have recorded a valuation allowance of $165,998 and $2,088,121 against
the deferred tax assets related to temporary differences and credits for federal
and state income tax purposes as of December 31, 1998 and 1999, respectively. We
believe that realization of these deferred tax assets is not assured, and
therefore we have not recognized the related deferred tax benefits. The change
in the valuation allowance for the years ended December 31, 1998 and 1999 was
$165,998 and $1,922,123, respectively.
As of December 31, 1999, we have operating loss carryforwards (expiring
through 2019 for federal purposes and 2006 for state purposes) of approximately
$3,324,000 and $3,323,000 for federal and state income tax purposes,
respectively. We have federal research credits (expiring through 2019) of
approximately $114,000. We have California research credits (carrying forward
indefinitely) of approximately $9,000.
Under provisions of the Internal Revenue Code, should substantial changes
in our ownership occur, the utilization of net operating loss carryforwards may
be limited.
(5) AGREEMENT WITH ALBERT EINSTEIN COLLEGE OF MEDICINE
On May 5, 1998, we entered into an exclusive, worldwide license agreement
(the Agreement) with Albert Einstein College of Medicine (AECOM) to gain
exclusive rights to certain intellectual property developed and patented by
AECOM. In consideration for the terms of the Agreement, we paid AECOM a one-time
licensing fee. In addition, we have paid the first three of four research
funding installments to be paid over the first two years of the Agreement. We
are not obligated to pay the remaining research funding payments in the event
that the Agreement is terminated. We are also required to make milestone
payments upon achievement of certain events with respect to licensed
intellectual property. Royalties for the life of the agreement equal 4% of net
product sales. If a product is combined with a drug or other substance for which
we are paying an additional royalty, the royalty rate we pay to AECOM is reduced
by one-half the amount of such additional royalty.
(6) LEASES
We lease office space and equipment pursuant to noncancelable operating
leases that will expire at various dates through 2002.
Minimum annual rentals are as follows:
<TABLE>
<S> <C>
Through December 31, 2000................................... $25,325
Through December 31, 2001................................... 1,992
Through December 31, 2002................................... 1,328
Through December 31, 2003................................... --
Through December 31, 2004 and thereafter.................... --
-------
Total..................................................... $28,645
=======
</TABLE>
Rent expense under noncancelable operating leases was $9,428 and $36,992
for the period from May 4, 1998 through December 31, 1998 and for the year ended
December 31, 1999, respectively.
(7) FIRST QUARTER 2000 EVENTS
Series C Redeemable Convertible Preferred Stock
On February 1, 2000, we issued 3,044,018 shares of series C redeemable
convertible preferred stock for approximately $14.2 million, net of issuance
costs. The series C redeemable convertible Preferred Stock has the same rights,
preferences and privileges as the series B redeemable convertible preferred
stock.
F-16
<PAGE> 82
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In connection with the issuance of the series C redeemable convertible
preferred stock, we issued warrants to purchase 120,000 shares of common stock
at $5 a share. The fair value of these warrants of $963,240 was estimated using
a Black-Scholes model and the following assumptions: estimated volatility of
60%, a risk-free interest rate of 4.59%, no dividend yield, and an expected life
equal to the contractual term of 5 years. This fair value was recognized as an
increase to additional paid-in capital in the three months ended March 31, 2000.
We determined that our series C preferred stock was issued with a
beneficial conversion feature. The beneficial conversion feature has been
recognized by allocating a portion of the preferred stock proceeds equal to the
intrinsic value of that feature, limited to the net proceeds received
(approximately $14.2 million), to additional paid-in capital. The intrinsic
value is calculated at the date of issue as the difference between the
conversion price of the preferred stock and the fair value of our common stock,
into which the preferred stock is convertible, multiplied by the number of
common shares into which the preferred stock is convertible, limited to the net
proceeds received. As our series C preferred stock is convertible into common
stock at the option of the holder, at the issuance date of the preferred stock
the entire $14.2 million discount resulting from the allocation of proceeds to
the beneficial conversion feature has been treated as a dividend and recognized
as a return to the preferred stockholders for purposes of computing basic and
diluted loss per share in the three months ended March 31, 2000.
Board Resolutions
In February 2000 our stockholders approved an amendment to our 1998 Stock
Plan increasing the number of shares of common stock available for issuance
under the plan by 700,000 to 3,200,000.
On February 1, 2000, our Board of Directors approved an amendment to our
certificate of incorporation increasing the total number of shares authorized to
34,150,000 shares, 22,000,000 of which are common stock and 12,150,000 of which
are preferred stock.
On March 9, 2000, our board of directors approved, subject to stockholder
approval, and effective upon the closing of our proposed initial public offering
the following resolutions:
- an amendment to our Certificate of Incorporation to increase the number
of authorized shares of common stock to 120,000,000, and
- an amendment to our 1998 Stock Plan providing non-employee directors with
an annual grant of options to purchase 20,000 shares of common stock.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in April 2000 and is subject to shareholder approval. A total of 500,000 shares
of common stock have been reserved for issuance under our 2000 Employee Stock
Purchase Plan, plus annual increases equal to the lesser of (i) 1,000,000
shares, (ii) 1% of the outstanding shares on such date, or (iii) a lesser amount
determined by our board of directors.
Our 2000 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the United States tax code, contains consecutive, overlapping
24-month offering periods. Each offering period includes four six month purchase
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first such offering
period which
F-17
<PAGE> 83
PAIN THERAPEUTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before May 1, 2002.
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee who immediately after
grant owns stock possessing 5% or more of the total combined voting power or
value of all classes of our capital stock, or whose rights to purchase stock
under all of our employee stock purchase plans accrues at a rate which exceeds
$25,000 worth of stock for each calendar year may not be granted an option to
purchase stock under this plan. The 2000 Employee Stock Purchase Plan permits
participants to purchase common stock through payroll deductions of up to 15% of
the participant's "compensation." Compensation is defined as the participant's
base straight time gross earnings and commissions but is exclusive of payments
for overtime, shift premium payments, incentive compensation, incentive
payments, bonuses and other compensation. The maximum number of shares a
participant may purchase during a six month purchase period is 7,500 shares.
Amounts deducted and accumulated by the participants are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 Employee Stock Purchase Plan is generally 85% of the
lower of the fair market value of the common stock at the beginning of the
offering period or at the end of the purchase period. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
Rights granted under the 2000 Employee Stock Purchase Plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the plan. The 2000 Employee Stock
Purchase Plan provides that, in the event of our merger with or into another
corporation or a sale of substantially all our assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set. The 2000 Employee Stock Purchase Plan will terminate automatically in
2010, unless terminated earlier. The Board of Directors has the authority to
amend or terminate the purchase plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the 2000 Employee Stock
Purchase Plan. Our Board of Directors has the exclusive authority to interpret
and apply the provisions of the purchase plan.
F-18
<PAGE> 84
DESCRIPTION OF ARTWORK:
INSIDE FRONT COVER PAGE:
The following words will appear across the top of the page in large, bold
type letters:
"Pain Therapeutics, Inc. is developing a new generation of opioid
painkillers. Our strategic goal is to build a specialty pharmaceutical
franchise in pain management."
Below, there will be an outline of an opium poppy plant with an overlay of
a table depicting our clinical development progress for product candidates
PTI-555, PTI-501, PTI-601 and PTI-701. The following text will appear in the
far left column of the table:
PTI-555
o Our new oral morphine painkiller for patients with moderate to
severe pain
PTI-501
o Our new injectable morphine painkiller for patients with moderate
to severe pain
PTI-601
o Our new tramadol painkiller for patients with moderate pain
PTI-701
o Our new hydrocodone/acetaminophen painkiller for patients with
moderate pain
The following words appear at the bottom of the page:
The clinical development process involves several phases of human clinical
trials. Phase I trials involve the introduction of the test drug into healthy
humans to analyze various effects, including pain relief, safety and dosage
tolerance. Phase II and Phase III trials evaluate dosage and assess pain relief
in an expanded population at geographically dispersed clinical study sites.
Phase III trials must be completed prior to seeking approval of the test drug by
the Food and Drug Administration through the submission of a New Drug
Application or NDA.
BUSINESS SECTION:
On page 30, we have included a diagram depicting the types of pain, with
examples of each type, that are typically treated with opioid drugs.
On page 31, we have included a table describing the three segments of the
pain management market and 1999 U.S. sales for typical opioid pain killers in
each segment.
On page 34, we have included a table summarizing our current four product
candidates and the stage of development and a description of the formulation of
each product candidate.
<PAGE> 85
PROSPECTUS
Edgar comment
5,000,000 Shares
Common Stock
THOMAS WEISEL PARTNERS LLC
CIBC WORLD MARKETS
TUCKER ANTHONY CLEARY GULL
--------------------------------------------------------------------------------
Neither we nor any of the underwriters have authorized anyone to provide
information different from that contained in this prospectus. When you make a
decision about whether to invest in our common stock, you should not rely upon
any information other than the information in this prospectus. Neither the
delivery of this prospectus nor the sale of our common stock means that
information contained in this prospectus is correct after the date of this
prospectus. This prospectus is not an offer to sell or solicitation of an offer
to buy these shares of common stock in any circumstances under which the offer
or solicitation is unlawful.
Until , 2000 (25 days after commencement of this offering), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
an addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Pain Therapeutics, Inc. in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 19,800
NASD filing fee............................................. 8,000
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................ 200,000
Legal fees and expenses..................................... 425,000
Accounting fees and expenses................................ 300,000
Blue Sky fees and expenses.................................. 1,500
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous expenses...................................... 40,700
----------
Total..................................................... $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VIII of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of the
Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Amended and Restated Bylaws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued unregistered securities to a limited number
of persons as described below:
Common Stock:
(1) In June 1998, we sold 8,480,000 shares of our common stock at a price
of $0.001 per share to a founder for $8,480.
II-1
<PAGE> 87
(2) In June 1998, we sold an aggregate of 20,000 shares of our common stock
at a price of $0.001 per share to investors for an aggregate purchase
price of $20.
(3) In September 1998, we sold 100,000 shares of our common stock at a
price of $0.10 per share to an investor for a purchase price of
$10,000.
(4) In September 1998, we sold an aggregate of 400,000 shares of our common
stock at a price of $0.10 per share to investors for an aggregate
purchase price of $40,000.
(5) In April 1999, we sold 300,000 shares of our common stock to an
investor at a price of $0.10 per share for a purchase price of $30,000.
(6) In May 1999, we sold an aggregate of 144,000 shares of our common stock
to investors at a price of $0.10 per share for an aggregate purchase
price of $14,400.
(7) In June 1999, we sold 1,000 shares of our common stock to a consultant
at a price of $0.10 per share for a total value of $100.
(8) In February 2000, we sold an aggregate of 245,000 shares of our common
stock at a price of $0.20 per share for an aggregate purchase price of
$49,000.
(9) In March 2000, we sold an aggregate of 26,042 shares of common stock at
a price of $0.10 per share for an aggregate purchase price of
$2,604.20.
(10)In March 2000, we sold an aggregate of 2,188 shares of common stock at
a price of $0.20 per share for an aggregate purchase price of $437.60.
Preferred Stock:
(1) In August 1998, we sold an aggregate of 1,100,000 shares of our series
A convertible preferred stock to investors at a price of $1.00 per
share for an aggregate purchase price of $1,100,000.
(2) In October 1998, we sold an aggregate of 1,559,489 shares of our series
A convertible preferred stock to investors at a price of $1.00 per
share for an aggregate purchase price of $1,559,489.
(3) In October 1999, we sold an aggregate of 4,846,320 shares of our series
B redeemable convertible preferred stock to investors at a price of
$1.85 per share for an aggregate purchase price of $8,956,692.
(4) In November 1999, we sold an aggregate of 559,085 shares of our series
B redeemable convertible preferred stock to investors at a price of
$1.85 per share for an aggregate purchase price of $1,034,307.
(5) In February 2000, we sold an aggregate of 3,044,018 shares of our
series C redeemable convertible preferred stock to investors at a price
of $5.00 per share for an aggregate purchase price of $15,220,090.
Stock Options and Stock Purchase Rights:
(1) From inception through March 2000, we granted stock options and stock
purchase rights to acquire an aggregate of 3,041,200 shares of our
common stock at prices ranging from $0.10 to $2.00 per share to
employees, consultants and directors pursuant to our 1998 Stock Plan.
(2) From inception through March 2000, we issued an aggregate of 1,218,230
shares of our common stock to employees, consultants and directors
pursuant to the exercise of stock options
II-2
<PAGE> 88
and stock purchase rights under our 1998 Stock Plan, for aggregate
consideration of $146,541.80.
Warrants:
(1) In June 1998, we issued a warrant to acquire 150,000 shares of our
series A convertible preferred stock at an exercise price of $1.00 per
share to an investor.
(2) In August 1998, we issued a warrant to acquire 70,000 shares of our
common stock at an exercise price of $1.00 per share to our landlord.
(3) In February 2000, we issued a warrant to acquire 120,000 shares of our
common stock at an exercise price of $5.00 per share to an investor.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein. The sales of the above
securities were deemed to be exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as transactions pursuant
to a compensatory benefit plan or a written contract relating to compensation,
or in reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about Pain Therapeutics, Inc. or
had access, through employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.1 Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of
the Registrant to be in effect upon closing of this offering
3.2* Form of Bylaws of the Registrant to be in effect upon
closing of this offering
4.1 Form of stock certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2+* License Agreement, dated May 5, 1998, between Registrant and
Albert Einstein College of Medicine
10.3* Research Agreement dated May 14, 1999 between the Registrant
and KP Pharmaceutical Technology, Inc.
10.4* Lease Agreement dated August 25, 1998 between the Registrant
and Britannia Pointe Grand Limited Partnership
10.5 1998 Stock Plan, as amended, and form of agreements
thereunder between the Registrant and certain
securityholders
10.6 2000 Employee Stock Purchase Plan
</TABLE>
II-3
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.7* Second Amended and Restated Investors' Rights Agreement
dated as of February 1, 2000 between Registrant and the
holders of its series B and series C redeemable convertible
preferred stock
10.8* Employment Agreement dated July 1, 1998 between the
Registrant and Mr. Barbier
10.9* Employment Offer Letter dated December 3, 1999 between the
Registrant and Mr. Jennings
10.10* Employment Offer Letter dated November 23, 1999 between the
Registrant and Mr. Johnson
10.11* Employment Offer Letter dated March 29, 1999 between the
Registrant and Dr. Sherman
23.1 Consent of KPMG LLP, Independent Certified Public
Accountants
23.2 Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (included on p. II-5 of the original
filing)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
-------------------------
+ Confidential treatment has been requested for certain portions of this
agreement. The omitted portions will be separately filed with the Securities
and Exchange Commission.
* Previously filed.
** To be filed by amendment.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
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.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement 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 a director,
officer or controlling person in connection with the securities being registered
hereunder, 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.
The undersigned Registrant hereby undertakes that:
(1) 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 a
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 this
Registration Statement as of the time it was declared effective.
(2) For the purpose 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-4
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto,
State of California, on the 20th day of June, 2000.
PAIN THERAPEUTICS, INC.
By: /s/ REMI BARBIER
---------------------------------------
Remi Barbier,
President, Chief Executive Officer
and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, as amended,
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>
/s/ REMI BARBIER* President, Chief Executive Officer June 20, 2000
--------------------------------------------- and Chairman of the Board of
Remi Barbier Directors (Principal Executive
Officer)
/s/ DAVID L. JOHNSON* Vice President, Finance and Chief June 20, 2000
--------------------------------------------- Financial Officer (Principal
David L. Johnson Financial and Accounting Officer)
/s/ GERT CASPRITZ, PH.D.* Director June 20, 2000
---------------------------------------------
Gert Caspritz, Ph.D.
/s/ NADAV FRIEDMANN, M.D., PH.D.* Director June 20, 2000
---------------------------------------------
Nadav Friedmann, M.D., Ph.D.
/s/ WILFRED R. KONNEKER, PH.D.* Director June 20, 2000
---------------------------------------------
Wilfred R. Konneker, Ph.D.
/s/ MICHAEL J. O'DONNELL* Director June 20, 2000
---------------------------------------------
Michael J. O'Donnell
/s/ SANFORD R. ROBERTSON* Director June 20, 2000
---------------------------------------------
Sanford R. Robertson
*By: /s/ REMI BARBIER Attorney-In-Fact June 20, 2000
----------------------------------------
Remi Barbier
Attorney-In-Fact
</TABLE>
II-5
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.1 Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of
the Registrant to be in effect upon closing of this offering
3.2* Form of Bylaws of the Registrant to be in effect upon
closing of this offering
4.1 Form of stock certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2+* License Agreement, dated May 5, 1998, between Registrant and
Albert Einstein College of Medicine
10.3* Research Agreement dated May 14, 1999 between the Registrant
and KP Pharmaceutical Technology, Inc.
10.4* Lease Agreement dated August 25, 1998 between the Registrant
and Britannia Pointe Grand Limited Partnership
10.5 1998 Stock Plan, as amended, and form of agreements
thereunder between the Registrant and certain
securityholders
10.6 2000 Employee Stock Purchase Plan
10.7* Second Amended and Restated Investors' Rights Agreement
dated as of February 1, 2000 between Registrant and the
holders of its series B and C redeemable convertible
preferred stock
10.8* Employment Agreement dated July 1, 1998 between the
Registrant and Mr. Barbier
10.9* Employment Offer Letter dated December 3, 1999 between the
Registrant and Mr. Jennings
10.10* Employment Offer Letter dated November 23, 1999 between the
Registrant and Mr. Johnson
10.11* Employment Offer Letter dated March 29, 1999 between the
Registrant and Dr. Sherman
23.1 Consent of KPMG LLP, Independent Certified Public
Accountants
23.2 Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (included on page II-5 of the original
filing)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
-------------------------
+ Confidential treatment has been requested for certain portions of this
agreement. The omitted portions will be separately filed with the Securities
and Exchange Commission.
* Previously filed.
** To be filed by amendment.
