<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 2000.
REGISTRATION NO. 333-96049
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DRUGABUSE SCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
------------------------------
<TABLE>
<S> <C> <C>
CALIFORNIA 2836 94-3222724
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1430 O'BRIEN DRIVE
MENLO PARK, CA 94025
(650) 462-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
PHILIPPE POULETTY, M.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DRUGABUSE SCIENCES, INC.
1430 O'BRIEN DRIVE
MENLO PARK, CA 94025
(650) 462-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
Susan Giordano, Esq. Paul Hilton, Esq.
Gunderson Dettmer Stough Lexi Methvin, Esq.
Villeneuve Franklin & Hachigian, LLP Brobeck, Phleger & Harrison, LLP
155 Constitution Drive 370 Interlocken Blvd., Suite 500
Menlo Park, California 94025 Broomfield, Colorado 80021
(650) 321-2400 (303) 410-2000
</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, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, 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. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value...... 4,600,000 $15.00 $69,000,000.00 $18,216.00
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a)
(3) A fee of $18,216.00 was previously paid by the Registrant in connection with
the filing of the Form S-1 on February 3, 2000.
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.
<PAGE>
PRELIMINARY PROSPECTUS Subject to completion, dated April , 2000
- --------------------------------------------------------------------------------
4,000,000 Shares
[DRUGABUSE SCIENCES LOGO]
Common Stock
- ---------------------------------------------------------
This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock. We expect the public offering
price to be between $13.00 and $15.00 per share.
We have applied to have our common stock listed on the Nasdaq National Market
under the symbol "DASI."
BEFORE BUYING ANY SHARES OF OUR COMMON STOCK YOU SHOULD READ THE DISCUSSION OF
MATERIAL RISKS OF INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON
PAGE 7.
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.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
- ----------------------------------------------------------------------------------
Public offering price $ $
- ----------------------------------------------------------------------------------
Underwriting discounts and commissions $ $
- ----------------------------------------------------------------------------------
Proceeds, before expenses, to DrugAbuse Sciences $ $
- ----------------------------------------------------------------------------------
</TABLE>
The underwriters may also purchase up to 600,000 shares of common stock from us
at the public offering price, less the underwriting discounts and commissions,
within 30 days from the date of this prospectus. This option may be exercised
only to cover over-allotments, if any. If the option is exercised in full, the
total underwriting discounts and commissions will be $4,508,000, and the total
proceeds, before expenses, to us will be $59,892,000 at an assumed public
offering price of $14.00 per share.
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares of common stock is expected to be made on
or about , 2000.
Warburg Dillon Read LLC Robertson Stephens
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus summary..................... 3
The offering........................... 5
Summary consolidated financial data.... 6
Risk factors........................... 7
Use of proceeds........................ 14
Dividend policy........................ 14
Capitalization......................... 15
Dilution............................... 17
Selected consolidated financial data... 19
Management's discussion and analysis of
financial condition and results of
operations........................... 22
Business............................... 27
Management............................. 49
Related party transactions............. 61
Principal shareholders................. 65
Description of securities.............. 68
Shares eligible for future sale........ 71
Underwriting........................... 73
Legal matters.......................... 75
Experts................................ 75
Change in independent accountants...... 75
Where you can find more information.... 77
Index to consolidated financial
statements........................... F-1
</TABLE>
<PAGE>
Prospectus summary
While this summary highlights what we believe to be the most important
information about this offering, you should read the entire prospectus carefully
for a complete understanding of the offering and our business.
OUR BUSINESS
We believe we are the first biotechnology company dedicated to developing and
marketing novel therapies for alcohol and drug abusers. We intend to become the
leading biopharmaceutical company in addiction care by offering a broad
portfolio of medications to serve the addiction care community. Our strategy is
to develop several medications in the near term and expand our product portfolio
through research and the acquisition of marketed products and technologies. We
intend to build a sales force to market our products, taking advantage of the
concentrated addiction care market.
THE PROBLEM
Addiction is a chronic disease of the brain. Current therapy depends heavily on
psychosocial therapy and the few available medications. However, we believe
psychosocial therapy alone is insufficient as it does not address the biological
basis of addiction. Furthermore, because of their underlying neurological
disease, addicts typically have great difficulty taking pills every day and
therefore current medications usually fail. Consequently, only a minority of
patients receiving treatment remain alcohol or drug free after one year.
Alcohol, heroin, cocaine and methamphetamine all affect a common neurological
pathway, which involves the neurotransmitter dopamine. Medications that affect
the dopamine pathway are available to treat alcohol and heroin dependence.
However, to be effective in maintaining abstinence, these medications need to be
taken every day on a long-term basis. There are no medications for treating
addiction to other drugs of abuse, such as cocaine and methamphetamine. There is
a great need for novel therapies which can improve compliance with existing
medications and offer new means to promote abstinence, prevent relapse, and
treat overdose for alcohol, heroin, cocaine and methamphetamine abusers.
OUR SOLUTION
We are developing a broad portfolio of biopharmaceutical products that address
key medical needs of alcohol abusers and drug addicts. We are developing product
candidates for the treatment of alcohol abuse and heroin addiction, NALTREL-TM-,
BUPREL-TM- and METHALiz-TM-, to improve existing medications. These products are
designed to be administered only once a month by a physician or a nurse, as
opposed to once a day by the patient. By putting the medical practitioner in
control, our products are expected to promote continuous therapy and help
overcome patient non-compliance. Our other product candidates, COC-AB-TM-,
MAP-AB-TM- and ITAC-TM-, are intended to provide novel means to treat patients
suffering from cocaine and methamphetamine overdose and addiction.
In 2000, to support prospective market approval, we expect to conduct clinical
trials with NALTREL for the treatment of alcohol and heroin dependence. In
parallel, in the next 18 months we expect to conduct several human trials with
BUPREL and METHALiz for the treatment of severe heroin addiction and with COC-AB
and ITAC for the treatment of cocaine overdose and addiction.
3
<PAGE>
OUR STRATEGY
We intend to:
- - Focus on the large but under-served alcohol and drug addiction care market;
- - Develop several medications in the near term;
- - Build a broad product portfolio through internal discovery research and
development, and the licensing or acquisition of commercial products and
product candidates; and
- - Market our products in the United States and Europe using our own dedicated
sales force.
Our principal executive offices are located at 1430 O'Brien Drive, Menlo Park,
CA 94025. Our telephone number is (650) 462-1000. AlcoholMD-TM-, BUPREL-TM-,
COC-AB-TM-, DAS-TM-, DrugAbuse Sciences-TM-, ITAC-TM-, Lactiz-TM-, MAP-AB-TM-,
METHALiz-TM- and NALTREL-TM- are our trademarks. Trade names, service marks or
trademarks of other companies appearing in this prospectus are the property of
their respective holders.
4
<PAGE>
The offering
The following information assumes that the underwriters do not exercise the
over-allotment option granted by us to purchase additional shares in the
offering.
<TABLE>
<S> <C>
Common stock offered by us................... 4,000,000 shares
Common stock to be outstanding after the
offering................................... 16,502,131 shares
Proposed Nasdaq National Market symbol....... DASI
Use of proceeds.............................. Research and development, sales and
marketing, general and administration and
working capital and general corporate
purposes. See "Use of proceeds."
</TABLE>
Except as otherwise indicated, the information in this prospectus, including the
number of shares to be outstanding after this offering assumes the following:
- - the automatic conversion of all outstanding shares of preferred stock into
7,305,769 shares of our common stock upon the closing of this offering
(which includes the 2,445,131 shares of our Series D Preferred Stock which
we issued in exchange for 1,849 shares of common stock in DrugAbuse
Sciences, SAS, our French Subsidiary on February 1, 2000);
- - net exercise of outstanding warrants to purchase 1,815,912 shares of our
common stock at an assumed public offering price of $14.00 per share;
- - 6-for-1 reverse split of the common stock to be effected prior to the
closing of this offering; and
- - no exercise of the underwriters' over-allotment option.
The information in this prospectus, unless otherwise indicated, does not assume
inclusion of the following:
- - 600,000 shares issuable upon exercise of the underwriters' over-allotment
option;
- - 374,519 shares that may be issuable upon the exercise of warrants
outstanding as of January 20, 2000;
- - 1,042,729 shares issuable upon the exercise of options outstanding as of
January 20, 2000, at a weighted average exercise price of $0.36 per share;
and
- - 1,656,417 shares made available for future grants and awards under our stock
plans to be effective at the close of this offering. For a description of
our stock option and stock purchase plans, please see "Management--Stock
plans."
The number of shares of common stock outstanding after the offering is based on
shares outstanding as of December 31, 1999, based on the assumptions above.
Please see "Capitalization."
5
<PAGE>
Summary consolidated financial data
The following table summarizes the financial data for our business during the
periods indicated. You should read the data set forth below in conjunction with
"Management's discussion and analysis of financial condition and results of
operations" and our consolidated financial statements and related notes thereto
included elsewhere in this prospectus.
Note 2 to our Notes to Consolidated Financial Statements explains how we
determined the number of shares we used to compute our basic and diluted net
loss per share available to common shareholders and our pro forma net loss per
share available to common shareholders.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: 1997 1998 1999
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Grant revenues......................................... $-- $810,607 $1,224,605
Loss from operations................................... (1,382,412) (1,272,946) (6,379,053)
Net loss............................................... (1,300,163) (1,192,343) (6,228,002)
Dividend related to beneficial conversion feature of
preferred stock...................................... -- -- (20,241,746)
Net loss available to common shareholders.............. (1,300,163) (1,192,343) (26,469,748)
Net loss per share available to common shareholders,
basic and diluted.................................... $(0.61) $(0.56) $(12.40)
=========== =========== ============
Shares used in computing net loss per share available
to common shareholders, basic and diluted............ 2,114,506 2,116,728 2,134,073
Pro forma net loss per share available to common
shareholders......................................... $(4.67)
============
Shares used in computing pro forma net loss per share
available to common shareholders..................... 5,672,186
============
</TABLE>
The pro forma information for the consolidated balance sheet data at
December 31, 1999 represents:
- the automatic conversion of all outstanding preferred stock into
7,305,769 shares of common stock (which includes the 2,445,131 shares of
our Series D preferred stock which we issued in exchange for 1,849 shares
of common stock of DrugAbuse Sciences, SAS, our French subsidiary, which
we had reflected as minority interests and which was converted on
February 1, 2000);
- the sale of 4,000,000 shares of common stock offered by us at the
estimated initial public offering price of $14.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------
1999
1999 PRO FORMA
CONSOLIDATED BALANCE SHEET DATA: 1997 1998 ACTUAL AS ADJUSTED
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents.................... $2,305,882 $1,039,315 $19,224,906 $69,804,906
Total assets................................. 2,693,408 1,997,048 21,036,632 71,616,632
Long-term obligations and capital lease
obligations................................ 478,684 543,090 367,789 367,789
Minority interest convertible into equity
securities of the Parent................... -- -- 11,654,492 --
Total shareholders' equity................... 1,707,699 862,490 7,833,442 70,067,934
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
Risk factors
An investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and the other information in this
prospectus before investing in our common stock. Our business and results of
operations could be seriously harmed if any of the following risks occur. In
this case the trading price of our common stock could decline due to any of
these risks, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY WITH A HISTORY OF LOSSES AND WE EXPECT TO
INCUR LOSSES IN THE FUTURE
We commenced operations in late 1994 and are still a development stage company.
We have not commercialized any products, have incurred significant losses to
date and expect to incur future losses. Our expenses have consisted principally
of costs incurred in research and development and from general and
administrative costs associated with our operations. Operating losses were
approximately $1.4 million, $1.3 million and $6.4 million for the fiscal years
ended December 31, 1997, 1998 and 1999, respectively. We had an accumulated
deficit of approximately $29.8 million at December 31, 1999. We expect our
expenses to increase and to continue to incur operating losses for at least the
next several years as we continue our research and development efforts and
develop and market our products. Our future success and profits depend upon our
ability to market and sell our products. The time frame to achieve market
success for any one of our products is long and uncertain and may not occur at
all. As a result, we may never become profitable.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS, WE MAY NOT BE ABLE TO SUPPORT OUR
OPERATIONS
Based on our current plans, we believe our cash, cash equivalents and short-term
investments, together with the net proceeds of this offering will be sufficient
to fund our operating expenses and capital requirements through at least the
next 18 months. However, if we require additional funds and we are unable to
obtain them on terms favorable to us, we may be required to delay, scale back or
eliminate some or all of our research and development programs or to license
third parties to market products or technologies that we would otherwise seek to
develop or market ourselves. If we raise additional funds by selling additional
shares of our capital stock, our shareholder's ownership interest will be
diluted.
IF WE DO NOT DEMONSTRATE THE SAFETY AND EFFECTIVENESS OF OUR PRODUCTS IN
CLINICAL TRIALS, WE WILL NOT BE ABLE TO APPLY FOR REGULATORY APPROVAL OF OUR
PRODUCTS
NALTREL-TM- is the only product candidate for which we have initiated clinical
trials involving human testing. Our other product candidates, BUPREL-TM-,
METHALiz, COC-AB-TM-, MAP-AB-TM- and ITAC-TM-, are still in the pre-clinical
testing phase. Conducting clinical trials is a lengthy, time-consuming,
uncertain and expensive process. We will incur substantial expenses for, and
devote significant time and resources to, pre-clinical testing and clinical
trials of our product candidates. It may take up to a minimum of two to three
years to complete trials for our first product. Clinical trials are subject to
various interpretations. Regulatory authorities may not agree with us regarding
our trial design, methods of analysis and our interpretations of clinical
results. If that occurs, regulatory authorities may require us to change our
trial design or conduct new trials.
- --------------------------------------------------------------------------------
7
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
In addition, it is possible that we could encounter problems in a clinical trial
that would significantly delay the completion of the trial, require us to repeat
the study or cause us to abandon the trial or our product candidates altogether.
IF WE DO NOT OBTAIN THE NECESSARY DOMESTIC AND FOREIGN REGULATORY APPROVALS,
THEN WE WILL NOT BE ABLE TO SELL OUR PRODUCTS
Numerous governmental authorities in the United States and Europe regulate the
production and marketing of our products and our ongoing research and
development activities. We will need to obtain approvals from the appropriate
regulatory authorities to market and sell our products. Foreign regulations can
vary among countries and foreign regulatory authorities may require different or
additional clinical trials than we conduct to obtain FDA approval.
The length of the regulatory review period varies considerably, as does the
amount of pre-clinical and clinical data required to demonstrate the safety and
effectiveness of a specific product. In addition, if the FDA or any other
foreign regulatory agency, changes its policy position during the period of
product development, we will encounter additional delays or possibly rejections.
Our approved products, their manufacturers and their manufacturing facilities
will be subject to continual review and periodic inspections. If we discover
unknown problems with one of our products, its manufacturer or facilities after
regulatory approval, regulatory agencies may place restrictions on the product
or manufacturer, or may require withdrawal of the product from the market.
We have relied upon scientific, technical, clinical, commercial and other data
supplied and disclosed by outside collaborators and will rely in part on such
data in support of our initial drug applications and subsequent clinical trials
for our products. If the FDA or any other foreign regulatory agency does not
permit us to rely upon such data to support our applications or subsequent
clinical trials or if the information contains errors or omissions of fact, it
will delay our research and development efforts and it is unlikely that we will
obtain the necessary regulatory approval for our products.
IF THE MARKET FOR MEDICATIONS TO TREAT ADDICTIONS DOES NOT DEVELOP, WE WILL NOT
BE SUCCESSFUL
The market for medications to treat addictions is a new market. If this market
does not develop and the addiction care community does not widely accept our
products, either because physicians do not prescribe them or patients do not
take them, we will not be successful.
IF WE DO NOT MAINTAIN OUR COLLABORATIVE RELATIONSHIPS WITH OTHER PARTIES, WE
WILL BE UNABLE TO DEVELOP AND MANUFACTURE OUR PRODUCTS
We rely heavily upon other parties for many important stages of our discovery,
research and product development, including:
- - manufacturing of our product candidates;
- - conducting of pre-clinical trials and clinical studies; and
- - development of new products and technologies under the license of existing
patented and proprietary information.
We will also rely upon other parties to manufacture our commercial products. In
addition, we license most of our technology from strategic partners. We license
the sustained-release polymer technology, called Lactiz, which is used in
NALTREL, BUPREL and METHALiz from Southern Research Institute and we license our
ITAC technology from The Scripps Institute. The successful completion of our
clinical trials and the sale of our products depends upon the continued
relationship with these partners.
- --------------------------------------------------------------------------------
8
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
If any of these partners were to terminate the licensing arrangement, or if the
licensor failed to perform its obligations under the agreements, we would be
unable to continue with our product testing and would not be successful in
bringing our product to the market.
COMPETITORS HAVE DEVELOPED OR COULD DEVELOP PRODUCTS OR TECHNOLOGIES THAT
COMPETE WITH OUR PRODUCTS AND THAT COULD RENDER OUR PRODUCTS OBSOLETE
Many of our competitors have greater financial, operational, sales and marketing
resources, and more experience in research and development than we have.
Products developed by these competitors could have advantages significantly
outweighing those of the products that we are seeking to develop and even render
our products obsolete. We expect the intensity of competition to increase.
Currently, we compete with biotechnology, pharmaceutical, chemical and other
companies, academic and scientific institutions, governmental agencies and
public and private research organizations.
Technological advances, new treatments and new products could make our products
obsolete or unsuccessful in the market. In particular, the patents for
naltrexone, methadone and buprenorphine have expired and several competitors may
be developing products similar to ours based on the same basic compounds.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON OR
MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS
Our products may conflict with patents that have been or may be granted to
competitors, universities or others. In the event someone brings an infringement
claim against us, we could face legal actions seeking damages and seeking to
enjoin clinical testing, manufacturing and marketing of the affected product.
This type of litigation could consume a substantial portion of our resources,
and if there was an adverse outcome to the litigation, we might not be able to
sell the affected product. If any claims of third-party patents are upheld as
valid and enforceable with respect to a product or process made, used or sold by
us, we could be prevented from practicing the subject matter claimed in those
patents or could be required to obtain licenses or redesign our products or
processes to avoid infringement. As a result, we would be liable to pay damages
that may exceed our resources. We may not be able to obtain necessary licenses
on commercially reasonable terms, or we may not be successful in attempting to
redesign our products to avoid infringement.
IF ONE OF OUR THIRD PARTY MANUFACTURERS WERE TO TERMINATE THEIR RELATIONSHIP
WITH US, WE WOULD NEED TO OBTAIN A NEW MANUFACTURER FOR OUR PRODUCTS AND WOULD
BE DELAYED IN OUR COMMERCIAL SALES
We have no manufacturing facilities for clinical production of our products and
we rely on third parties for the manufacture of drug product. If we are unable
to enter into new agreements with our manufacturers for our clinical trials or
commercial manufacture of our products, we will need to obtain regulatory
approval for any alternate manufacturer which may delay the commercialization of
our products and possibly invalidate our clinical trials.
Aventis Pasteur manufactures COC-AB for use in our clinical trials and for
commercial sale. SP Pharmaceuticals manufactures Naltrel for use in our clinical
trials. Our use of third party manufacturers involves risks, including:
- - reduced control over quality, timing and scale of production;
- - inability to manufacture products on reasonable terms;
- - inability to produce commercial quantities of our products;
- --------------------------------------------------------------------------------
9
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
- - loss of FDA approval or approval from other foreign regulatory agencies; and
- - in the case of products containing controlled substances, loss of DEA
approval.
If any of these risks were to materialize, this could delay pre-clinical testing
and clinical trials it could invalidate the results from these trials and we
could be unable to meet commercial manufacturing quantity and quality
requirements.
We currently do not have any agreements for the manufacture of BUPREL, METHALiz,
or ITAC for clinical trials. We have entered into an agreement with Aventis
Pasteur for the commercial manufacture of COC-AB but we currently do not have
any other agreements for the commercial manufacture of our other product
candidates. We may not be able to enter into manufacturing agreements for our
other product candidates on commercially reasonable terms or at all.
IF ONE OF OUR THIRD-PARTY SUPPLIERS WERE TO TERMINATE THEIR RELATIONSHIP WITH
US, WE WILL HAVE DELAYS IN OUR CLINICAL TRIALS
Each of our suppliers must be qualified and approved according to the FDA, DEA
and other foreign regulatory agencies' policies. If any of our suppliers were
unable to supply us with the necessary materials in a timely fashion, we would
need to obtain a substitute vendor. Obtaining a substitute vendor would not only
delay the timing of our pre-clinical testing and clinical trials, but would
require the submission of additional regulatory applications, which could take
several months to process. The delay of our testing would inhibit our ability to
obtain regulatory approval and therefore, we would not be able to sell our
products for an indeterminate amount of time.
IF WE DO NOT ESTABLISH SALES AND MARKETING CAPABILITIES, WE WILL NOT BE ABLE TO
SELL OUR PRODUCTS
We have no sales and marketing experience. Even if we obtain approval for our
products, if we do not establish the sales and marketing capabilities necessary
to commercialize our products, we will never be successful. We will need to
invest significant amounts of capital to establish sufficient sales and
marketing capability. We will need to recruit and retain skilled sales
management, direct salespersons or distributors. If we enter into distribution
arrangements with third parties for the sale of our products, we will be
dependent on them. If we are unable to attract and retain a skilled sales and
marketing team, or if third party distributors do not perform as expected, we
will not become profitable.
IF OUR PRODUCTS ARE ALLEGED TO BE HARMFUL, WE WILL NOT BE ABLE TO SELL THEM AND
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS
In the event that anyone alleges that any of our products are harmful, we may
experience reduced consumer demand for our products and our products may be
recalled from the market. In addition, we may be forced to defend a lawsuit and,
if unsuccessful, to pay a substantial amount in damages. We currently have
insurance against liability risks associated with pre-clinical testing and
clinical trials, and intend to obtain coverage to insure against liability risks
associated with manufacturing and marketing of our products. If our insurance
coverage limits are not adequate to protect us from the liabilities we might
incur in connection with the clinical testing or sales of our products, we will
be required to pay for the damages associated with the liabilities. Insurance is
expensive and, in the future, may not be available on acceptable terms, if at
all. A successful product liability claim or series of claims brought against us
in excess of our insurance coverage, or a recall of our products, could have a
detrimental effect on our business, financial condition and results of
operations.
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10
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, OUR BUSINESS WILL NOT
DEVELOP OR EXPAND
Our success will depend on our ability to attract and retain key employees and
scientific advisors. Competition among biotechnology and biopharmaceutical
companies for highly skilled scientific and management personnel, particularly
in our geographic region, is intense. We anticipate expanding our existing
functions and entering into new areas and activities, which require additional
expertise, such as clinical testing, regulatory compliance, marketing and
distribution. This expansion will place increased demands on our resources.
These activities will require the addition of new personnel with expertise in
these areas and the development of additional expertise by existing personnel.
If we fail to acquire such personnel, lose existing personnel, specifically
current members of our management team, such as our Chief Executive Officer, or
fail to develop this expertise, our success would be hindered. We maintain a
key-man life insurance policy on the life of our founder and Chief Executive
Officer, Philippe Pouletty, in the amount of $5.0 million.
We also depend on the continued availability of outside scientific collaborators
who perform research in areas relevant to our business, and on consultants and
scientific advisors. Our scientific collaborators, consultants and advisors are
not our employees and generally may terminate their relationship with us at any
time. As a result, we have limited control over their activities and can expect
that only limited amounts of their time will be dedicated to our research.
Although our scientific collaborators have agreed not to engage in activities
that would involve a conflict of interest with our business, it is possible that
this could occur in the future.
WE HAVE EXPERIENCED RECENT GROWTH AND IF WE DO NOT MANAGE THIS GROWTH
EFFECTIVELY, IT COULD AFFECT OUR ABILITY TO PURSUE BUSINESS OPPORTUNITIES AND
EXPAND OUR BUSINESS
If we fail to effectively manage our growth it could affect our ability to
pursue business opportunities and expand our business. We have recently expanded
our management team, adding a Vice President of Clinical Development in
October 1999, a Senior Vice President of Marketing and Sales, a Vice President
of Regulatory Affairs and a Senior Vice President of European Development in
January of this year. Philippe Pouletty, the founder and Chairman of our
company, replaced our former Chief Executive Officer in December of 1999 and our
Chief Financial Officer, a director since 1998, joined our management team in
April of 1999. Since we have only recently added these officers, it may take
some time before the management team is able to effectively work together and
manage our business or operations. In addition, our management team will need to
expand, train and manage our workforce and continue to improve our operational
and financial systems and managerial controls.
We have only recently implemented financial and accounting processes, controls,
reporting systems and procedures. For example, we have recently implemented
commercial accounting software. We have only 3 personnel in our internal
financial and accounting group. We believe that we need to hire additional
financial and accounting personnel to manage future growth. Additionally, due to
our international operations and the difference in accounting conventions
between the United States and Europe, there is added complexity in our financial
reporting and controls that we must overcome.
RISKS RELATED TO THIS OFFERING
CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK AMONG OUR EXISTING EXECUTIVE
OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS MAY PREVENT NEW INVESTORS FROM
INFLUENCING SIGNIFICANT CORPORATE DECISIONS
Upon completion of this offering, our executive officers, directors and
beneficial owners of 5% or more of our common stock and their affiliates will,
in aggregate, beneficially own approximately 48.19% of our outstanding common
stock or 46.55% if the underwriters' over-allotment option is
- --------------------------------------------------------------------------------
11
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
exercised in full. As a result, these persons, acting together, will have the
ability to determine the outcome of all matters submitted to our shareholders
for approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets. In addition,
these persons, acting together, will have the ability to control the management
and affairs of our company. Accordingly, this concentration of ownership may
harm the market price of our common stock by:
- - delaying, deferring or preventing a change in control of our company;
- - impeding a merger, consolidation, takeover or other business combination
involving our company; or
- - discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.
Please see "Principal shareholders" for additional information on concentration
of ownership of our common stock.
OUR STOCK PRICE COULD BE VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE IN
VALUE, WHICH IN TURN COULD AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL TO
FUND THE COMMERCIALIZATION OF OUR PRODUCTS
The trading price of our common stock is likely to be highly volatile and could
be subject to wide fluctuations in price in response to various factors, many of
which are beyond our control, including:
- - actual or anticipated variations in quarterly operating results;
- - announcements of technological innovations or breakthroughs in research by
us or our competitors;
- - delay or failure in initiating, conducting, completing or analyzing clinical
trials or unsatisfactory design or results of these trials;
- - achievement of regulatory approvals;
- - new products or services introduced or announced by us or our competitors;
- - changes in financial estimates by securities analysts;
- - conditions or trends in the biotechnology, pharmaceutical and addiction care
industries;
- - announcements or departures of key personnel; and
- - sales of our common stock.
In addition, the stock market in general and the market for pharmaceutical and
biotechnology companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to a company's
operating performance. These broad market and industry factors may seriously
harm the market price of our common stock, regardless of our operating
performance. In the past, shareholders have initiated securities class-action
litigation against companies whose securities have experienced periods of
volatility. If this type of litigation was instituted against us, we would be
faced with substantial costs and management's attention and resources would be
diverted, which could in turn seriously harm our business and financial
condition.
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12
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD
CAUSE OUR STOCK PRICE TO DECLINE
Sales of substantial amounts of our common stock in the public market after this
offering could seriously harm prevailing market prices for our common stock.
Upon completion of this offering, we will have 16,502,131 shares of common stock
outstanding, 4,000,000 of which will be freely tradeable. An additional
7,539,786 shares will become available for sale 180 days after the date of this
prospectus. These sales might make it difficult or impossible for us to sell
additional securities when we need to raise capital. The number of additional
shares available for sale in the public market will be affected by volume
restrictions imposed by law. Generally, other than for shares sold in this
offering, shareholders who have held their shares for at least one year may sell
no more than the greater of 1% of the outstanding shares or the average weekly
trading volume in any 90-day period. Shareholders who have held their shares for
more than two years can sell without restrictions.
Please see "Shares eligible for future sale" for a description of the number of
shares which may be sold by existing shareholders in the future.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND CALIFORNIA LAW COULD MAKE
A THIRD-PARTY ACQUISITION OF US DIFFICULT. THIS COULD LIMIT THE PRICE INVESTORS
MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK
The anti-takeover provisions in our articles of incorporation, our bylaws and
California law could make it more difficult for a third party to acquire us
without approval of our board of directors. As a result of these provisions we
could delay, deter or prevent a takeover attempt or third party acquisition that
our shareholders consider to be in their best interests, including a takeover
attempt that results in a premium over the market price for the shares held by
our shareholders.
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13
<PAGE>
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Use of proceeds
We estimate that our net proceeds from the sale of the 4,000,000 shares of
common stock that we are offering will be approximately $50.6 million, assuming
an estimated initial public offering price of $14.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $58.4 million. We have not
yet determined our expected use of these proceeds, but we estimate that we will
use approximately $20.0 million for research and development, $8.0 million for
sales and marketing, $11.0 million for general and administrative expenses and
$11.6 million for general corporate purposes, including working capital. The
amounts that we actually expend will vary significantly depending on any number
of factors, including future revenue growth, if any, and the amount of cash we
generate from operations. As a result, we will retain broad discretion over the
allocation of the net proceeds from this offering. A portion of the net proceeds
may also be used for the acquisition of businesses, products and technologies
that are complementary to ours. We have no current agreements or commitments for
acquisitions of complementary businesses, products or technologies. Pending
these uses, we will invest the net proceeds of this offering in short-term,
investment grade and interest-bearing securities.
Dividend policy
We have never declared or paid any cash dividends since inception and do not
currently anticipate paying any cash dividends in the foreseeable future. Any
future determination relating to dividend policy will be made at the discretion
of our board of directors and will depend on a number of factors, including
future earnings, capital requirements, financial condition and future prospects
and other factors the board of directors may deem relevant.
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14
<PAGE>
- --------------------------------------------------------------------------------
Capitalization
The following table shows our capitalization as of December 31, 1999;
- - On an actual basis; and
- - On a pro forma basis to give effect to:
- the automatic conversion of all outstanding shares of preferred stock into
7,305,769 shares of our common stock upon the closing of this offering
(which includes the 2,445,131 shares of our Series D Preferred Stock which
we issued in exchange for 1,849 shares of common stock in DrugAbuse
Sciences, SAS, our French subsidiary, which we had reflected as minority
interests and which was converted on February 1, 2000);
- net exercise of outstanding warrants to purchase 1,815,912 shares of our
common stock at an assumed public offering price of $14.00 per share;
- 6-for-1 reverse split of the common stock to be effected prior to the
closing of this offering; and
- no exercise of the underwriters' over-allotment option.
- - On a pro forma as adjusted basis:
- our receipt of the estimated net proceeds from our sale of 4,000,000
shares of common stock in this offering at an assumed initial offering
price of $14.00 and, after deducting the underwriting discounts and
commissions and estimated offering expenses; and
- the filing of new articles of incorporation upon the closing of this
offering.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total long-term obligations and capital lease
obligations..................................... $367,789 $367,789 $367,789
------------ ------------ -----------
Minority interest convertible into equity
securities of the Parent........................ 11,654,492 -- --
------------ ------------ -----------
Shareholders' equity:
Convertible preferred stock: $0.001 par value;
shares authorized: 7,707,414; shares issued
and outstanding, actual 4,860,638; no shares
outstanding, pro forma or pro forma as
adjusted...................................... 4,861 -- --
Common stock: $0.001 par value; shares
authorized: 85,000,000; shares issued and
outstanding, actual 3,380,450; shares issued
and outstanding, pro forma 12,502,131; shares
issued and outstanding, pro forma as adjusted;
16,502,131.................................... 2,721 10,027 14,027
Additional paid-in capital........................ 52,714,300 64,366,347 114,942,347
Deferred stock compensation....................... (14,409,691) (14,409,691) (14,409,691)
Note receivable from shareholders................. (510,950) (510,950) (510,950)
Accumulated other comprehensive loss.............. (126,018) (126,018) (126,018)
Deficit accumulated during the development
stage........................................... (29,841,781) (29,841,781) (29,841,781)
------------ ------------ -----------
Total shareholders' equity........................ 7,833,442 19,487,934 70,067,934
------------ ------------ -----------
Total capitalization.......................... $19,855,723 $19,855,723 $70,435,723
============ ============ ===========
</TABLE>
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15
<PAGE>
CAPITALIZATION
- --------------------------------------------------------------------------------
This table excludes:
- - 1,042,729 shares of common stock issuable upon exercise of stock options
outstanding as of January 20, 2000 at a weighted average exercise price of
$0.36 per share;
- - 750,000 shares of common stock available for issuance under our 2000 Stock
Incentive Plan;
- - 375,000 shares of common stock available for issuance under our 2000
Employee Stock Purchase Plan;
- - 200,000 shares of common stock available for issuance under our 2000
Directors' Option Plan; and
- - 374,519 shares of common stock that may be issuable upon exercise of
outstanding warrants at an exercise price of $0.06 per share;
To the extent that these options are exercised, there will be further dilution
to new investors. Please see "Management--stock plans," and Note 8 of "Notes to
Consolidated Financial Statements" for further information regarding our stock
option plans.
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16
<PAGE>
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Dilution
Our net tangible book value as of December 31, 1999 was $19.5 million, or
approximately $2.36 per share, based on the number of common shares outstanding
as of December 31, 1999, calculated giving effect to:
- - the automatic conversion of all outstanding shares of preferred stock into
4,860,638 shares of our common stock upon the closing of this offering;
- - 6-for-1 reverse stock split of the common stock to be effected prior to the
closing of this offering; and
- - no exercise of underwriters' over-allotment option.
Net tangible book value per share is equal to our total tangible assets, less
liabilities divided by the shares of common and preferred stock outstanding.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to our sale
of 4,000,000 shares of common stock in this offering at an assumed initial
public offering price of $14.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses, our net tangible book
value as of December 31, 1999 would have been $70.1 million or $5.72 per share.
This represents an immediate increase in net tangible book value of $3.36 per
share to existing shareholders and an immediate dilution in net tangible book
value of $8.28 per share to purchasers of common stock in the offering.
Pro forma net tangible book value dilution per share represents the incremental
dilutive effect of:
- - the automatic conversion of 2,445,131 shares of our Series D Preferred Stock
which were issued in exchange for 1,849 shares of common stock in DrugAbuse
Sciences, SAS, our French subsidiary, which was reflected as minority
interest convertible into equity securities of the Parent and which was
converted on February 1, 2000; and
- - net exercise of outstanding warrants to purchase 1,815,912 shares of our
common stock at an assumed public offering price of $14.00 per share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Net tangible book value per share as of December 31,
1999.................................................... $2.36
Increase per share attributable to new investors.......... 3.36
------
Net tangible book value per share after the offering........ 5.72
------
Dilution per share to new investors......................... 8.28
Incremental dilution occurring upon exchange and conversion
of our preferred stock for DrugAbuse Sciences, SAS, common
stock and net exercise of outstanding warrants............ 1.47
------
Pro forma dilution per share to new investors............... $9.75
======
</TABLE>
The following table presents on a pro forma basis as of December 31, 1999 after
giving effect to the conversion of all outstanding shares of preferred stock
into common stock upon completion of this offering, the differences between the
existing shareholders and the purchasers of shares in the offering
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17
<PAGE>
DILUTION
- --------------------------------------------------------------------------------
with respect to the number of shares purchased from us, the total consideration
paid and the average price paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 12,502,131 76% $26,631,081 32% $2.13
New shareholders................... 4,000,000 24 $56,000,000 68% 14.00
---------- ----- ----------- -----
Totals........................... 16,502,131 100% $82,631,081 100%
========== ===== =========== =====
</TABLE>
The table above assumes the net exercise of warrants to purchase 1,815,912
shares of common stock and excludes:
- - 1,042,729 shares issuable upon exercise of options outstanding at
January 20, 2000 at a weighted average exercise price of $0.36 per share;
- - 374,519 shares that may be issuable upon exercise of warrants outstanding at
January 20, 2000 at an exercise price of $0.06 per share;
- - 1,656,417 shares reserved for issuance under our stock option and purchase
plans.
To the extent outstanding or future options or warrants are exercised, there
will be further dilution to new investors. For a description of our equity
plans, please see "Management--Stock plans" and Note 8 of Notes to consolidated
financial statements.
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18
<PAGE>
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Selected consolidated financial data
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes and "Management's
discussions and analysis of financial condition and results of operations"
appearing elsewhere in this prospectus.
The consolidated statements of operations data for the fiscal years ended
December 31, 1997, 1998 and 1999 and the consolidated balance sheet data as of
December 31, 1998 and 1999 are derived from our audited consolidated financial
statements included elsewhere in this prospectus. The consolidated balance sheet
data as of December 31, 1997 is derived from our audited financial statements
not included in this prospectus. The statement of operations data for the fiscal
years ended December 31, 1995 and 1996 and the consolidated balance sheet data
as of December 31, 1995 and 1996 are derived from unaudited financial statements
not included in the prospectus. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting
principally of normal recurring adjustments necessary for a fair presentation of
the results of operations for this period. The historical results are not
necessarily indicative of the operations to be
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19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
expected for future periods and the results of interim periods are not
necessarily indicative of the results for a full year.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF FOR THE YEAR ENDED DECEMBER 31,
OPERATIONS DATA 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Grant revenues............... $-- $-- $-- $810,607 1,224,605
Operating expenses:
Research and development
(including non-cash stock
compensation of $0.1,
$0.2 and $1.3 million in
1997, 1998 and 1999)..... 196,891 207,545 1,103,174 1,463,046 5,491,289
General and administrative
(including non-cash stock
compensation of
$0.6 million in 1999).... 57,664 92,020 279,238 620,507 2,112,369
---------- ---------- ----------- ----------- ------------
Total operating
expenses............... 254,555 299,565 1,382,412 2,083,553 7,603,658
---------- ---------- ----------- ----------- ------------
Loss from operations......... (254,555) (299,565) (1,382,412) (1,272,946) (6,379,053)
Interest income.............. -- 6,653 85,314 96,067 273,547
Interest expense............. -- -- (3,065) (15,464) (122,496)
---------- ---------- ----------- ----------- ------------
Net loss..................... (254,555) (292,912) (1,300,163) (1,192,343) (6,228,002)
---------- ---------- ----------- ----------- ------------
Dividend related to
beneficial conversion
feature of preferred
stock...................... -- -- -- -- (20,241,746)
---------- ---------- ----------- ----------- ------------
Net loss available to common
shareholders............... (254,555) (292,912) (1,300,160) (1,192,343) (20,469,748)
Other comprehensive income
(loss):
Change in foreign currency
translation
adjustments.............. (8,964) (7,073) 35,760 (44,581) (116,714)
---------- ---------- ----------- ----------- ------------
Comprehensive loss........... (263,519) (299,985) $(1,264,403) (1,236,924) (26,586,462)
========== ========== =========== =========== ============
Net loss per share available
to common shareholders
basic and diluted.......... $(0.13) $(0.14) $(0.61) $(0.56) $(12.40)
========== ========== =========== =========== ============
Shares used in computing net
loss per share available to
common shareholders basic
and diluted................ 2,027,013 2,094,345 2,114,506 2,116,728 2,134,073
========== ========== =========== =========== ============
Pro forma net loss per share
available to common
shareholders............... $(4.67)
============
Shares used in computing pro
forma net loss per share
available to common
shareholders............... 5,672,186
============
</TABLE>
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20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents............. 380,655 40,698 $2,305,882 $1,039,315 $19,224,906
Total assets.......................... 396,171 49,870 2,693,408 1,997,048 21,036,632
Long-term obligations and capital
lease obligations................... 250,000 250,000 478,684 543,090 367,789
Minority interest convertible into
equity securities of the Parent..... -- -- -- -- 11,654,492
Total shareholders' equity
(deficit)........................... 130,359 (403,518) 1,707,699 862,490 7,833,442
</TABLE>
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21
<PAGE>
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Management's discussion and analysis of financial condition and results of
operations
You should read the following discussion in conjunction with the financial
statements and the notes to those statements that appear elsewhere in this
prospectus.
OVERVIEW
We are a development stage company. Since our inception, we have incurred losses
and, as of December 31, 1999, we had an accumulated deficit of $29.8 million. To
date, our revenues have been solely from government grants. We intend to carry
out the necessary registration trials for our lead product, NALTREL-TM-, in
2000. We do not anticipate generating commercial product revenues from our own
internally developed products until the various regulatory agencies, such as the
FDA and other European agencies, have approved these for marketing.
We expect to recognize revenues from government grants and from the sale of
approved pharmaceutical products. We may in-license or acquire currently
available commercial products. We expect to market our own internally developed
products following regulatory approval. We expect our sales to increase over
time as our products become accepted by physicians and as we introduce a broader
array of products.
Our expenses have consisted primarily of research and development costs and
general and administrative costs associated with our operations. We expect our
research and development expenses to increase in the future as we continue to
improve and develop products. Our selling expenses will increase as we
commercialize our products. The additional obligations we will have as a public
company will also add to our expenses. As a result, we expect to incur losses in
the foreseeable future.
We have a limited history of operations and we anticipate that our quarterly
results of operations will fluctuate for the foreseeable future due to several
factors, including:
- - the time and extent of our research and development efforts;
- - the market acceptance of product candidates following approval;
- - the introduction of new products by our competitors; and
- - the timing of regulatory approval for additional products.
Our limited operating history makes accurate prediction of future operations
difficult or impossible.
We have recorded deferred stock compensation expense in connection with the
grants of stock options to employees and consultants. Deferred stock
compensation for options granted to employees is the difference between the
estimated fair value for financial reporting purposes of our common stock on the
date such options were granted and their exercise price. Deferred stock
compensation for options granted to consultants has been determined in
accordance with Statement of Financial Accounting Standards No. 123 as the fair
value of the equity instruments issued. We have recognized stock compensation
expense in accordance with FIN 28, an accelerated amortization method. Deferred
stock compensation for options granted to consultants is periodically remeasured
as the underlying options vest in accordance with Emerging Issues Task Force
No. 96-18.
In connection with the grant of stock options to employees and consultants, we
recorded deferred stock compensation of approximately $15.9 million,
$0.4 million and $0.1 million for the years ended December 31, 1999, 1998 and
1997, respectively. These amounts were recorded as a component of
- --------------------------------------------------------------------------------
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
shareholders equity and are being amortized as charges to operations over the
vesting periods of the options. We recorded amortization of deferred stock
compensation of approximately $64,863 for the year ended December 31, 1997,
compared to $0.2 million in 1998 and $1.8 million in 1999. For options granted
through December 31, 1999, we expect to record additional amortization expense
for deferred compensation as follows: $7.3 million in 2000, $3.8 million in
2001, $2.1 million in 2002 and $0.8 million in 2003. Amortization expense
relates to options awarded to employees and consultants assigned to all
operating expense categories in the statements of operations. We will also
record an additional $4.2 million of deferred stock compensation related to
options for 364,738 shares of common stock granted during January 2000.
Amortization expense relates to options awarded to employees and consultants and
is assigned to all operating expense categories in the statements of operations.
See Note 8 of Notes to Consolidated Financial Statements.
On February 1, 2000, we exchanged 2,245,131 shares of our Series D preferred
stock for 1,849 shares of common stock of our subsidiary, DrugAbuse Sciences,
SAS.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUE
Government grant revenue increased to $1.2 million in 1999 from $0.8 million in
1998 and to $0.8 million in 1998 from $0.0 in 1997. The increases in 1999 and
1998 were primarily due to grants received from the French government and the
National Institute on Drug Abuse.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 275.3% to $5.5 million in 1999 from
$1.5 million in 1998 and increased 32.6% to $1.5 million in 1998 from $1.1
million in 1997. Research and development expenses included non-cash stock
compensation expense of $1.3 million, $0.2 million and $0.1 million for the
years ended December 31, 1999, 1998 and 1997, respectively. The increase in 1999
was primarily due to expenses relating to animal studies and the commencement of
human trials with Naltrel, and to a lesser extent, research projects relating to
the chemistry of COC-AB, Buprel and MAP-AB and the increase in 1998 resulted
from the development work associated with NALTREL and COC-AB.
GENERAL ADMINISTRATIVE EXPENSES
General and administrative expenses increased 240.4% to $2.1 million in 1999
from $0.6 million in 1998 and increased 122.2% to $0.6 million in 1998 from
$0.3 million in 1997. General and administrative expenses included non-cash
stock compensation expense of $0.6 million in 1999. The increase in 1999 was
primarily due to the strengthening of our management team and the engagement of
consultants to evaluate the commercial market and the increase in 1998 was
primarily due to the costs associated with patent work for NALTREL and COC-AB
and the hiring of personnel in fourth quarter of 1998.
INTEREST INCOME
Interest income increased to approximately $273,547 in 1999 from approximately
$96,067 in 1998 and increased to approximately $96,067 in 1998 from $85,314 in
1997. The increase in 1999 was due to the proceeds received from the Series C
and Series D Preferred Stock financings and the increase in 1998 was due to
higher rates on short term investments in 1998 offset by expenditure of the
proceeds from the Series B preferred stock financing in March 1997.
- --------------------------------------------------------------------------------
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense increased to $122,496 in 1999 from $15,464 in 1998 and
increased to $15,464 in 1998 from $3,065 in 1997. The increase in 1999 was due
to a short-term convertible note and the increase in 1998 was due to the
increase in borrowings under a capital lease agreement in France.
INCOME TAXES
No provision for federal and state income taxes was recorded as we incurred net
operating losses from inception through December 31, 1999. As of December 31,
1999, we had approximately $7 million of net operating loss carryforwards which
expire in varying amounts through the year 2019. Due to uncertainty regarding
the ultimate utilization of the net operating loss carryforwards, we have not
recorded any benefit for losses and a valuation allowance has been recorded for
the entire amount of the net deferred tax asset. Under applicable tax
regulations, sales of our stock, including shares sold in this offering, may
further restrict our ability to utilize our net operation loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through $26.6 million
in private equity financings and $2.5 million in grants and loans from the
French and United States governments. At December 31, 1999, cash and cash
equivalents were $19.2 million compared to $1.0 million at December 31, 1998.
Our cash reserves are held in short-term, investment grade and interest-bearing
securities.
Cash used in operations for the year ended December 31, 1999 was $4.5 million
compared with $1.1 million for the same period in 1998.
Cash provided by financing activities was $22.7 million for the year ended
December 31, 1999 compared to use of funds of $0.1 for the same period in 1998.
Financing activities included the receipt of net proceeds of $19.9 million from
the sale of preferred stock to investors in the twelve month period ended
December 31, 1999 and $0 in the twelve month period ended December 31, 1998.
Working capital increased to $19.4 million in the twelve month period ended
December 31, 1999 from $1.0 million in the twelve month period ended December
31, 1998. The increase was due to our financings.
As of December 31, 1999, we had an aggregate of $367,789 in future obligations
of principle payments under capital leases and long term obligations. During
fiscal 2000, $0.2 million of our capital leases and long term obligations are to
be paid.
In June 1997, we entered into a multi-year research and development loan, with a
French government agency. We received approximately $420,000 for the future
research and development activities in 1997. We perform research on a
"best-effort" basis and the loan is repayable over a five year period. Payments
received under this multi-year research and development loan have been recorded
as long term obligations.
In November 1997, we entered into a line of credit with BNP. The line of credit
has a total capacity of approximately $140,000 to finance research and
development activities. The line of credit bears interest at 6.25% with
principal and interest payable semi-annually. $65,000 is available for
borrowing. The line of credit terminates in November 2001.
We believe our existing cash, cash equivalents and short term investments,
together with the net proceeds of this offering will be sufficient to fund our
operating expenses and capital requirements
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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through at least the next 18 months. Our future capital uses and requirements
depend on numerous factors, including:
- - our progress with research and development;
- - the success of our pre-clinical testing and clinical trials;
- - costs and timing of obtaining regulatory approval for our products;
- - our ability to license and/or acquire innovative technologies and products;
- - our ability to protect our intellectual property rights;
- - our ability to manufacture our products;
- - our ability to introduce and sell our products;
- - our ability to hire competent personnel;
- - the level of our sales and marketing expenses;
- - pricing and policies of reimbursement; and
- - the costs and timing of obtaining new patent rights, changes in regulation,
competition, and medical and technological developments in the market.
Therefore, our capital requirements may increase in the future periods. As a
result, we may require additional funds and may attempt to raise additional
funds through equity or debt financings, collaborative arrangements with
corporate partners, government grants or other sources.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
and software products will need to accept four-digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software may need to be upgraded, redesigned or replaced to comply with such
Year 2000 requirements to avoid system failure or miscalculations causing
disruptions of normal business activities.
STATE OF READINESS
We have experienced no Year 2000 compliance problems relating to our systems. In
response to the Year 2000 problem, we implemented changes to our existing
information technology systems through a combination of modifications and
upgrades to Year 2000 compliant software.
We expect to have no Year 2000 problems in the future.
COSTS
We have incurred minimal costs associated with identifying and addressing Year
2000 compliance issues, and do not expect to incur costs in the future.
RISKS
We believe that the Year 2000 issue will not have a material adverse effect on
our business, financial condition or operating results. Since December 31, 1999
we have experienced no Year 2000 problems, however, latent issues may still
surface in the future that require upgrades, modifications, or replacement, all
of which could be time-consuming and expensive. In addition, there can be no
assurance that utility companies, Internet access companies and our third-party
vendors or Year 2000
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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compliant. The failure by such entities to be Year 2000 compliant could result
in a systemic failure such as a prolonged Internet, telecommunications or
electrical failure.
CONTINGENCY PLAN
Because no systems have been found to be non-compliant and we have experienced
no problems to date, we have determined that a contingency plan is not required.
We are unable to provide for contingencies arising as a result of large scale or
Internet-wide failure because we are not aware of any adequate replacement
service for the Internet.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 our activities
without increasing risk. Some of the securities that we invest in may have
market risk. This means that a change in prevailing interest rates may cause the
fair value of the principal amount of the investment to fluctuate. For example,
if we hold a security that was issued with a fixed interest rate at the
prevailing rate and the prevailing rate later rises, the fair value of the
principal amount 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,
government and non-government debt securities and money market funds. The
average duration of all our investments has generally been less than one year.
Due to the short term nature of these investments, we believe we have no
material exposure to interest rate risk arising from our investments. Therefore,
no quantitative tabular disclosure is required.
FOREIGN CURRENCY RATE FLUCTUATIONS
The functional currency for our French subsidiary is the French franc. The
translation from the French franc to the US dollar is translated for balance
sheet accounts using the current exchange rate in effect at the balance sheet
date and for revenues and expense accounts using average exchange rate during
the period. The effects of translation are recorded as a separate component of
shareholders equity. Our French subsidiary conducts its business with customers
in local European currencies or the Euro. Exchange gains and losses arising
through these transactions are recorded using the actual exchange differences on
the date of the transaction. We have not taken any action to reduce our exposure
to changes in currency in foreign currency exchange rates, such as options or
futures contracts, with respect to transactions with our French subsidiary or
transactions with our European customers.
INFLATION
We do not believe that inflation has had a material adverse impact on our
business or operating results during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivative--which focused on
freestanding contracts such as options and forwards, including futures and
swaps--expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivatives fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. We do not anticipate
that the adoption of SFAS No. 133 will have a material impact on our financial
position or results of operations.
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Business
OVERVIEW
We believe we are the first biotechnology company dedicated to developing and
marketing novel therapies for alcohol and drug abusers. We intend to become the
leading biopharmaceutical company in addiction care by offering a broad
portfolio of medications to serve the addiction care community. Our strategy is
to develop several medications in the near term, and expand our product
portfolio through research and the acquisition of marketed products and
technologies. We intend to build a sales force to market our products, taking
advantage of the concentrated addiction care market.
We are developing and intend to market a broad portfolio of biopharmaceutical
products that address various medical needs of alcohol abusers and drug addicts.
We develop our product candidates for the treatment of alcohol and heroin
addiction, NALTREL-TM-, BUPREL-TM- and METHALiz-TM-, to improve existing
medications. We develop these products to be administered only once a month by a
physician or a nurse, as opposed to once a day by the patient. By putting the
medical practitioner in control, we expect our products to promote continuous
therapy and help overcome patient non-compliance, the primary limitation of
current medications. We intend our other product candidates, COC-AB-TM-,
MAP-AB-TM- and ITAC-TM-, to provide novel means to treat patients suffering from
cocaine and methamphetamine overdose and addiction. In 2000, to support
prospective market approval in the United States and Europe, we expect to
conduct pivotal clinical trials with NALTREL for the treatment of alcohol abuse
and heroin addiction. In parallel, in the next 18 months we expect to conduct
several human trials with BUPREL and METHALiz for treatment of severe heroin
addiction, and with COC-AB and ITAC for the treatment of cocaine overdose and
addiction.
BACKGROUND
We estimate that in the United States and Europe, there are in excess of
20.0 million alcoholics and 2.0 million heroin addicts. According to the Office
of National Drug Control Policy, in the United States, there are an estimated
3.6 million cocaine addicts. Substance abuse can have severe social and medical
consequences, including imprisonment, car accidents, overdose, liver failure,
infections such as HIV and viral hepatitis, and death. In addition, the National
Institute of Health estimated that $197.0 billion dollars is lost each year in
the United States due to absenteeism and lost productivity at work related to
alcohol and drug abuse.
We estimate that 7% of alcholics and drug addicts, approximately 1.5 million
patients in the United States, receive treatment for their addiction. According
to the Substance Abuse and Mental Health Services Administration, the majority
of alcohol and drug abuse patients that receive treatment are treated in the
limited number of specialized addiction care centers. Current treatments consist
primarily of psychosocial therapy and drug-substitution therapy and are
generally not effective in curing alcohol and drug addiction. According to the
National Drug and Alcohol Treatment Unit Survey, in 1992, nearly $7.1 billion
was spent in the United States to treat alcohol and drug abuse. An estimated
$11.00 of social and medical costs are saved for every dollar spent on substance
abuse treatment according to the New York State Office of Alcoholism and
Substance Abuse Services. Despite the potential medical benefits and
cost-savings of treating addictions, we believe the market for addiction care is
poorly served by the pharmaceutical industry and that the medical community
needs new products to effectively treat alcohol abuse and drug addictions.
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THE NEUROBIOLOGY OF ADDICTION
Addiction is a chronic disease of the brain triggering the compulsive use of
substances like alcohol, heroin, cocaine and methamphetamine at increasing and
more frequent doses, despite severe social and medical consequences. Scientists
have only recently started to uncover the biology of addiction at the molecular
level.
Alcohol and all drugs of abuse interfere with normal neurological pathways that
are responsible for transmitting signals in the brain, particularly the pathway
that involves the neurotransmitter dopamine. This dopamine pathway in the brain
controls euphoria and pain. All addictive substances impact dopamine directly or
indirectly. Alcohol and heroin stimulate a receptor in the brain called the
opiate receptor. Heroin binds directly to the opiate receptor, while alcohol
triggers the release of naturally occurring endorphins, which then bind to the
opiate receptor. Stimulation of the opiate receptor by heroin or alcohol-induced
endorphins causes cells to release dopamine. Unlike alcohol and heroin,
methamphetamine triggers a direct release of dopamine, while cocaine prevents
the normal reabsorption of dopamine following its release. Excess levels of
dopamine overstimulate the dopamine receptors of nearby cells, triggering
feelings of euphoria.
The scientific community increasingly understands the molecular biology of
opiate and dopamine receptors, potentially enabling the rational design of novel
medications targeting these receptors. Opiate receptors include several
subtypes, mu, delta, and kappa, which are located on the outside of a neuron
membrane in several regions of the brain. The opiate receptors are made of
proteins that contain six helices. Molecules such as endorphins, morphine,
heroin and methadone bind specifically to the helices located in the outer
region of the receptor, modify their shape, and trigger transmission of an
intracellular signal by the inner region of the receptor. The molecules that
stimulate the opiate receptor are called receptor agonists. Stimulation of the
receptors can induce euphoria and resistance to pain. Other molecules, such as
naltrexone, can bind to the receptor without triggering its stimulation and can
prevent the binding of agonists. They are called antagonists. Dopamine receptors
belong to a family of protein receptors expressed on the membrane of neurons in
various areas of the brain. Dopamine binds to and stimulates three categories of
dopamine receptors called D1, D2 and D3, which mediate different neurochemical
signals. Seven protein helices linked by protein loops make these receptors.
Their shape changes when dopamine occupies the receptor, triggering a signal
transmission to the neuron. Control of movement, cognitive functions,
cardiovascular functions, behavior and emotions involve D1, D2 and D3 receptors.
When brain cells are repeatedly exposed to addictive substances, levels of
dopamine and other neurotransmitters, such as serotonin and GABA, and their
corresponding neuroreceptors are chronically modified, creating a chemical
imbalance. As a result of this chemical-imbalance, an abuser's neurological
pathways demand the presence of the addictive substance and the abuser has
become addicted. Once addicted, the substance abuser will use the substance more
frequently to induce euphoria at the expense of normal activities. The substance
abuser will also increase the amount of the substance taken, because an
increased concentration of alcohol or drug becomes necessary to obtain the same
level of euphoria. As dopamine and the other affected neurotransmitters play a
key role in multiple brain functions, this chemical imbalance often leads to
other neurological manifestations such as impaired judgement and perceptions,
memory loss, depression, irritability, aggressive behavior, seizures and
thoughts of suicide.
CLINICAL ASPECTS OF ADDICTION
The clinical aspects of addiction are the:
- - acute effects of a drug overdose or binge drinking;
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- - chronic toxicity of repeated use on various biological systems and brain
functions;
- - acute withdrawal symptoms; and
- - lifelong risk of relapse.
ACUTE EFFECTS. Drug overdose and binge drinking affect multiple organs and
biological systems. Acute intoxication often results in psychotic episodes,
respiratory or cardiovascular distress, accidental injury or death. For example,
a 1992 study, The Economic Costs of Alcohol and Drug Abuse in the U.S. has shown
that approximately 40% of fatal car accidents in the United States are
alcohol-related. The Drug Abuse Warning Network estimated 250,000 emergency room
visits per year are the result of drug overdose.
CHRONIC TOXICITY OF SUBSTANCE OF ABUSE. As brain chemistry is modified on a
chronic basis, substance abusers may suffer multiple psychiatric and
neurological disorders such as depression, suicidal thoughts and psychotic
behavior. Permanent neurological damage may occur.
ACUTE WITHDRAWAL SYNDROME. Withdrawal is a condition resulting from sudden
discontinuation of a substance to which a person is addicted. Withdrawal from
alcohol can result in rapid heart rate, difficulty sleeping and life threatening
delirium tremens. Heroin withdrawal can result in irritability, pain, nausea,
vomiting, cramps and muscle aches. Withdrawal from cocaine or methamphetamine
can result in irritability, sleeplessness, and depression.
RELAPSE. The ultimate goal of medical treatment for addicts is to achieve an
alcohol-and drug-free state called abstinence. However, several studies found
that for patients who have achieved abstinence, the rate of relapse is high
within the first months of therapy, and remains a significant risk over the
patient's lifetime. Relapse can be very severe, and many patients experience
multiple cycles of detoxification, abstinence, relapse and overdose. Due to the
long-term risk of relapse, alcohol abusers and drug addicts are life-long
patients.
CURRENT ADDICTION CARE AND AVAILABLE PRODUCTS
Care for addiction includes chronic therapy and emergency therapy. Chronic
therapy promotes and attempts to maintain long-term abstinence following
detoxification. Emergency therapy attempts to reverse the effects of overdose.
Few medications are available to promote abstinence in alcohol and heroin
abusers. No medication is available to treat cocaine and methamphetamine
addiction or overdose. Studies have shown that as many as eighty percent of
patients are not compliant with their therapeutic regimen, typically resulting
in treatment failure.
CHRONIC ADDICTION CARE
Chronic therapy relies heavily on psychosocial therapy because few medications
are available. Psychosocial therapy, which consists of regular counseling
sessions, is the cornerstone of addiction care but has limited success because
it does not address the biological basis of addiction.
There are two types of medications available for long-term therapy of addicts.
Substitution therapy is the use of a pharmaceutical product that mimics the
abused substance. Abstinence therapy is the use of a medication to help the
addict abstain from substance use and cure addiction.
Substitution therapy is used for heroin addicts whose dependence is too severe
to permit abstinence therapy. It consists of medications which are chemically
related to heroin and which bind to and stimulate the opiate receptor. These
medications prevent withdrawal symptoms and maintain the state of addiction, but
in a medically-controlled environment. Substitution therapy is not a cure for
addiction. However, there are significant medical and social benefits, such as
reducing the risk of contracting infections and decreasing propensity to commit
crime. Substitution therapy can be used as
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a temporary therapy for patients who can then be detoxified and become
abstinent, or as a long-term therapy for severe addicts who are unresponsive to
abstinence therapies.
Abstinence therapy is medically more desirable than substitution therapy, as it
can effectively reduce dependence and may restore normal brain functions.
However, there are few medications available to promote abstinence, and
medication non-compliance is a major limitation. An estimated 80% of patients
fail to take their medication on a daily basis as prescribed and typically
relapse into severe alcohol and heroin abuse. A minority of alcoholics and
heroin addicts receiving abstinence treatment typically remain abstinent after
one year.
The existing medications are summarized in the following table.
<TABLE>
<CAPTION>
DOSAGE
PRODUCT/FIRST US REGIMEN/
APPROVAL DATE TECHNOLOGY USAGE SUBSTANCE OF ABUSE LIMITATION
- ---------------- ----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
METHADONE Binds to and Substitution Heroin and other Requires daily
(1975) stimulates opiate therapy opiates therapy at a
receptor licensed clinic
BUPRENORPHINE(1) Binds to and Substitution Heroin and other Requires daily
stimulates opiate therapy opiates therapy
receptor
LAAM (1993) Binds to and Substitution Heroin and other Requires therapy
stimulates opiate therapy opiates 2 times per week
receptor at clinic
NALTREXONE Blocks opiate Abstinence Alcohol and heroin Daily/
(1984, HEROIN; 1994, receptor maintenance non-compliance
ALCOHOL)
ACAMPROSATE(2) GABA antagonist Abstinence Alcohol Daily/
maintenance non-compliance
DISULFIRAM (1951) Induces nausea Relapse Alcohol Toxicity/
and vomiting upon prevention non-compliance
alcohol
absorption
</TABLE>
(1) Approved in France in 1995.
(2) Approved in France in 1987 and subsequently in other European countries.
The opiate agonists, methadone, LAAM and buprenorphine are the three
substitution medications. According to the Substance Abuse and Mental Health
Services Administration, an estimated 180,000 patients in the United States use
methadone. Sales of this off-patent generic product are subject to low pricing,
with approximately $20.0 million in sales in 1999 in the United States.
Methadone binds to the opiate receptor, triggering a stimulation of the dopamine
pathway. It decreases the use of heroin but maintains dependence. Licensed
methadone clinics dispense methadone and typically require the patient to visit
several times per week. LAAM is structurally related to methadone, has similar
effects, and is administered three times a week at the clinic. Buprenorphine,
currently marketed only in France, is a compound structurally related to
methadone, but which stimulates the opiate receptor to a lesser extent. An
estimated 62,000 patients in France, approximately 37% of the heroin addict
population
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use buprenorphine on a daily basis. In 1999, sales in France reached
approximately $80 million. Buprenorphine therapy may result in significant
diversion of use and potential lethal overdoses, as the patient is responsible
for administration.
The two main products available to promote and maintain abstinence are
naltrexone, for alcoholics and heroin addicts, and acamprosate (available only
in the EU) for alcoholics. Both naltrexone and acamprosate are available as oral
daily tablets. Naltrexone is an opiate antagonist that blocks the opiate
receptor, thereby decreasing the effects of and desire to use both alcohol and
heroin, and promoting an alcohol and heroin-free state when used on a chronic
basis. Acamprosate only affects alcohol dependence. Worldwide sales of branded
and generic naltrexone were an estimated $34 million in 1999. Sales of
acamprosate were an estimated $20 million in 1999. Naltrexone and acamprosate
have a similar efficacy and safety profile in alcoholics and are both limited by
severe patient non-compliance. To avoid prescribing therapies which will not be
used, physicians typically prescribe these medications only to the small subset
of their patients who are highly motivated to comply. We believe that we can
develop a sustained-release formulation of naltrexone to address the issue of
non-compliance, but that acamprosate is not conducive to sustained-release
formulation development because of the high dose required to obtain a
therapeutic effect. The other medication to treat alcoholism is disulfiram.
Disulfiram induces nausea and vomiting when the patient drinks alcohol because
it increases the concentration of toxic alcohol byproducts. Few patients are
willing to use disulfiram long term.
For cocaine and methamphetamine dependence, no medication is currently
available.
EMERGENCY THERAPY
Emergency therapy focuses on reversing the life-threatening effects of alcohol
and drug overdose. The goal is to use an antidote to block the effect of or
rapidly remove the toxic substance from the patient's blood stream and tissue,
reduce the complications of the overdose and lower the overall cost of emergency
care. Heroin is the only drug of abuse for which there is an antidote, called
naloxone. Naloxone binds to the opiate receptor, displaces molecules of heroin
already bound to the receptor, and prevents further binding of heroin to the
receptor. For cocaine and methamphetamine overdose, there is no antidote
available.
Other medications commonly used in alcoholics and drug addicts are products to
treat medical conditions resulting from substance abuse such as depression,
infectious diseases or liver dysfunction.
We believe that due to the seriousness of addiction and the low compliance with
current medications, there is a substantial need for medications that treat the
biological basis of addiction, facilitate medication compliance through less
frequent dosing schedules and promote alcohol and drug abstinence.
OUR SOLUTION
We are developing and intend to market a broad portfolio of biopharmaceutical
products for alcohol and drug abusers that we believe will:
- - facilitate and maintain abstinence;
- - provide safer substitution therapy;
- - treat overdose; and
- - prevent the onset of addiction.
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Our lead product candidates are:
- - NALTREL, a sustained-release formulation of naltrexone to treat patients
with alcohol or heroin dependence;
- - BUPREL, a sustained-release formulation of buprenorphine to provide
substitution therapy to patients with heroin dependence;
- - METHALiz, a sustained-release formulation of methadone to provide
substitution therapy to patients with severe heroin dependence; and
- - COC-AB, an antidote to treat cocaine overdose.
Our product candidates use two proven technologies. NALTREL, BUPREL and METHALiz
are based on our sustained-release technology, called Lactiz, which we licensed
from Southern Research Institute. Other companies have applied Southern Research
Institute's patented technology to create successful sustained-release
medications outside addiction care. COC-AB is based on an antidote technology
which has been applied by others to various other applications including
treatment of snake venom and digoxin poisoning.
WE ARE IMPROVING EXISTING MEDICATIONS USING SUSTAINED-RELEASE FORMULATIONS
All current abstinence medications are available only as daily oral medications.
The majority of patients prescribed an abstinence medication fail to take their
daily pill. Non-compliance with prescribed medication typically leads to therapy
failure and relapse into alcohol or drug abuse. We are developing
sustained-release formulations of approved medications to overcome chronic
non-compliance with daily therapies. A sustained-release formulation only
requires the administration once a month by the physician or the nurse, as
opposed to once a day by the patient. We believe once-a-month administration
fits well with the regular schedule of patient visits to their physician for
psychosocial therapy sessions. Putting addiction care in the hands of doctors
rather than patients should ensure compliance and greatly improve the chances of
success in addiction therapy.
We are applying our sustained-release technology to several medications,
naltrexone, buprenorphine and methadone, which are already used in the field of
substance abuse. Naltrexone, an abstinence medication which blocks the opiate
receptor, is effective in alcohol and heroin dependent patients. Buprenorphine
(approved only in France) and methadone are substitution medications prescribed
to heroin addicts. Because the active ingredients in our product candidates,
naltrexone, buprenorphine and methadone have demonstrated safety and
effectiveness in the oral dosage form approved by the FDA or by foreign
regulatory agencies for the treatment of addiction, we believe the demonstration
in human trials of the prolonged release of the medication in the blood is the
critical step in clinical development of our sustained-release dosage forms.
WE ARE CREATING MOLECULAR BARRIERS TO BLOCK ACCESS OF A DRUG TO THE BRAIN
Drugs of abuse exert their toxic effect in the brain only after they have
crossed the barrier that separates the blood from the brain tissue, called the
blood brain barrier. Current medications only interfere with drugs of abuse once
they have entered the brain. We are developing novel medications to prevent a
drug from crossing the blood brain barrier. We believe that we can develop
antibodies that will bind to a specific drug in the bloodstream, such as
cocaine, forming large molecular complexes that are unable to pass through the
blood brain barrier. Preventing drugs from entering the brain will limit their
toxic effects and the desire to use them. We are developing two complementary
antibody technologies, COC-AB for treatment of overdose and ITAC for prevention
of cocaine dependence.
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WE ARE CONDUCTING RESEARCH ON NOVEL COMPOUNDS THAT MAY REGULATE THE EFFECT OF
DOPAMINE
As dopamine is central to the biology of addiction, we believe that therapeutic
products derived from molecules that regulate the release of dopamine by brain
cells could help treat drug dependence. In collaboration with academic
scientists at the University of Paris V, we are conducting early-stage research
on the design of novel medications that can modify the levels of dopamine and
its effect on dopamine receptors.
OUR STRATEGY
Our goal is to become the leader in the United States and Europe in the
development and commercialization of pharmaceutical products for the treatment
of patients with alcohol dependence or drug addiction.
WE FOCUS ON THE LARGE ADDICTION CARE MARKET
We believe we are the first biotechnology company to focus exclusively on
addiction care. We intend to develop products for the key medical indications
for alcohol and drug abusers:
- - promoting and maintaining abstinence;
- - providing substitution therapy;
- - preventing relapse; and
- - treating overdose.
By offering new and improved therapies that address the multiple medical needs
of substance abusers, we plan to increase the availability and effectiveness of
treatment options and promote phamacotherapy as the cornerstone of addiction
care.
WE ARE DEVELOPING SEVERAL MEDICATIONS IN THE NEAR TERM
We currently focus on developing products with short development time frames
that may be rapidly commercialized. We are applying two known and proven
technologies, a sustained-release polymer and an antidote technology, to develop
our first four products NALTREL, BUPREL, COC-AB and METHALiz. We believe we have
a greater probability of near-term success in gaining FDA approval for our three
sustained-release products as compared to the approval probability of novel
molecular entities. The sustained-release technology is a proven technology for
other marketed pharmaceutical products and the active ingredients are already
approved by the FDA or other regulatory authorities as oral dosage forms.
Several of our products that we are developing address major indications and
large potential markets.
WE ARE BUILDING A BROAD PRODUCT PORTFOLIO
We intend to build a broad portfolio of products through internal research and
development and the licensing or acquisition of existing commercial products and
product candidates. We believe we will be well positioned to acquire new product
candidates and technologies from academic groups and biotechnology or
pharmaceutical companies active in central nervous system research but with no
commercial interest in addiction care. We may also seek to acquire, before our
own products are on the market, some of the products already marketed for
addiction care. We believe the synergies between our different products will
allow a medical practitioner to combine several medications to treat patients
according to the stage and severity of their particular medical condition. We
believe we can increase the probability of successful treatment for patients
already receiving therapy and induce more alcoholics and drug addicts to seek
treatment by making therapy easier and more effective.
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WE INTEND TO MARKET OUR PRODUCTS IN THE UNITED STATES AND EUROPE USING OUR OWN
DEDICATED SALES FORCE
We intend to market our products directly. We believe that a small sales force
of approximately 60 dedicated representatives will enable us to effectively
market our products to the limited number of specialized, high volume, addiction
treatment centers in the United States and Europe.
WE INTEND TO FOCUS ON NEAR-TERM REVENUES AND FUND LONGER-TERM RESEARCH WITH
GRANTS
We hope to achieve profitability from sales generated in the United States and
Europe from the first approved product in our current portfolio. We believe we
can generate significant margins by marketing our broad portfolio of products
using the same sales force. While developing near-term products, we can also
develop a pipeline of innovative product candidates. As addiction care is a
government priority in many countries, significant grant funding is available to
support addiction research. To date we have received research grants from
European and US government entities of approximately $4.2 million and are
seeking additional grants.
If the market for addiction care medication does not develop and our products do
not become widely accepted due to safety and effectiveness issues, marketing and
distribution restrictions, adverse publicity or pricing and reimbursement
issues, we will not be successful. In addition, our revenues will depend on
reimbursement for the reasonable price of our products by government health
organizations, private health insurance providers and other organizations. If
our products, once approved, are not reimbursed by those payors at reasonable
prices or at all, our market penetration and our product sales will be lower.
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PRODUCT CANDIDATES
We are developing a portfolio of novel product candidates that we believe
improve existing medications by facilitating medication compliance, and address
novel treatment indications. Near term products are for treatment of alcohol and
heroin abusers. Longer term products are for treatment of cocaine and
methamphetamine addicts.
<TABLE>
<CAPTION>
PRODUCT CANDIDATE TECHNOLOGY INDICATION SUBSTANCE OF ABUSE DEVELOPMENT STATUS(1)
- ----------------- ----------------- ------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
NALTREL-TM- Lactiz-TM-(2) Abstinence Alcohol Final clinical trial
Sustained-release maintenance planned in 2000
naltrexone
Heroin Final clinical trial
planned in 2000
BUPREL-TM- Lactiz-TM-(2) Substitution Heroin Clinical trial
Sustained-release therapy for planned in late 2000
buprenorphine mild addicts
METHALIZ-TM- Lactiz-TM-(2) Substitution Heroin Clinical trial
Sustained-release therapy for planned in 2001
methadone severe
addicts
COC-AB-TM- Antidote(2) Overdose Cocaine Clinical trial
therapy planned in 2000
MAP-AB-TM- Antidote(2) Overdose Methamphetamine Clinical trial
therapy planned in 2001
ITAC-TM- PLATFORM Vaccine(2) Abstinence Cocaine Clinical trial
TECHNOLOGY induction planned in 2000/2001
DOPAMINE MODULATORS Rational drug Abstinence Cocaine Early stage research
design maintenance Methamphetamine
ALCOHOLMD.COM Website Clinician and Alcohol Launch planned late
patient 2000
education
Psychosocial
therapy
</TABLE>
(1) Dates assume successful completion of preclinical research.
(2) Commercial rights held by us subject to royalty payments to our
collaborators.
NALTREL-TM-
NALTREL is a sustained-release formulation of naltrexone designed to be
administered by intramuscular injection on a monthly basis by a physician or a
nurse. The potential recommended use of NALTREL is for the treatment of alcohol
and heroin dependence. NALTREL is designed to release naltrexone continuously
over 30 days from a single administration. By putting the medical practitioner
in control of therapy, we expect that the use of NALTREL will facilitate patient
compliance, enhance the effectiveness of the medication, improve overall
treatment outcomes and become the therapy of choice for a large number of
patients.
NALTREL IS BASED ON NALTREXONE, A PROVEN MEDICATION. Naltrexone is an effective
medication approved in more than 30 countries in an oral daily dosage form for
treatment of alcohol dependence
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and heroin addiction. It blocks the opiate receptor, preventing euphoria and
thereby decreasing the desire for, and the effects of alcohol and heroin. If
taken daily on a chronic basis, naltrexone is highly effective in reducing
alcohol and heroin consumption, promoting abstinence and preventing relapse. In
clinical trials involving the daily oral dosage form of naltrexone, patients who
were compliant in taking their medication demonstrated a much higher success
rate at achieving abstinence than those who were not compliant. However, most
patients who are prescribed daily naltrexone tablets are not compliant; they
stop taking their medication within the first few weeks or months, and fail
therapy.
NALTREL IS BASED ON OUR LACTIZ SUSTAINED-RELEASE TECHNOLOGY. The Lactiz
technology uses polylactide, a biodegradable, carbon-based polymer, which can be
processed into solid microscopic spheres. The microscopic spheres consist of a
network of tiny pores and channels into which a medication can be incorporated.
When injected into muscle, the microscopic spheres fill with water, initiating a
progressive and continuous release of medication into surrounding tissues. The
medication then diffuses into small blood vessels called capillaries, and from
capillaries into larger blood vessels. It then crosses the blood brain barrier
and diffuses into the brain. The properties of Lactiz, including its molecular
weight and density, as well as the type and amount of medication loaded into the
microscopic spheres, control the rate at which medication is released into
surrounding tissue. The polylactide polymer making up Lactiz breaks down into
carbon dioxide and water over time, eventually disappearing. Lactiz-based
products can be re-injected at appropriate intervals. By adjusting the
properties of Lactiz, we can create formulations with sustained-release
characteristics that may allow for medication release ranging from two weeks to
three months.
NALTREL CLINICAL TRIAL RESULTS. We have developed multiple formulations of
NALTREL and evaluated them in animals and in humans to select a formulation that
we believe will safely deliver sufficient levels of naltrexone over a one-month
period following a single administration. We have completed human trials in 28
subjects to evaluate levels of naltrexone in the blood. The results evidenced
two critical facts. First, release of naltrexone over one month following a
single NALTREL administration was similar to the amount of naltrexone delivered
by 31 daily naltrexone oral tablets. Second, the blood levels of naltrexone
resulting from one NALTREL administration were less variable over time than with
the oral tablets. As naltrexone is a clinically-proven commercial drug in the
tablet dosage form, and as our sustained-release technology is similar to the
technology used in previously approved products, we believe that these first
human trials suggest that NALTREL will be effective in treating alcoholics and
heroin addicts.
NALTREL PIVOTAL TRIALS PLAN. In 2000, we intend to conduct pivotal safety and
efficacy trials in alcoholics and heroin addicts to support potential market
approvals in the United States and Europe. In the US, we expect to need a single
pivotal trial to support the alcohol dependence indication and a single pivotal
trial to support the heroin dependence indication. Subject to discussion of the
protocols with the FDA and European regulatory authorities, the clinical trial
in alcoholics will be a double-blind, randomized, placebo-controlled trial in an
estimated 300 alcoholic patients. We plan to conduct the trial at approximately
30 sites in the United States. We expect to treat and follow-up patients for
three to six months. We expect that at the end of this period we will find that
patients will have been drinking less and that they are less likely to relapse
into heavy drinking. Subject to discussion of the protocols with the FDA and
European regulatory authorities, the clinical trial in heroin addicts will
enroll an estimated 100 patients and will be placebo-controlled. We expect that
at the end of this period we will find that NALTREL will have blocked the opiate
receptor preventing the patient from experiencing drug-induced euphoria. In
addition to these trials, we intend to conduct additional NALTREL studies in
particular patient sub-populations, such as rapid detoxification, converting
methadone users to abstinence therapy to respond to the interests of the medical
community.
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BUPREL-TM-
BUPREL is a sustained-release formulation of buprenorphine designed to be
administered by intramuscular injection on a monthly basis by a physician or a
nurse, using the same Lactiz technology as for NALTREL. The potential indication
of BUPREL is for substitution therapy for heroin-dependent patients who are not
ready or willing to be detoxified. Buprenorphine partially stimulates the opiate
receptor, inducing mild euphoria and maintaining dependence, while reducing the
consumption of heroin. Frequent misuse of the oral dosage form by the patient
may limit the safety of buprenorphine therapy. By putting the physician or the
nurse in charge of administering the medication, we expect BUPREL will simplify
and improve the safety of buprenorphine therapy.
We are currently optimizing formulations of BUPREL in preclinical studies and
expect to enter the clinic in late 2000. Initial trials in approximately 30
patients are expected to permit the potential selection of a formulation that
release an appropriate medication amount over one month. Subsequent trials in
approximately 100 patients will be designed to potentially confirm the
buprenorphine release profile and one pivotal trial will seek to establish
safety and efficacy in fewer than 300 heroin dependent patients.
METHALIZ-TM-
METHALiz is a sustained-release formulation of methadone designed to be
administered by intramuscular injection on a monthly basis by a physician or a
nurse, using the same Lactiz technology as for NALTREL and BUPREL. The potential
indication of METHALiz is for substitution therapy for severe heroin-dependent
patients who are not ready or willing to be detoxified and for whom
buprenorphine therapy is not available or sufficiently potent. Methadone
stimulates the opiate receptor, prevents withdrawal symptoms and maintains
dependence while reducing the consumption of heroin. According to the American
Methadone Treatment Association, approximately 180,000 heroin addicts in the
United States use an oral formulation of methadone, dispensed by
900 specialized methadone clinics. While high-risk patients are required to
visit the registered methadone clinic on a daily basis to be administered their
dose of methadone, many patients are allowed to take one or more days worth of
product home for self-administration. This sometimes leads to fatal overdosing.
By putting the physician or the nurse in charge of administering the medication
and making the dosing schedule more convenient, by eliminating patient
take-homes and self-dosing, we expect METHALiz will simplify and improve the
safety of methadone therapy.
Subject to successful preclinical development, we expect to enter the clinic in
2001. Initial trials in approximately 30 patients may permit the selection of
the formulation that provides an appropriate amount of medication over one
month. Subsequent trials in fewer than 100 subjects will be designed to confirm
the methadone release profile and one pivotal trial will seek to establish
safety and efficacy in fewer than 300 patients.
COC-AB-TM-
We designed COC-AB as a cocaine antidote for the treatment of cocaine overdose,
an indication for which there is no treatment available. The current care for
toxic overdose is intensive treatment with cardiovascular and central nervous
system medications, which may be costly and labor-intensive. We designed COC-AB
to rapidly remove cocaine from the brain and body, acting as an antidote by
binding free cocaine in the blood and triggering the removal of cocaine. COC-AB
is administered by intravenous injection. Therapy of digoxin overdose and snake
venom bites uses a similar technology. Aventis Pasteur, a marketer of similar
antidotes for other indications, is our manufacturer.
COC-AB is a purified protein fragment, called F(ab')(2,) derived from an
antibody produced in horses. It binds tightly to cocaine and toxic cocaine
metabolites in the bloodstream to stop further cocaine entry into tissues,
particularly the heart and brain which is responsible for the potential
life-threatening
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consequences of cocaine overdose. As a result, the concentration of free cocaine
molecules in the bloodstream drops. The body strives to maintain equilibrium of
free cocaine between tissue sites and the bloodstream. Therefore, as the free
cocaine in the bloodstream is bound as a COC-AB-cocaine complex, the cocaine
present in the brain and other tissues diffuses back to the bloodstream where it
is captured by COC-AB. The liver and kidneys clear the inactive COC-AB-cocaine
complex within days.
We make COC-AB by injecting horses with a proprietary chemical derivative of
cocaine linked to a protein carrier. Most of the metabolites of cocaine are
benign. To be effective, an antidote should preferably target only cocaine
itself and its toxic metabolites and not be unnecessarily consumed by these
benign metabolites. By chemically modifying cocaine into novel chemical
entities, we succeeded in producing antibodies that distinguish between toxic
by-products of cocaine, such as cocaethylene and norcocaine, and its non-toxic
metabolites such as benzoylecgonine and ecgonine-methylester. As a result, we
expect that COC-AB activity in the body will target primarily the toxic
metabolites that result from cocaine overdose.
We are currently scaling-up COC-AB in collaboration with our manufacturer,
Aventis Pasteur. We expect to enter the clinic mid-2000 to study the effect of
COC-AB on blood levels of cocaine in approximately 25 cocaine users. To assess
the clinical benefits of COC-AB in patients suffering from cocaine overdose, we
then intend to conduct a clinical trial in the emergency room in fewer than 100
patients and additional trials to support potential market approval.
MAP-AB-TM-
We intend to apply the same antidote technology to develop additional products.
We develop MAP-AB for the treatment of methamphetamine overdose. Methamphetamine
is one of the substances of abuse with the fastest growth in the United States.
Recent research has demonstrated the long-lasting toxic effects of
methamphetamine. These effects are thought to be responsible for the severe
behavioral abnormalities that accompany the prolonged use of methamphetamine.
According to the National Institute for Drug Abuse, or NIDA, there is an urgent
need for an effective medication to treat methamphetamine addiction, especially
anti-methamphetamine antibodies which could be used by emergency room physicians
to treat the growing number of overdoses. We are currently in pre-clinical
development of the chemistry of MAP-AB that could, upon intravenous
administration to a patient in the emergency room, capture methamphetamine
molecules and decrease their toxicity.
ITAC-TM-
We develop ITAC as a cocaine vaccine candidate to create a chemical barrier in
the blood to prevent cocaine from reaching the brain. Following administration
of the vaccine, the patient forms anti-cocaine antibodies. Upon cocaine use,
cocaine-antibody complexes will form that are too large to move through blood
vessel walls into the brain. Cocaine is trapped within the bloodstream until it
is eliminated with no toxic effects from the body through normal kidney and
liver activity. Such a vaccine may serve as a valuable component of treatment
programs that protect against relapse. In animals, ITAC prevents the onset of
cocaine dependence. Using a proprietary technology similar to the one developed
to produce COC-AB, our collaborators at the Scripps Research Institute have
developed the cocaine vaccine candidate by chemically modifying cocaine and
linking it to a large protein molecule. Animals vaccinated with the ITAC vaccine
develop cocaine-specific antibodies that bind with cocaine in the blood, as well
as its toxic metabolites, preventing most of the drug from reaching the brain.
Injecting cocaine into rodents immunized with the ITAC vaccine candidate
resulted in significantly higher levels of cocaine in the blood where it is
harmless, and correspondingly lower levels in the brain, thereby reducing
dependence to cocaine. We are currently studying in additional animal models
various vaccine formulations to select one candidate that may be tested in
humans. In 2000,
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we expect to initiate clinical trials with ITAC in cocaine abusers to study the
safety of the vaccine and its ability to generate anti-cocaine antibodies in
humans.
ALCOHOLMD.COM
We are developing an interactive website for medical practitioners and patients
for alcohol addiction treatment. For medical practitioners, the website will
feature medical literature, including an online medical journal, information
about best practices for addiction care, latest treatment options and provide a
forum for addiction care physicians to exchange ideas on a real time basis. In
addition, the website will be designed to host a consultant forum allowing
physician in the field to solicit opinions from leading experts. For patients
and their families, AlcoholMD.com is expected to provide tools for the
self-evaluation of drinking habits, information on treatment options and an
online forum for patient and family support. We will seek to make AlcoholMD.com
the premier online website for alcohol abuse care by assembling broad
information about alcohol addiction care and providing links to other addiction
care websites. We also intend to study the use of online psychotherapy support
for patients who are in treatment for alcohol abuse. We expect to launch
AlcoholMD.com in the second half of 2000. Importantly, we expect this website to
facilitate the marketing of our own products and services.
THE MARKET
LARGE POPULATION OF CHRONIC PATIENTS TREATED IN A SMALL NUMBER OF SPECIALIZED
CENTERS
Approximately 1.5 million patients in the United States receive therapy for
alcohol, heroin or cocaine addiction in a limited number of specialized
treatment centers as recorded by the Substance Abuse and Mental Health Services
Administration. Approximately 3,200 physicians are members of the American
Society of Addiction Medicine and these physicians write most of the
prescriptions for the few medications available to treat these patients.
Approximately 70% of alcohol abusers and drug users are employed and most
employers in the United States provide mental health plan coverage. It is
estimated that insurance or direct government financing in the United States
pays for 90 percent of addiction care. In Europe, various social security and
private payers plans cover addiction care.
ADDICTION CARE IS COST-EFFECTIVE
For every dollar spent on substance abuse treatment, an estimated $11.00 of
other social and medical costs are avoided. For instance, treatment is estimated
to reduce overall hospital admission rates of substance abusers by 38% in the
United States. In addition, treatment for addiction can decrease crime rates. In
one study, treatment for one year was shown to reduce arrests by an estimated
65%. We believe novel addiction medications can command pricing comparable to
other critical care therapies. For example, buprenorphine in France, used now by
an estimated 37% of heroin addicts, costs approximately $1,500 per year.
MORE PATIENTS ARE IN NEED OF THERAPY
Only an estimated 6% of alcohol abusers and cocaine addicts, and 27% of heroin
addicts are in treatment in the United States and Europe. There are an estimated
12.4 million alcohol abusers, 810,000 heroin addicts and 3.6 million cocaine
addicts in the United States, and approximately 14 million alcohol and drug
abusers in Europe. Lack of effective medications often discourages families and
primary care physicians to refer more patients to addiction treatment centers.
COLLABORATIONS
We are strengthening our position by forming relationships with strategic
partners. Alliances with government organizations, academic institutions and
others will help develop and market our new
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therapies. We have cultivated relationships with academic communities, clinics,
government organizations and others, to advance the development of medications
in the treatment in addiction. We have formed alliances with research
organizations and pharmaceutical companies for product development and the
manufacturing of NALTREL, BUPREL, METHALiz, COC-AB and ITAC. This strategy
lowers costs and leverages the resources and expertise of our collaborators.
MANUFACTURING AND SUPPLY ARRANGEMENTS
We do not intend to build manufacturing facilities, but to contract out our
manufacturing requirements to recognized leaders in pharmaceutical
manufacturing.
RELATIONSHIP WITH AVENTIS PASTEUR
In June 1999, we entered into a manufacturing agreement with Aventis Pasteur for
the manufacture of COC-AB. Aventis Pasteur is one of the world's largest vaccine
companies with a broad range of products. Under the terms of the agreement,
Aventis Pasteur has agreed to manufacture and supply us with COC-AB (Fab')2
product. As part of the relationship, Aventis Pasteur has agreed to certain
exclusivity provisions that preclude Aventis Pasteur from developing,
manufacturing or licensing a product that contains an anti-cocaine antibody or
antibody derivative for anyone other than us. We have agreed to exclusively use
Aventis Pasteur to manufacture COC-AB. This agreement has been in effect since
June 1999 and will continue until the 10(th) anniversary of the first commercial
sale of COC-AB to the general public. After such ten year period, we can
negotiate up to two (2) year renewals. The manufacturing agreement may be
terminated upon:
- uncured material breach;
- failure to obtain regulatory approval within specified time frames ranging
from two years to six years, and;
- termination of the patent and know-how license agreement between us and
Aventis Pasteur.
Also in June 1999, we entered into a patent and know-how license agreement with
Aventis Pasteur. In this agreement, Aventis Pasteur granted to us an exclusive
license under certain patents and know-how to produce and sell COC-AB products
for the treatment of drug addiction. This agreement will continue for thirteen
years following the date of first commercial sale of COC-AB to the public and
until we have made all royalty payments. The agreement may be terminated by
either party 120 days following written notice of an uncured material breach.
RELATIONSHIP WITH SP PHARMACEUTICALS L.L.C.
In November 1999, we entered into a manufacturing agreement with SP
Pharmaceuticals L.L.C. for the manufacture of NALTREL active and placebo product
for our use in clinical trials. Under the terms of the agreement, SP
Pharmaceuticals has agreed to manufacture and supply us with NALTREL.
SP Pharmaceuticals also agreed not to develop, manufacture or sell any product,
drug or compound directed to the treatment of drug, alcohol, or other substance
abuse addiction which involve sustained-release properties for any party other
than us during the term of this agreement and for two years after the expiration
or termination of this agreement. The agreement is to continue until
February 1, 2001. It may be extended for additional successive one year periods
until the development work is completed. This agreement may be terminated upon
an uncured material breach.
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LICENSING AGREEMENTS
RELATIONSHIP WITH SOUTHERN RESEARCH INSTITUTE
In February 1997, we entered into an agreement with Southern Research Institute,
or SRI, for the research and development of NALTREL. SRI is a multidisciplinary
non-profit research organization and is recognized for its ability to produce
practical, workable solutions to difficult technological problems. SRI has been
instrumental in developing the proprietary micro-encapsulation technology for
NALTREL.
Under the terms of the agreement, we are working with SRI on the development of
an injectable, biodegradable microscopic sphere formulation for one-month
delivery of naltrexone. In connection with the agreement, we were also granted
the option to license some of the developed product. On July 1, 1999, we
exercised the option of licensing worldwide rights, on an exclusive basis to
develop, produce and sell any injectable, sustained-release formulation of
naltrexone or other opiate receptor antagonists. In addition, we received a
nonexclusive license to certain other SRI patents and know-how for the purpose
of developing and commercializing any injectable, sustained-release formulations
of naltrexone. With respect to any of the other SRI patents, we agreed to give
SRI a non-exclusive, royalty-free license to fully exploit for any other purpose
any improvements to the other SRI patents for which we file a patent
application. The term of the development agreement will continue until
December 31, 2000. The license will continue until December 31, 2010, or the
expiration of the naltrexone patents or the expiration of the SRI patent rights,
whichever is last to occur. SRI may terminate the agreement if we have not filed
a new drug application for an injectable, sustained-release formulation of
naltrexone with the FDA by July 1, 2004, unless we can show our failure to file
resulted from events reasonably beyond our control. Further, SRI may terminate
the agreement upon 90 days written notice of an uncured material breach by us.
In January 2000, we entered into a second agreement with SRI for the research
and development of controlled release buprenorphine or other opiate receptor
agonists, including but not limited to, methadone. Under the terms of the
agreement, we are developing with SRI an injectable, sustained-release
formulation for delivery of controlled release buprenorphine. On January 21,
2000 we exercised the option of licensing exclusive worldwide rights for any
current or future patent rights covering inventions made during the performance
of the work under the research agreement to develop and commercialize any
injectable, sustained-release formulation of buprenorphine or other opiate
recepter agonists, including, but not limited to, methadone. The license
requires us to give a non-exclusive, royalty-free license to SRI to exploit for
any commercial purpose, other than sustained-release buprenorphine and other
opiate recepter agonists, any improvements we make to SRI patents. The term of
the development agreement will continue until January 21, 2003. The license will
continue until the expiration of the last of the buprenorphine patents or the
expiration of other relevant SRI patent rights. This agreement may be terminated
upon an uncured material breach by us.
RELATIONSHIP WITH SCRIPPS RESEARCH INSTITUTE
In June 1996, SCRIPPS Research Institute granted us a license of certain patents
relating to the development and marketing of diagnostic and therapeutic products
within the field of treatment of cocaine addition. SCRIPPS is engaged in
fundamental scientific biomedical and biochemical research. The SCRIPPS Research
Institute is one of the largest, private, non-profit research organizations in
the United States. SCRIPPS has become internationally known for its basic
research into immunology, molecular and cellular biology, chemistry,
neurosciences, autoimmune diseases, cardiovascular diseases and synthetic
vaccine development.
Under the terms of the agreement we licensed exclusive worldwide rights to
develop and market ITAC. This agreement will remain in effect so long as we sell
products covered under the terms of the license
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or until the licensed patents expire. Scripps may terminate the agreement within
60 days after an arbitrator's decision that we have not complied with the
commercial development obligations required in the agreement. Further, Scripps
may terminate the agreement upon 15 days written notice for nonpayment of any
amounts due by us and upon 60 days notice for any other uncured breach by us.
RELATIONSHIP WITH UNIVERSITY OF PARIS V
In June 1999 and March 2000, we entered into research and development agreements
with the University of Paris V to jointly develop COC-AB and related antibodies,
MAP-AB and dopamine modulators using both the facilities and expertise of the
University of Paris V.
Under the terms of the agreements, we have been granted worldwide rights,
current and future, to all inventions related to and including COC-AB, MAP-AB
and dopamine modulators. In consideration of the agreements we have agreed to
make royalty payments to the University of Paris V for a period of five years
from the date of the first commercial sale of either COC-AB, MAP-AB or dopamine
modulators, as the case may be.
In order for our clinical trials to be successful, we must continue to maintain
collaborative relationships with our partners. We rely heavily on these partners
to manufacture our product candidates, conduct pre-clinical trials and clinical
studies and license patented and proprietary technology to us.
PATENTS AND PROPRIETARY TECHNOLOGY
Our success will depend in part on our and our licensors' ability to obtain
patents for our technology and preserve our trade secrets and to operate without
infringing upon the proprietary rights of others. We currently hold one US
patent relating to COC-AB and we expect that a second patent will be issued in
the near future. We also have a patent application pending for our proprietary
naltrexone formulation, NALTREL and have a patent application pending for our
proprietary buprenorphine formulation, BUPREL. In addition, we have an exclusive
license from Southern Research Institute for patents relating to
sustained-release formulations of NALTREL, BUPREL, and METHALiz and an exclusive
license from the Scripps Research Institute for a patent relating to ITAC.
Patent positions in the pharmaceutical field are often uncertain and may involve
complex legal, scientific and factual questions. There has been increasing
litigation in the pharmaceutical industry with respect to the manufacture, use
and sale of new therapeutic products that are the subject of conflicting patent
rights. The validity and breadth of claims in pharmaceutical patents may involve
complex factual and legal issues for which no consistent policy has emerged, and
therefore, are highly uncertain. Moreover, the patent laws of foreign countries
differ from those of the US, and hence the degree of protection afforded by
foreign patents may be different. There can be no assurance that patent
applications relating to products and technologies developed by us will result
in patents being issued or that, if issued, the patents will provide a
competitive advantage or will afford protection against competitors with similar
technologies, or that such patents will not be challenged successfully or
circumvented by competitors, or that our technologies, products or processes
will not infringe on third parties patent rights. In addition, the US Patent and
Trademark Office has a substantial backlog of biotechnology patent applications
and the approval or rejection of patent applications may take several years.
We also rely on certain proprietary trade secrets and know-how that are not
patentable. Although we have taken steps to protect our unpatented trade secrets
and know-how, in part through the use of confidentiality agreements, with our
employees and consultants there can be no assurance that:
- these agreements will not be breached; or
- our trade secrets will not otherwise become known or independently
developed.
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COMPETITION
Currently, we compete primarily with other companies marketing products for the
treatment of alcohol and heroin abuse. In the future we may compete with
companies developing similar products using alternative technologies, or
different products for similar medical indications that could render our
products obsolete. We believe we will compete in the future on the basis of
approved product indications, post-marketing studies, pricing and reimbursement.
Many of our competitors have greater financial, operational, sales and marketing
resources, and more experience in research and development than we have.
Several companies are currently making or developing products that compete with
or will compete with our products. The current products that will compete with
ours are:
- - Acamprosate, for treatment of alcoholics, marketed by Lipha;
- - Buprenorphine, for treatment of heroin addiction, marketed by Schering
Plough;
- - Disulfiram, for treatment of alcoholics, marketed by Wyeth Ayerst and
others;
- - LAAM, a derivative of methadone, for treatment of heroin addiction, marketed
by Roxane;
- - Methadone, for treatment of heroin addiction, marketed by Roxane and
Mallinckrodt; and
- - Naltrexone oral tablets, for treatment of heroin addicts and alcoholics,
marketed by Barr Laboratories and Dupont Merck.
PRE-CLINICAL TESTING AND CLINICAL TRIALS
Before we can obtain the necessary regulatory approvals for the sale of any of
our products, we must demonstrate, through pre-clinical testing and clinical
trials, that our product candidates are safe and effective. Naltrel is the only
product candidate for which we have initiated clinical trials involving human
testing. Our other product candidates are still in the pre-clinical testing
phase.
Conducting clinical trials is a lengthy, time-consuming, uncertain and expensive
process. Several factors may delay or affect the commencement and completion of
clinical trials, including:
- - inability to manufacture or develop the product candidates and the placebo
to be used in the clinical trials;
- - inability to obtain the controlled substances to be used in the study;
- - patient enrollment, including the size of the patient population, the nature
of the protocol, the proximity of patients to clinical sites, the
eligibility criteria for the study and the potential for patient drop out,
particularly due to the nature of the study;
- - inability to adequately follow patients after initial participation in the
clinical trial;
- - availability of third parties to conduct the trials.
If our product candidates fail to perform as expected, then we will not be able
to develop our products as expected.
GOVERNMENT REGULATION
Our research and development activities, pre-clinical tests and clinical trials,
and ultimately the manufacturing, marketing and labeling of our products, are
subject to extensive regulation by the FDA and other regulatory agencies in the
United States and other countries. In the US, the Federal Food,
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Drug, and Cosmetic Act, or the Act, and the regulations promulgated thereunder
and other federal and state statutes and regulations govern, among other things,
the testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising, promotion, import and export of our products. Similarly,
the EU subjects the manufacture, testing, marketing, labeling, advertising, and
classification of medicinal products to extensive regulation, which is
implemented at national level and supplemented by additional national rules
throughout the Member States of the EU. Pre-clinical testing and clinical trial
requirements and the regulatory approval process typically take years and
require the expenditure of substantial resources. Additional government
regulation may be established that could prevent or delay regulatory approval of
our product candidates. Delays or rejections in obtaining regulatory approvals
would adversely affect our ability to commercialize any pharmaceutical product
candidates we develop and our ability to receive product revenues or royalties.
Even if regulatory approval of a product candidate is granted, the approval may
include significant limitations on the indicated uses for which the product may
be marketed.
The FDA and other foreign regulatory agencies require that the safety and
effectiveness of our product candidates be supported through adequate and
well-controlled clinical trials. If the results of pivotal clinical trials that
we submit in applications for approval do not establish the safety and efficacy
of our product candidates to the satisfaction of the FDA and other foreign
regulatory agencies, we will not receive the approvals necessary to market our
product candidates, which would have a material adverse effect on our business,
financial condition, cash flows and results of operations.
Some of our products will also be regulated by the United States Drug
Enforcement Administration and by the European Union as controlled substances.
FDA REGULATION--APPROVAL OF THERAPEUTIC PRODUCTS
Our therapeutic products are regulated either as drugs (in the case of NALTREL,
BUPREL, METHALiz, and dopamine modulators) or as biological products (in the
case of COC-AB, MAP-AB and ITAC). The steps required before a drug or biological
product may be marketed in the United States include:
- - pre-clinical and clinical studies;
- - the submission to the FDA of an Investigational New Drug application, or
IND, which must become effective before human clinical trials may commence;
- - adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug;
- - the submission to the FDA of a New Drug Application, or NDA, or, a
Biological License Application, or BLA; and
- - FDA approval of the application, including approval of all product labeling.
Pre-clinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Pre-clinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practice. The results of the pre-clinical tests are typically submitted and
reviewed by the FDA as part of an IND, before human clinical trials begin. If
the FDA does not object to an IND, it will become effective in 30 days.
Submission of an IND may not result in FDA authorization to commence clinical
trials and the lack of an objection may not mean that the FDA will ultimately
approve a product for marketing. We filed an IND for NALTREL in early 1999.
Clinical trials involve the administration of the investigational product to
humans under the supervision of a qualified principal investigator. The
protocols for clinical trials must be reviewed by
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the FDA and must be conducted in accordance with Good Clinical Practices. Each
clinical trial must be approved by an Institutional Review Board that will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution conducting the clinical trials. We
must also obtain patient informed consent.
Clinical trials are typically conducted in three sequential phases that may
overlap. In clinical trials for the study of medication safety in healthy
volunteers, typically called Phase I clinical trials, the drug is given to
healthy human volunteers and is tested for safety, dosage tolerance, metabolism,
distribution, excretion and blood levels. In trials for the study of medication
safety in patients, typically known as Phase I/II clinical trials, trials are
conducted in a target patient population:
- - to gather evidence about the blood levels, safety and effectiveness of the
drug for specific uses;
- - to determine dosage tolerance and optimal dosage; and
- - to identify possible adverse effects and safety risks.
Phase III clinical trials are undertaken to evaluate effectiveness and to test
for safety in an expanded patient population. Our clinical trials may not be
completed successfully or within any specified time period. We or the FDA may
suspend clinical trials at any time, if either we or the FDA conclude that
clinical subjects are being exposed to an unacceptable health risk, or for many
other reasons.
The FDA may disagree with the design of the Phase III clinical trial protocols
after the results of the Phase III clinical trials have been announced. The FDA
inspects and reviews clinical trial sites and data from the clinical trials to
determine compliance with Good Clinical Practice. The FDA also examines whether
there was bias in the conduct of clinical trials. Phase III clinical trials are
complex and difficult, and they may not be successful.
The results of pre-clinical studies and clinical trials, if successful, are
submitted in an application to seek the FDA approval to market the drug or
biological product for a specified use. The testing and approval process
requires substantial time and effort, and approval may not be granted for any
product nor approval granted according to any schedule. The FDA may refuse to
approve an application if it believes that regulatory criteria are not satisfied
and may require additional testing for safety and efficacy of the drug. If
regulatory approval is granted, the approval will be limited to specific
indications. Our product candidates may not receive regulatory approvals for
marketing, or if approved, the approval may not be for the indications we have
requested.
The FDA provides a "fast track" review process for drugs that treat serious or
life threatening diseases and conditions and have a demonstrated potential to
meet unmet medical needs for these diseases or conditions. Approval may be
conditioned on a requirement that, following product launch, a company continue
to study the drug to verify and describe its clinical benefit. Under "fast
track" procedures, the FDA may withdraw approval on an expedited basis if the
company fails to show due diligence in conducting post-marketing clinical trials
or if the post-approval clinical trials fail to demonstrate that the product is
safe or effective. When appropriate, we intend to pursue opportunities for "fast
track" review of our products. We may not be able to take advantage of "fast
track" review of our products.
The current fee for submission of NDAs and BLAs is $256,338, and may increase
from year to year. The FDA also may require annual fees for approved products
and for companies that manufacture products. The FDA may waive or reduce these
fees under special circumstances. We will seek waivers or reductions of fees
where possible, but we may not be eligible for any such waiver or reduction.
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FDA REGULATION--POST-APPROVAL REQUIREMENTS
Even if we obtain regulatory approvals for our product candidates, our products
and the facilities that manufacture them are subject to continual review and
periodic inspection. Each US drug manufacturing establishment must be registered
with the FDA. Manufacturing establishments in the US and abroad are subject to
inspections by the FDA and must comply with the FDA's good manufacturing
practice regulations, which are strictly enforced. Full technical compliance
requires manufacturers to expend funds, time and effort in the area of
production and quality control.
The FDA continues to regulate products after they have been approved. For
example, the FDA and, in certain instances, the Federal Trade Commission,
regulate the labeling and promotion of approved products. The FDA also requires
that we report certain adverse events involving our products. In addition, the
FDA can impose other post-marketing controls on us and our products.
Failure to comply with regulatory requirements can result in warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal or withdrawal of approvals and
criminal prosecution of our company and employees.
EU REGULATION--APPROVAL OF THERAPEUTIC PRODUCTS
Before clinical trials and marketing of our products in the EU begin, we must
obtain EU regulatory approval regardless of FDA approval. The approval procedure
varies in each Member State, and the time required may be different from that
required for FDA approval.
Under EU law, there are two procedures for the approval of therapeutic products.
The first is a centralized approval procedure, administered by the European
Agency for the Evaluation of Medicinal Products , or the EMEA. The second is a
decentralized approval procedure, which requires approval by the Medicines
Agency in each Member State where our therapeutic products will be marketed.
Once a product has been approved by one Member State, the product is eligible
for expedited review by other Member States. The centralized approval procedure
is mandatory for certain biological products and may be applicable to our
products. We believe that approval of COC-AB, MAP-AB and ITAC will be considered
under this procedure. We believe that the approval of some of our other
products, such as, NALTREL, BUPREL and METHALiz will be considered under the
decentralized procedure. There can be no assurance that one Member State will
recognize a drug approval granted earlier by another Member State, but a
decision will be made within 90 days.
Regardless of which procedure might be used, the rigorous and lengthy steps
ordinarily required before a medicinal product may be marketed in the EU
include:
- - adequate non-clinical tests and clinical trials;
- - the submission to the EMEA or to the respective Member States' Medicines
Agencies of an application for a marketing authorization, supported by all
necessary documents and test results; and
- - approval of the application, including approval of all product labeling and
packaging, by the European Commission and/or the relevant Medicines Agencies
in each Member State.
- - In the EU, there is no "fast track" review process to for expedited
regulatory approval.
In all cases, the safety, effectiveness and quality of our product candidates
must be demonstrated according to demanding criteria under EU and US rules. Our
non-clinical tests and clinical trials performed in the US may not be recognized
and accepted by the regulatory authorities in the EU. Pre-clinical tests in the
EU must be conducted by laboratories that comply with Good Laboratory Practice,
and clinical trials must be conducted in accordance with specific national Good
Clinical
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Practices. Moreover, many Member States require compliance with principles of
Good Manufacturing Practices in the manufacture of products intended for use in
clinical trials. The complex array of national requirements for clinical trials
conducted in the EU may delay regulatory approvals.
After receiving pre-marketing approval we will have to comply with rules in the
Member States relating to the labeling and advertising of our products.
Even if regulatory authorities approve our product candidates, our products and
our facilities, including facilities located outside the EU, may be subject to
ongoing testing, review and inspections by EU health regulatory authorities.
Failure to comply with EU regulatory requirements can result in, among other
things, warning letters, fines, injunctions, civil penalties, recall orders or
seizure of products, total or partial suspension of production, refusal or
withdrawal of approvals and criminal prosecution of us and our employees.
DEA REGULATION
Some components of our current product candidates are regulated as controlled
substances by the Drug Enforcement Agency, or DEA. The active ingredient in
METHALiz is currently classified on Schedule II (signifying, among other things,
a high potential for abuse) and the active ingredient in BUPREL is currently
classified as Schedule V (signifying, among other things, a lower potential for
abuse). In addition, the active ingredient in ITAC is derived from a substance
classified on Schedule II and may itself be regulated as a Schedule II
substance.
As controlled substances, the handling of these ingredients, and the
manufacture, shipment, storage, sale, and use of finished products containing
these ingredients, are subject to the highest degree of regulation and
accountability by DEA. The amount of controlled substances we can obtain for
clinical trials and for commercial distribution is limited by the DEA and may
not be sufficient to complete clinical trials or meet commercial demand.
Moreover, DEA may, in the future, seek to regulate other active ingredients in
our product candidates as controlled substances. DEA restrictions on the
controlled substances used in our products, or on the marketing of our products
containing those controlled substances, could significantly limit the sales of
our products, resulting in a material adverse impact on our financial
performance.
REGULATION OF CONTROLLED SUBSTANCES IN THE EUROPEAN UNION
EU regulations govern trade in controlled substances between the EU and third
countries, and may adversely affect the manufacture, clinical testing, shipment,
storage, sale and use of certain active ingredients contained in our products or
our products themselves. EU regulations impose a specific system of monitoring
trade in controlled substances, including licensing and registration
requirements, pre-notification of consignments of certain controlled substances,
prohibitions of certain operations, and a variety of record keeping, labeling
and security requirements. Enforcement actions for non-compliance with
regulations include fines and/or criminal sanctions.
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SCIENTIFIC ADVISORY BOARD
We have established a scientific advisory board made up of leading scholars in
the field of addiction science. Members of our scientific advisory board consult
with us on matters relating to the development of our products described
elsewhere in this prospectus. We reimburse members of our Scientific Advisory
Board for reasonable out-of-pocket expenses they incur in connection with board
meetings. Some of the members may also receive options to purchase shares of our
common stock. The members of the scientific advisory board are as follows:
<TABLE>
<CAPTION>
ADVISOR INSTITUTION
- ------------------------------------------------------------------------------------------------
<S> <C>
Walter Ling, MD, Chairman University of California, Los Angeles
Jean Ades, MD Louis Mourier Hospital, Paris
Dominique Blanchard, PhD Establissement de Transfusion Sanguine,
Nantes
Herve Galons, PhD University of Paris V, Paris
Kim D. Janda, PhD The Scripps Research Institute, La Jolla
Reese Jones, MD University of California, San Francisco
George Koob, PhD The Scripps Research Institute, La Jolla
Charles O'Brien, MD University of Pennsylvania, Philadelphia
Jean-Marc Rouzioux, MD, PhD, LD Aventis Pasteur, Lyon
</TABLE>
EMPLOYEES
As of March 6, 2000, we employed 19 persons, four of whom hold PhD or MD degrees
and one who holds another advanced degree. Approximately seven employees are
engaged in management or administration, one in business development, one in
finance, one in marketing and sales, one in regulatory affairs and quality
assurance, and six are involved in research and clinical development. Our
success will depend in large part upon our ability to attract and retain
employees. We face competition in this regard from other companies, research and
academic institutions, government entities and other organizations. We believe
that we maintain good relations with our employees.
FACILITIES
We sublease an office facility in Menlo Park, California that is approximately
1,500 square feet for $4,500.00 per month that we use as our headquarters and as
the base for our operations. The sublease expires on September 30, 2000. We rent
laboratory space in Paris, France and also intend to lease a facility in Paris
that is approximately 1,700 square feet. Under the terms of this lease, we will
pay rent of approximately $3,400 per month beginning July 1, 2000. We believe
that our current facilities will be adequate to meet our near-term space
requirements. We also believe that suitable additional space will be available
to us, when needed, on commercially reasonable terms.
ORGANIZATION
We were incorporated in the state of California in 1993. We have a wholly-owned
subsidiary, DrugAbuse Sciences, SAS, incorporated under the laws of France.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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Management
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is the name, age, position and a brief account of the business
experience of each of our executive officers, directors and key employees as of
March 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS AND KEY
EMPLOYEES
Philippe Pouletty, MD..................... 41 Chairman of the Board and Chief Executive
Officer
Elizabeth M. Greetham..................... 50 Chief Financial Officer, Senior Vice
President, Business Development, Secretary
and Director
James W. Elder............................ 47 Senior Vice President, Marketing and Sales
Jason A. Gross, PharmD.................... 35 Vice President, Regulatory Affairs and
Quality Assurance
Maryvonne Hiance.......................... 51 General Manager of European Operations
Jacques Kusmierek, MD..................... 57 Deputy General Manager of European
Operations, Senior Vice President European
Development
David E. Smith, MD........................ 60 Medical Director and Director
Donald R. Wesson, MD...................... 58 Vice President, Clinical Development
Raffy Kazandjian(2)....................... 40 Director
Fred P. Phillips IV(2).................... 35 Director
Russell Ricci(1).......................... 53 Director
Gordon Russell(2)......................... 66 Director
Vincent Worms(1).......................... 47 Director
</TABLE>
- ---------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
PHILIPPE POULETTY, MD Dr. Pouletty is our founder and has served as our
Chairman of the Board since 1993 and chief executive officer since December
1999. In 1988, Dr. Pouletty founded SangStat Medical Corporation (NASDAQ: SANG),
the only specialty pharmaceutical company dedicated to organ transplantation
which received FDA approval for two new drugs in 1998. Dr. Pouletty served as
President, CEO and a director of SangStat from 1988 to 1995. From 1995 to 1998
he served as Chairman and CEO and is presently the Chairman. He is also a member
of the board of Conjuchem, a private biotechnology company. Before founding
SangStat, Dr. Pouletty co-founded Clonatec, a French biotechnology company,
where he was the director of research from 1984 to 1988. From 1981 to 1984,
Dr. Pouletty was Interne des Hospitaux de Paris and practiced hematology and
immunology at two of Paris' leading hospitals. He is the inventor of 22 issued
US patents, co-author of 41 published scientific papers and a member of the
American Society of Addiction Medicine. Dr. Pouletty received his M.D. degree
from the University of Paris VI and immunology and virology degrees (M.S.) at
Institut Pasteur. He was a post-doctoral fellow at Stanford University in the
Department of Medical Microbiology and Immunology.
ELIZABETH M. GREETHAM Ms. Greetham joined us in 1998 as a member of the board
of directors and in April 1999 assumed the position of Chief Financial Officer
and Senior Vice President, Business Development. From 1988 to 1999,
Ms. Greetham was a portfolio manager for Weiss, Peck & Greer,
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an institutional investment management firm. She managed the WPG Life Sciences
Funds, L.P., which invested in select biotechnology stocks. Prior to that,
Ms. Greetham was a consultant to F. Eberstadt & Co. She has over 25 years of
investment experience as a portfolio manager and health care analyst in the
United States and Europe. She is a member of the Board of Directors of Guilford
Pharmaceuticals, SangStat Medical Corporation, PathoGenesis Corporation and
CliniChem Development Inc., all publicly traded companies. Ms. Greetham earned
an MA (Hons.) from the University of Edinburgh, Scotland.
JAMES W. ELDER Mr. Elder joined us in January 2000, to become our Senior Vice
President, Marketing and Sales. For the past twenty-one years, he has held
numerous management positions at Mallinckrodt Incorporated, a pharmaceutical
company that manufactures controlled substances in bulk. Mr. Elder was most
recently Business Director of the Addiction Treatment Business Unit, where he
was responsible for developing products and services for addiction treatment
clinics, including a methadone clinic computer, sales of methadone and
naltrexone pharmaceuticals and bulk methadone, and retail sales of generic
analgesics. Other positions held by Mr. Elder at Mallinkrodt include Marketing
Manager of the Pharmaceutical Dosage Products and Drug Chemicals Divisions,
Quality Assurance Manager, and Senior Business Manager. Prior to joining
Mallinckrodt, Mr. Elder worked as a Research Chemist for the Protein Research
Division of Ralston Purina. Mr. Elder earned an MBA at the Southern Illinois
University and received his Bachelor of Arts in Chemistry from the University of
Missouri-Columbia.
JASON A. GROSS, PHARMD Mr. Gross joined us in January 2000 to become our Vice
President, Regulatory Affairs and Quality Assurance. From 1997 until 2000, he
was the director of State, Federal and International regulatory affairs at
Zenith/Goldline Pharmaceuticals, a subsidiary of IVAX Corporation. From 1992 to
1997 Dr. Gross was an officer in the Public Health Service assigned to the Food
and Drug Administration, Center for Drug Evaluaion and Research (CDER). He
served in various regulatory capacities including Chief Consumer Safety Officer
for the Office of Generic Drugs; Division of Bioequivalence, Manager of the
Domestic Preapproval Inspection Process and was assigned to the Office of the
Commissioner at the US Food and Drug Administration, to work on issues
associated with the tobacco initiative and homeopathic medications. Dr. Gross
studied Marketing and Management at Pima Community College and received his
Doctor of Pharmacy from the University of Arizona, after which he completed a
post Doctorate specialized residency in Ambulatory Care at the National
Institutes of Health.
MARYVONNE HIANCE Ms. Hiance joined us as General Manager of our European
operations in 1997. She served as President of Sangstat Atlantique, Sangstat's
European subsidiary from 1990 to 1992. She was co-founder from 1991 to 1996, of
Demeter Innovation, a French consulting company where she was manager from 1991
to 1993. Ms. Hiance was General Manager of Strategic Ventures, a company focused
on organizing and financing the international growth of European companies, from
1993 to 1997. She holds an Engineering degree from the 'Ecole Polytechnique
Feminine', Paris and a Nuclear Engineering degree from the 'Institut des
Sciences et Techniques', Grenoble.
JACQUES KUSMIEREK, MD Dr. Kusmierek joined us in January 2000 as Deputy General
Manager of European Operations and Senior Vice President of European
Development. From 1990 to 1999, he served in several positions at Sanofi
Pharmaceuticals in Paris, France. From 1996 to 1999 he served as Vice President
and Chief Executive Medical Officer of Human Health Worldwide, where he was
responsible for establishing the new Medical Affairs division which included
Health Economics and Outcome Research, Pricing and Reimbursement. From 1990 to
1996 he was Executive Vice President of Research and Director of International
Clinical Development, a division he started and managed for six years.
Dr. Kusmierek has held medical director and clinical research positions at Eli
Lilly, Rhone
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Poulenc and Boehringer Ingelheim in both the US and Europe. Dr. Kusmierek
received his M.D. degree from the University of Rene Descartes in Paris, France.
He is a board-certified cardiologist and completed additional training in
clinical pharmacology at the University of Pierre and Marie Curie.
DAVID E. SMITH, MD Dr. Smith is our Medical Director and a member of our
Scientific Advisory Board, positions he has held since 1998. Dr. Smith founded
the Haight Ashbury Free Clinics in the San Francisco area in 1967 and has been
the President and Medical Director from inception. He serves as medical director
for several organizations including the California State Department of Alcohol
and Drug Programs at the University of California in San Francisco (UCSF). Dr.
Smith has been an author and advisor of more than 300 articles, books, and films
and has been an investigator in numerous clinical trials of addiction
treatments. He served as President of the American Society of Addiction Medicine
(ASAM) from 1995 to 1997 and also served as President of the California Society
of Addiction Medicine (CSAM). He is also a member of the Clinical Review Board
for the National Institute on Drug Abuse (NIDA). In 1967, Dr. Smith founded the
Journal of Psychoactive Drugs, where he currently serves as Executive Editor.
Dr. Smith received a M.S. in pharmacology and his M.D. from the University of
California, San Francisco.
DONALD R. WESSON, MD Dr. Wesson joined us in January 1998 as a member of our
Scientific and Medical Advisory Board, and in October 1999 he was appointed Vice
President, Clinical Development. Dr. Wesson has been the Scientific Director of
Friends Research Associates in Berkeley, California, a collaborative group of
researchers dedicated to expanding the treatment options for addiction care. He
has been the principal investigator for 11 clinical trials sponsored by the
National Institute on Drug Abuse (NIDA), and 10 clinical trials sponsored by the
pharmaceutical industry. Since 1997, Dr. Wesson has served as the Chairman of
the American Society of Addiction Medicine's (ASAM) Medications Development
Committee. He has written more than 100 articles, book chapters, and books
concerning drug abuse and its treatment and is on the editorial board of several
journals including the Journal of Psychoactive Drugs and the Journal of
Addictive Diseases. Dr. Wesson received his M.D. at the Medical College of
Alabama and is a board-certified psychiatrist.
RAFFY KAZANDJIAN Mr. Kazandjian joined our board of directors in March 1998. He
is currently the Investment Director at CDC-Innovation, a venture-capital firm
he joined in 1996. He has extensive knowledge in the area of life sciences
investments and information technology. Mr. Kazandjian currently serves on the
boards of directors of several European and North American pharmaceutical and
biotechnology and internet companies, including Thallia Pharmaceuticals,
Neurotech, and Quantum Biotechnologies. Mr. Kazandjian is a graduate of
Massachusetts Institute of Technology, with an MBA from INSEAD in Paris, and
started his career with the P&G Company.
FRED P. PHILLIPS IV Mr. Phillips joined our Board of Directors in
October 1999. Since November 1997, Mr. Phillips has invested in technology
companies on behalf of ABN AMRO NV, an investment firm in the Netherlands.
Mr. Phillips is presently a director of several privately held technology
companies in the United States and Europe. Mr. Phillips holds a B.S. in
economics from Cornell University, a M.St. in philosophy from Oxford University,
and a J.D. from Yale University.
RUSSELL J. RICCI, MD Dr. Ricci joined our board of directors in January 2000
and is the General Manager of IBM's Healthcare Industry leading a team
developing information technology and e-business solutions to payors, providers
and pharmaceutical companies. Prior to joining IBM, he held a number of
executive and clinical positions with other organizations, including Voluntary
Hospitals of America (VHA), and New Health Ventures at Blue Cross and Blue
Shield of Massachusetts, where he served as President. Dr. Ricci received his
undergraduate degree from Columbia University and his M.D. from New York
University and is a former associate chairman and assistant clinical professor
at Boston University School of Medicine.
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GORDON RUSSELL Mr. Russell joined our board of directors in December 1998, and
was formerly a general partner at Sequoia Capital, a venture capital firm he
joined in 1979. At Sequoia he developed the partnership's original healthcare
investments in companies such as Acuson, Ventritex, SangStat Medical
Corporation, and Biotrack. Mr. Russell is a Chairman of Fusion Medical
Technologies, a publicly traded company. He is a Chairman of the Board of
Overseers of the Dartmouth Medical School and the C. Everett Koop Institute at
Dartmouth. He also sits on the Board of Trustees of the Palo Alto Medical
Foundation. Mr. Russell has an A.B. in History from Dartmouth College.
VINCENT WORMS Mr. Worms joined our board of directors in July 1994, and is
currently a General Partner at Partech International a venture capital firm he
jointly founded in 1982. His 17 years of investment experience have been
concentrated in the computer and CAD/CAE areas, and now predominantly in the
software industry. Mr. Worms is presently a director of Business Objects,
SangStat Medical Corporation, Visioneer and Informatica. He has a MS in Civil
Engineering from the Massachusetts Institute of Technology and a MS in
engineering from Ecole Polytechnique in Paris.
BOARD OF DIRECTORS
We currently have authorized eight directors. All of our officers serve at the
discretion of the board of directors. There are no family relationships among
our directors and officers.
BOARD COMMITTEES
The compensation committee of the board of directors reviews and makes
recommendations to the board regarding all forms of compensation provided to our
executive officers and directors, including stock compensation and loans. In
addition, the compensation committee reviews and makes recommendations on bonus
and stock compensation arrangements for all of our employees. As part of these
responsibilities, the compensation committee also administers our 2000 Stock
Incentive Plan, 2000 Employee Stock Purchase Plan and 2000 Directors' Option
Plan. The current members of the compensation committee are Vincent Worms and
Russell Ricci.
The audit committee of the board of directors reviews and monitors our corporate
financial reporting and our external audits, the results and scope of the annual
audit and other services provided by our independent auditors and our compliance
with legal matters that have a significant impact on our financial reports. The
audit committee also consults with management and our independent auditors
before the presentation of financial statements to shareholders and, as
appropriate, initiates inquiries into aspects of our financial affairs. In
addition, the audit committee has the responsibility to consider and recommend
the appointment of, and to review fee arrangements with, our independent
auditors. The current members of the audit committee are Fred Phillips, Gordon
Russell, and Raffy Kazandjian.
DIRECTOR COMPENSATION
We do not currently provide our directors with cash compensation for their
services as members of the board of directors, although members are reimbursed
for some expenses in connection with attendance at board and committee meetings.
On December 15, 1999, all non-employee directors, including Gordon Russell,
David Smith, Vincent Worms, Raffy Kazandijian, Fred Phillips, and Russell Ricci
were granted a stock option for 33,333 shares at $0.45. The directors will vest
in 25% of the shares subject to their options after 12 months of continuous
service as directors after their grant date; the remaining shares vest equally
over the next 36 months of continuous service. Following this offering,
directors will receive automatic option grants under our 2000 Directors' Option
Plan. A non-employee director who first joins our board following the offering
will receive an option for 20,000 shares of our common stock. Twenty-five
percent of the shares subject to this initial option vest after 12 months of
continuous service as a director; the remaining shares vest equally over the
next 36 months of
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continuous service. At each annual meeting of shareholders, beginning in 2001,
all non-employee directors who will continue to be board members after the
annual meeting will receive an option for 5,000 shares of our common stock,
which will vest after 12 months of continuous service after the grant date. In
no event will a non-employee director receive an option for 5,000 shares in the
same calendar year that he or she receives the option for 20,000 shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Vincent Worms and Russell Ricci. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member of
the board of directors or compensation committee of any other company, and no
interlocking relationship has existed in the past, except that Elizabeth
Greetham and Vincent Worms serve on the compensation committee of SangStat
Medical Corporation, a publicly traded company, in which Philippe Pouletty
serves as the Chairman of the Board.
EXECUTIVE COMPENSATION
The following table presents information on compensation for fiscal year 1999
paid by us for services by our current chief executive officer, our former chief
executive officer, and our executive officers, collectively referred to as the
Named Executive Officers.
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<TABLE>
<CAPTION>
ANNUAL COMPENSATION SECURITIES
OTHER ANNUAL RESTRICTED STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS(#)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Philippe Pouletty, M.D.... -- -- -- -- 726,656
Chairman of the Board,
Chief Executive Officer
and President
Elizabeth M. Greetham..... -- -- -- 2,200 480,553
Chief Financial Officer,
Senior Vice President,
Business Development and
Director
James W. Elder(1)......... -- -- -- -- --
Senior Vice President,
Marketing and Sales
Maryvonne Hiance.......... 60,000 -- -- -- 25,000
General Manager of
European Operations
Stanley Kaplan, Ph.D.(2)... 175,000 8,033 36,526 -- --
Former Chief Executive
Officer and Former
President
</TABLE>
- ---------
(1) Mr. James W. Elder began serving as our Senior Vice President, Marketing and
Sales on January 19, 2000.
(2) Dr. Kaplan ceased to serve as Chief Executive Officer as of December 26,
1999. He continued to serve as President until December 31, 1999.
Dr. Kaplan currently provides consulting services and will provide these
services until April 9, 2000. Other annual compensation for Mr. Kaplan
includes a severance payment of $30,834 and $5,692 in accrued vacation.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the stock options we granted during fiscal year
1999 to each of our Named Executive Officers. Generally these stock options are
immediately exercisable. We have the right to repurchase all unvested shares at
the original exercise price if the optionee's service terminates. Each of the
options has a ten-year term, subject to earlier termination if the optionee's
service terminates.
The percentages in the column entitled "Percent of total options granted to
employees in 1999" are based on an aggregate of 1,721,210 options granted under
the 1994 Stock Plan, the 1999 Stock Plan A, and the 1999 Stock Plan B during the
12 months ended December 31, 1999.
The amounts listed in the following table under the heading "Exercise price"
were valued by our board of directors on the date of grant. In determining this
fair market value, the board of directors took into account the purchase price
paid by investors for shares of our preferred stock (taking into account the
liquidation preferences and other rights, privileges and preferences associated
with such preferred stock) and an evaluation by the board of directors of our
revenues, operating history and prospects. The exercise price may be paid in
cash, in shares of our common stock valued at fair market value on the exercise
date or through a cashless exercise procedure involving a same-day sale of the
purchased shares. We may also finance the option exercise by lending the
optionee sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with the exercise.
We calculated the amounts listed in the following table under the heading
"Potential realizable value at assumed annual rates of stock price appreciation
for option term" based on the ten-year term of the option at the time of grant.
For purposes of these columns, we assumed stock price appreciation of 5% and 10%
pursuant to rules promulgated by the Securities and Exchange Commission. These
rates do not represent our prediction of our stock price performance. We
calculated the potential realizable values at 5% and 10% appreciation by
assuming that the estimated fair market value on the date of grant appreciates
at the indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price. Information on how we determined the fair market value of our
common stock is disclosed in the preceding paragraph. The price to the public in
this offering is higher than the estimated fair market value on the date of
grant. Therefore, the potential realizable value of the option grants would be
significantly higher than the
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- --------------------------------------------------------------------------------
numbers shown in the column if future stock prices were projected to the end of
the option term by applying the same annual rates of stock price appreciation to
the public offering price.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES PRICE EXPIRATION (IN THOUSANDS)
NAME GRANTED (#) IN 1999 ($/SH) DATE 5% ($) 10% ($)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Philippe Pouletty, M.D...... 106,709(1) 6.20% $0.30 09/27/2009 $20,133 $51,020
619,947(2) 36.02 0.45 12/14/2009 175,447 444,616
Elizabeth M. Greetham....... 108,585(3) 6.31 0.30 04/06/2009 20,487 51,917
371,968(4) 12.61 0.45 12/14/2009 105,268 266,770
James Elder................. -- -- -- -- -- --
Maryvonne Hiance............ 25,000(5) 1.45 0.30 07/12/2009 4,717 11,953
Stanley Kaplan, PhD......... -- -- -- -- -- --
</TABLE>
- ---------
(1) Dr. Pouletty's option grant vests 25% upon completion of 12 months of
service from the vesting start date and the balance equally over the next
36 months of service. This option will become fully vested upon a change in
control before Dr. Pouletty's service terminates.
(2) Dr. Pouletty's option grant vests for 30% of the shares equally over 36
months of services and for 70% at the end of his sixth year of service, with
potential vesting acceleration upon the attainment of specific milestones.
This option will become fully vested upon a change in control.
(3) Ms. Greetham's option grant vests at the end of her sixth year of service,
with potential vesting acceleration upon the attainment of specific
milestones.
(4) Ms. Greetham's option grant vests at the end of her sixth year of service,
with potential vesting acceleration upon the attainment of specific
milestones. This option will become partially vested upon a change in
control.
(5) Ms. Hiance's option grant vests as follows: 25% of the shares vest equally
over four years and the balance at the end of her sixth year of service,
with acceleration upon the attainment of specific milestones.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
The following table sets forth for each of our Named Executive Officers the
number of options exercised during the fiscal year ended December 31, 1999 and
the number and value of securities underlying unexercised options that are held
by the Named Executive Officers as of December 31, 1999. No stock appreciation
rights were exercised by our Named Executive Officers in fiscal year 1999, and
no stock appreciation rights were outstanding at the end of that year.
The numbers in the column entitled "Value Realized" are equal to the fair market
value of the purchased shares on the option exercise date, less the exercise
price paid for such shares. Generally, these stock options are immediately
exercisable. We have the right to repurchase all unvested option shares at the
original exercise price if the optionee's service terminates. The heading
"Vested" refers to shares no longer subject to our right of repurchase; the
heading "Unvested" refers to shares subject to our right of repurchase as of
December 31, 1999.
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MANAGEMENT
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The numbers in the column entitled "Value of unexercised in-the-money options at
December 31, 1999" are based on the value of our common stock at December 31,
1999, as determined by our board of directors, $0.45, less the exercise price
payable or paid for such shares. The fair market value of our common stock at
December 31, 1999 was estimated by the board of directors on the basis of the
purchase price paid by investors for shares of our preferred stock (taking into
account the liquidation preferences and other rights, privileges and preferences
associated with the preferred stock) and an evaluation by the board of our
revenues, operating history and prospects. The price to the public in this
offering is higher than the estimated fair market value at December 31, 1999.
Consequently, the value of unexercised options would be higher than the numbers
shown in the table if the value were calculated by subtracting the option
exercise price from the public offering price.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, DECEMBER 31,
ACQUIRED ON VALUE 1999 (#) 1999 ($)
NAME EXERCISE (#) REALIZED ($) VESTED UNVESTED VESTED UNVESTED
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Philippe Pouletty, M.D....... 726,656 16,006 -- -- -- --
Elizabeth M. Greetham........ 480,553 16,288 -- -- -- --
James Elder.................. -- -- -- -- -- 0
Maryvonne Hiance............. -- -- 10,417 39,583 260 990
Stanley Kaplan, PhD.......... 48,684 7,303 -- -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS, SEVERANCE AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
As a condition to employment, each employee must execute our Employee
Confidentiality Information and Inventions Agreement. In addition, all of our
current employees have entered into arrangements with us which contain
restrictions and covenants. These provisions include covenants relating to the
protection of our confidential information, the assignment of inventions, and
restrictions on competition and soliciting our clients, employees, or
independent contractors. None of our US employees are employed for a specified
term, and each employee's employment with us is subject to termination at any
time by either party for any reason, with or without cause. Our French employees
are also at-will employees but are subject to the employment laws of France,
including notice provisions and other restrictions regulating the termination of
employment.
We have entered into an agreement dated December 26, 1999, with Dr. Stanley
Kaplan, our former Chief Executive Officer and President. On his termination
date, December 31, 1999, we paid Dr. Kaplan $30,834, which was equal to two
months of his base salary, and $5,692, which represented his accrued vacation.
In addition, the severance agreement confirms that Dr. Kaplan is vested in
48,683 shares of the 182,562 shares under his stock option granted September 8,
1998. Dr. Kaplan will provide us with consulting services from January 10, 2000
until April 9, 2000, for a salary of $7,800 per month for 20 hours of work per
week.
We have entered into an employment agreement dated December 27, 1999, with James
W. Elder, our Senior Vice President, Marketing and Sales, North America, which
provides for an initial annual base salary of $140,000 and a potential bonus of
up to 25% of base salary subject to meeting specific milestones and
participation in our employee benefit plans. We will pay reasonable moving
expenses, up to $20,000. If Mr. Elder is terminated without cause during the
first five years with us and if the total value of Mr. Elder's vested stock
options is lower than $140,000, we will pay Mr. Elder six months of severance
payments equal to his starting monthly salary. These payments will cease before
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MANAGEMENT
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the end of the six months if Mr. Elder accepts a new full time position or the
value of his vested options exceeds $140,000. If Mr. Elder is terminated without
cause after the fifth anniversary of employment, we will pay Mr. Elder a
severance of two months salary.
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with each of our directors
and officers that would require us to indemnify them against liabilities that
may arise by reason of their status or service as directors or officers and to
advance their expenses incurred as a result of any proceeding against them.
However, we will not indemnify directors or officers with respect to liabilities
arising from willful misconduct of a culpable nature. For more information
concerning these agreements, see "Description of securities--limitation of
liabilities and indemnification matters."
STOCK PLANS
2000 STOCK INCENTIVE PLAN
SHARE RESERVE
Our board of directors adopted our 2000 Stock Incentive Plan on January 13,
2000, subject to shareholder approval. We have reserved 750,000 shares of our
common stock for issuance under the 2000 Stock Incentive Plan. Any shares not
yet issued under our 1994 Stock Plan and 1999 Stock Plans on the date of this
offering will also be available under the 2000 Stock Incentive Plan. On
January 1 of each year, starting with the year 2001, the number of shares in the
reserve will automatically increase by 6% of the total number of shares of
common stock that are outstanding at that time or by 2,000,000 shares, whichever
is less. In general, if options or shares awarded under the 2000 Stock Incentive
Plan or the 1994 or 1999 Stock Plans are forfeited, then those options or shares
will again become available for awards under the 2000 Stock Incentive Plan. We
have not yet granted any options under the 2000 Stock Incentive Plan.
ADMINISTRATION
The compensation committee of our board of directors administers the 2000 Stock
Incentive Plan. The committee has the complete discretion to make all decisions
relating to the interpretation and operation of our 2000 Stock Incentive Plan.
The committee has the discretion to determine who will receive an award, what
type of award it will be, how many shares will be covered by the award, what the
vesting requirements will be (if any), and what the other features and
conditions of each award will be. The compensation committee may also reprice
outstanding options and modify outstanding awards in other ways.
ELIGIBILITY
The following groups of individuals are eligible to participate in the 2000
Stock Incentive Plan:
- - Employees;
- - Members of our board of directors who are not employees; and
- - Consultants.
TYPES OF AWARD
The 2000 Stock Incentive Plan provides for the following types of awards:
- - Incentive stock options to purchase shares of our common stock;
- - Nonstatutory stock options to purchase shares of our common stock; and
- - Restricted shares of our common stock.
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OPTIONS
An optionee who exercises an incentive stock option may qualify for favorable
tax treatment under Section 422 of the Internal Revenue Code of 1986.
Nonstatutory stock options, however, do not qualify for such favorable tax
treatment. The exercise price for incentive stock options granted under the 2000
Stock Incentive Plan may not be less than 100% of the fair market value of our
common stock on the option grant date. In the case of nonstatutory stock
options, the minimum exercise price is 50% of the fair market value of our
common stock on the option grant date. Optionees may pay the exercise price by
using:
- - Cash;
- - Shares of common stock that the optionee already owns;
- - A full-recourse promissory note;
- - An immediate sale of the option shares through a broker designated by us; or
- - A loan from a broker designated by us, secured by the option shares.
Options vest at the time or times determined by the compensation committee. In
most cases, our options vest over the four-year period following the date of
grant. Options generally expire 10 years after they are granted, except that
they generally expire earlier if the optionee's service terminates earlier. The
2000 Stock Incentive Plan provides that no participant may receive options
covering more than 1,000,000 shares in the same year, except that a newly hired
employee may receive options covering up to 2,000,000 shares in the first year
of employment.
RESTRICTED SHARES
Restricted shares may be awarded under the 2000 Stock Incentive Plan in return
for:
- - Cash;
- - A full-recourse promissory note; or
- - Services provided to us.
Restricted shares vest at the time or times determined by the compensation
committee.
CHANGE IN CONTROL
If a change in control of DrugAbuse Sciences occurs, an option or restricted
stock award under the 2000 Stock Incentive Plan may vest on an accelerated basis
to the extent determined by the compensation committee. The compensation
committee may determine that outstanding grants will vest in full or in part at
the time of the change in control. It may also determine that the grants will
vest on an accelerated basis only if the participant is actually or
constructively discharged within a specified period of time after the change in
control. Finally, the committee may determine that the grants will remain
outstanding without acceleration of vesting. However, if the surviving
corporation fails to assume an outstanding option or replace it with a
comparable option, then the option will always become fully vested as a result
of the change in control. A change in control includes:
- - A merger of DrugAbuse Sciences after which our own shareholders own 50% or
less of the surviving corporation (or its parent company);
- - A sale of all or substantially all of our assets;
- - A proxy contest that results in the replacement of more than one-half of our
directors over a 24-month period; or
- - An acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to our company (such as a holding company
owned by our shareholders).
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<PAGE>
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AMENDMENTS OR TERMINATION
Our board may amend or terminate the 2000 Stock Incentive Plan at any time. If
our board amends the plan, it does not need to ask for shareholder approval of
the amendment unless applicable law requires it. The 2000 Stock Incentive Plan
will continue in effect for 10 years, unless the board decides to terminate the
plan earlier.
2000 EMPLOYEE STOCK PURCHASE PLAN
SHARE RESERVE AND ADMINISTRATION
Our board of directors adopted our 2000 Employee Stock Purchase Plan on
January 13, 2000, subject to shareholder approval. Our 2000 Employee Stock
Purchase Plan is intended to qualify under Section 423 of the Internal Revenue
Code. We have reserved 375,000 shares of our common stock for issuance under the
plan. On May 1 of each year, starting with the year 2001, the number of shares
in the reserve will automatically be restored to 375,000. In other words, the
reserve will be increased by the number of shares that have been issued under
the 2000 Employee Stock Purchase Plan during the prior 12-month period. The plan
will be administered by the compensation committee of our board of directors.
ELIGIBILITY
All of our employees are eligible to participate if they are employed by us for
more than 20 hours per week and for more than five months per year. Eligible
employees may begin participating in the 2000 Employee Stock Purchase Plan at
the start of any offering period. Each offering period lasts 24 months.
Overlapping offering periods start on May 1 and November 1 of each year.
However, the first offering period will start on the effective date of this
offering and end on April 30, 2002.
AMOUNT OF CONTRIBUTIONS
Our 2000 Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions may
not exceed 15% of the employee's salary and commissions. Purchases of our common
stock will occur on April 30 and October 31 of each year. Each participant may
purchase up to 2,000 shares on any purchase date (4,000 shares per year). But
the value of the shares purchased in any calendar year (measured as of the
beginning of the applicable offering period) may not exceed $25,000.
PURCHASE PRICE
The price of each share of common stock purchased under our 2000 Employee Stock
Purchase Plan will be 85% of the lower of:
- - The fair market value per share of common stock on the date immediately
before the first day of the applicable offering period, or
- - The fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the plan
will be 85% of the lower of:
- - The price per share to the public in this offering, or
- - The fair market value per share of common stock on the purchase date.
OTHER PROVISIONS
Employees may end their participation in the 2000 Employee Stock Purchase Plan
at any time. Participation ends automatically upon termination of employment
with DrugAbuse Sciences. If a change in control of DrugAbuse Sciences occurs,
our 2000 Employee Stock Purchase Plan will end and shares will be purchased with
the payroll deductions accumulated to date by participating employees, unless
the plan is assumed by the surviving corporation or its parent. Our board of
directors may
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<PAGE>
MANAGEMENT
- --------------------------------------------------------------------------------
amend or terminate the plan at any time. If our board increases the number of
shares of common stock reserved for issuance under the plan (except for the
automatic increases described above), it must seek the approval of our
shareholders. The 2000 Employee Stock Purchase Plan will continue in effect for
10 years, unless the board decides to terminate the plan earlier.
2000 DIRECTORS' OPTION PLAN
SHARE RESERVE
Our board of directors adopted our 2000 Directors' Option Plan on January 13,
2000, subject to shareholder approval. We have reserved 200,000 shares of our
common stock for issuance under the plan. On January 1 of each year, starting
with the year 2001, the number of shares in the reserve will automatically be
restored to 200,000. In other words, the reserve will be increased by the number
of shares that have been optioned under the 2000 Directors' Option Plan during
the prior 12-month period. In general, if options granted under the 2000
Directors' Option Plan are forfeited, then those options will again become
available for grants under the plan. The Directors' Option Plan will be
administered by the compensation committee of our board of directors, although
all grants under the plan are automatic and non-discretionary.
INITIAL GRANTS
Only the non-employee members of our board of directors will be eligible for
option grants under the 2000 Directors' Option Plan. Each non-employee director
who first joins our board after the effective date of this offering will receive
an initial option for 20,000 shares. That grant will occur when the director
takes office. The initial options vest in equal monthly installments over the
four-year period following the date of grant, except that all vesting for the
first year occurs at the close of that year.
ANNUAL GRANTS
At the time of each of our annual shareholders' meetings, beginning in 2001,
each non-employee director who will continue to be a director after that meeting
will automatically be granted an annual option for 5,000 shares of our common
stock. However, a new non-employee director who is receiving the 20,000-share
initial option will not receive the 5,000-share annual option in the same
calendar year. The annual options vest in full one year following the date of
grant.
OTHER OPTION TERMS
The exercise price of each non-employee director's option will be equal to the
fair market value of our common stock on the option grant date. A director may
pay the exercise price by using cash, shares of common stock that the director
already owns, or an immediate sale of the option shares through a broker
designated by us. The non-employee directors' options have a 10-year term,
except that they expire one year after a director leaves the board (if earlier).
If a change in control of DrugAbuse Sciences occurs, a non-employee director's
option granted under the 2000 Directors' Option Plan will become fully vested
(unless the accounting rules applicable to a pooling of interests preclude
acceleration). Vesting also accelerates in the event of the optionee's death or
disability.
AMENDMENTS OR TERMINATION
Our board may amend or terminate the 2000 Directors' Option Plan at any time. If
our board amends the plan, it does not need to ask for shareholder approval of
the amendment unless applicable law requires it. The 2000 Directors' Option Plan
will continue in effect for 10 years, unless the board decides to terminate the
plan.
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<PAGE>
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Related party transactions
SALES OF SECURITIES
Since our inception in December 1993 through March 1, 2000, we have issued and
sold the following securities in private placement transactions:
- - 672,892 shares of our common stock for an aggregate price of $30,280 in
August 1994, in connection with the sale of our Series A preferred stock,
and accounting for a three for one stock split on November 15, 1994 and a
four-for-one stock split on June 14, 1996;
- - 375,556 shares of our Series A preferred stock for an aggregate price of
$499,489 in August, which accounts for a three for one stock split on
November 15, 1994 and a four-for-one stock split on June 14, 1996, resulting
in aggregate proceeds to us of $499,489;
- - 1,316,069 shares of Series B preferred stock for an aggregate price of
$3,284,995 in March 1997;
- - warrants to purchase 1,855,684 shares of our common stock in connection with
the sale of Series B preferred stock;
- - 932,456 shares of Series C preferred stock for an aggregate price of
$2,327,428 on March 1999;
- - 4,681,688 shares of Series D preferred stock for an aggregate price of
$22,314,874 on October 1999, includes the exchange of 1,849 shares of common
stock in DrugAbuse Sciences, SAS;
- - warrants to purchase 374,519 shares of Series D preferred stock in
connection with the sale of Series D preferred stock.
All preferred stock was issued to various venture capital and other
institutional investors in reliance upon exemption from registration under
Section 4(2) of the Securities Act. All shares issued upon exercise of options
were issued to employees and consultants in reliance upon exemption from
registration under Rule 701 of the Securities Act. All shares of common stock
issued to one of our executive officers were issued in reliance upon exemption
from registration under Section 4(2) of the Securities Act. None of the
institutional investors who negotiated the terms of these transactions were
affiliated with us prior to purchasing these shares.
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<PAGE>
RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The purchasers of more than $60,000 of these securities include, among others,
the following executive officers, directors and holders of more than 5% of our
outstanding stock and their affiliates:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF SHARES OF
SHARES OF SERIES A SERIES B SERIES C SERIES D
EXECUTIVE OFFICERS, DIRECTORS COMMON PREFERRED PREFERRED PREFERRED PREFERRED TOTAL
AND 5% SHAREHOLDERS STOCK STOCK STOCK STOCK STOCK CONSIDERATION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Philippe Pouletty..... 2,906,782(1) 20,032 52,083 16,784(2) $571,648
Elizabeth M. Greetham..... 487,886 60,096 31,470(3) 502,161
Gordon Russell(4)......... 297,846(5) 71,168 50,080 80,128 41,960(6) 626,350
Partech International(7)... 702,348(8) 179,844 300,479 122,060 270,853 2,600,432
CDC Innovation(9)......... 300,480 122,067 167,841(10) 1,854,680
ABN-Amro Capital Investments
Belgie N.V.(11)......... 433,750(12) 2,067,426
Nomura International PLC... 734,306(13) 3,499,999
Parnib Belgie N.V......... 591,641(14) 2,820,000
3i Group PLC.............. 986,517(15) 4,702,137
</TABLE>
- ---------
These figures assume the conversion of the shares of our French subsidiary,
DrugAbuse Sciences, SAS, into shares of our common stock.
(1) Includes 880,376 shares of our common stock issued pursuant to net exercise
of warrants at an exercise price of $0.30.
(2) Excludes warrants to purchase 1,342 shares of our Series D preferred stock
at an exercise price of $0.06.
(3) Excludes warrants to purchase 2,517 shares of our Series D preferred stock
at an exercise price of $0.06.
(4) Consists of: 247,526 shares of common stock, 71,168 shares of Series A
preferred stock, 50,080 shares of Series B preferred stock, 80,128 shares of
Series C preferred stock, 41,960 shares of Series D preferred stock, and
warrants to purchase 3,356 shares of Series D preferred stock held by Gordon
W. Russell, TTE Russell, 1988 Revocable Trust. Mr. Russell, one of our
directors, is the trustee of the Gordon Russell Trust.
(5) Includes 149,014 shares of our common stock issued pursuant to net exercise
of warrants at an exercise price of $0.30.
(6) Excludes warrants to purchase 3,356 shares of Series D preferred stock at an
exercise price of $0.06.
(7) Consists of:
- - 43,897 shares of common stock, 11,240 shares of Series A preferred stock,
9,754 shares of Series B preferred stock, and 3,962 shares of Series C
preferred stock held by Multinvest, an affiliate of Partech International;
- - 142,660 shares of common stock, 36,530 shares of Series A preferred stock,
67,802 shares of Series B preferred stock, and 27,538 shares of Series C
preferred stock held by Parvest Europe, an affiliate of Partech
International;
- --------------------------------------------------------------------------------
62
<PAGE>
RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
- - 428,001 shares of common stock, 109,594 shares of Series A preferred stock,
203,416 shares of Series B preferred stock, and 82,636 shares of Series C
preferred stock held by Parvest US, an affiliate of Partech International;
- - 63,779 shares of Series D preferred stock and warrants to purchase 5,102
shares of Series D preferred stock held by Axa US Growth Fund, a side fund
of Parvest US;
- - 86,648 shares of Series D preferred stock and warrants to purchase 6,931
shares of Series D preferred stock held Parallel Capital I LLC, a side fund
of Parvest US;
- - 120,426 shares of Series D preferred stock and warrants to purchase 9,634
shares of Series D preferred stock held Parallel Capital II LLC, a side fund
of Parvest US; and
- - 87,790 shares of common stock, 22,480 shares of Series A preferred stock,
19,507 shares of Series B preferred stock, and 7,924 shares of Series C
preferred stock held by Tradinvest, an affiliate of Partech International.
- - Mr. Vincent Worms, one of our directors, is a General Partner of Partech
International.
(8) Includes 353,126 shares of our common stock issued pursuant to net exercise
of warrants at an exercise price of $0.30.
(9) Mr. Raffy Kazandjian, one of our directors, is the Investment Director at
CDC Innovation.
(10) Excludes warrants to purchase 13,427 shares of Series D preferred stock at
an exercise price of $0.06.
(11) Consists of:
- - 433,750 shares of Series D preferred stock and warrants to purchase 34,700
shares of Series D preferred stock held by ABN-Amro Capital Investments
BELGIE N.V.
- - Mr. Fred Phillips IV, one of our directors, is affiliated with ABN-Amro
Capital Investments Belgie N.V.
(12) Excludes warrants to purchase 34,700 shares of Series D preferred stock at
an exercise price of $0.06.
(13) Excludes warrants to purchase 58,744 shares of Series D preferred stock at
an exercise price of $0.06.
(14) Excludes warrants to purchase 47,331 shares of Series D preferred stock at
an exercise price of $0.06.
(15) Excludes warrants to purchase 78,921 shares of Series D preferred stock at
an exercise price of $0.06.
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63
<PAGE>
RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
Shares by all affiliated persons and entities have been aggregated. Share
numbers and purchase price information are reflected on an as if converted into
shares of common stock basis. See "Principal shareholders" for more detail on
shares held by these purchasers.
In addition, we have granted options to some of our directors and executive
officers. See "Management--director compensation," "Management--executive
compensation" and "Principal shareholders."
We believe that all of the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal shareholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors on the board of directors, and will continue to
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
Elizabeth Greetham and Vincent Worms serve on the compensation committee of
SangStat Medical Corporation, a publicly traded company, in which Philippe
Pouletty serves as the Chairman of the Board.
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64
<PAGE>
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Principal shareholders
The following table presents selected information regarding beneficial ownership
of our outstanding common stock as of March 1, 2000 and as adjusted to reflect
the sale of the common stock being sold in this offering for:
- - each of our directors;
- - our executive officers listed in the "Summary compensation" table above;
- - all of our directors and executive officers as a group; and
- - each other person (or group of affiliated persons) who owns beneficially 5%
or more of our common stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SHARES
SHARES OUTSTANDING(1)(2)
BENEFICIALLY BEFORE THE AFTER THE
BENEFICIAL OWNER OWNED OFFERING OFFERING
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Five percent shareholders
Entities affiliated with Partech International (3) ........ 1,575,584 12.60% 9.55%
50 California street, Suite 3200
San Francisco, California 94111
3i Group PLC .............................................. 986,517 7.89 5.98
91 Waterloo Road
London SE1 8XP,
United Kingdom
Nomura .................................................... 734,306 5.87 4.45
Nomura House
1 St. Martin's-le-Grant
London EC1A 4NP
Parnib Belgie N.V. ........................................ 591,641 4.73 3.59
Uitbredingstraat 10/16
2600 Antwerpen
Belgium
CDC--Innovations .......................................... 590,388 4.72 3.58
Raffy Kazandjian
Tour Maine--Montparnasse
33 Avenue du Maine--B.P. 180
75755 Paris Cedex 15
France
</TABLE>
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65
<PAGE>
PRINCIPAL SHAREHOLDERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SHARES
SHARES OUTSTANDING(1)(2)
BENEFICIALLY BEFORE THE AFTER THE
BENEFICIAL OWNER OWNED OFFERING OFFERING
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Directors and named executive officers
Philippe Pouletty, M.D..................................... 2,995,681 23.96% 18.15%
Elizabeth M. Greetham...................................... 579,452 4.63 3.51
James W. Elder (4)......................................... 116,666 * *
Maryvonne Hiance (5)....................................... 61,404 * *
David E. Smith (6)......................................... 50,000 * *
Raffy Kazandjian (7)....................................... 623,722 4.99 3.78
Fred P. Phillips IV (8).................................... 723,630 5.79 4.39
Russell Ricci (9).......................................... 33,333 * *
Gordon Russell (10)........................................ 574,515 4.60 3.48
Vincent Worms (11)......................................... 1,634,076 13.07 9.90
All executive officers and directors 7,635,811 58.23 48.19
as a group (13 persons) (12).............................
</TABLE>
- ---------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Percentage ownership is based on 12,502,131 shares outstanding as of
January 20, 2000, including 7,305,769 shares of Common Stock issuable upon
conversion of all outstanding preferred stock at the closing of this
offering, net exercise of warrants to purchase 1,815,912 shares of Common
Stock, and conversion of DrugAbuse Sciences SAS shares into shares of our
Series D preferred stock. Shares of Common Stock subject to options
currently exercisable or exercisable within 60 days of January 20, 2000 are
deemed outstanding for purposes of computing the percentage ownership of
the person holding such options but are not deemed outstanding for
computing the percentage ownership of any other person. Unless otherwise
indicated, the address for each listed shareholder is: c/o DrugAbuse
Sciences, Inc., 1430 O'Brien Drive, Menlo Park, CA 94025. To our knowledge,
except as indicated in the footnotes to this table and under applicable
community property laws, the persons or entities identified in this table
have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
(2) Assumes the Underwriters' over-allotment is not exercised.
(3) Includes 274,530 shares owned by Parvest Europe, 823,647 shares owned by
Parvest US, 63,779 shares owned by Axa US Growth Fund, 86,648 shares owned
by Parallel Capital I LLC, 120,426 shares owned by Parallel Capital II LLC,
137,701 shares owned by Tradinvest, and 68,853 shares owned by Multinvest.
Mr. Worms, one of our directors, is a general partner and/or managing
member of the Partech International entities listed above. Mr. Worms
disclaims beneficial ownership of the shares held by the entities
affiliated with Partech International except to the extent of his pecuniary
interest therein.
(4) Includes 116,666 shares of common stock issuable upon exercise of
immediately exercisable options, 116,666 shares of which are subject to our
right of repurchase.
(5) Includes 50,000 shares of common stock issuable upon exercise of
immediately exercisable options, 39,075 shares of which are subject to our
right of repurchase.
(6) Includes 50,000 shares of common stock issuable upon exercise of
immediately exercisable options, 41,667 of which are subject to our right
of repurchase.
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66
<PAGE>
PRINCIPAL SHAREHOLDERS
- --------------------------------------------------------------------------------
(7) Includes 590,388 shares owned by CDC-Innovation. Includes 33,333 shares of
common stock issuable upon exercise of immediately exercisable options,
33,333 of which are subject to our right of repurchase.
(8) Includes 433,750 shares owned by ABN-Amro Capital Investments Belgie, N.V.
Includes 33,333 shares of common stock issuable upon exercise of
immediately exercisable options, 33,333 of which are subject to our right
of repurchase.
(9) Includes 33,333 shares of common stock issuable upon exercise of
immediately exercisable options, 33,333 of which are subject to our right
of repurchase.
(10) Includes 490,862 shares owned by the Gordon Russell Trust. Includes 33,333
shares of common stock issuable upon exercise of immediately exercisable
options, 33,333 of which are subject to our right of repurchase
(11) Includes 1,575,584 shares owned by Partech entities. Includes 33,333
shares of common stock issuable upon exercise of immediately exercisable
options, 33,333 of which are subject to our right of repurchase.
(12) Includes options immediately exercisable for 609,996 shares, 599,071 of
which are subject to our right of repurchase.
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67
<PAGE>
- --------------------------------------------------------------------------------
Description of securities
Upon the consummation of this offering, we will be authorized to issue
50,000,000 shares of common stock, and 5,000,000 shares of undesignated
preferred stock. The following is a summary description of our capital stock.
Our bylaws and our Amended and Restated Articles of Incorporation, to be
effective after the closing of this offering, provide further information about
our capital stock.
COMMON STOCK
As of January 20, 2000 there were 12,502,131 shares of common stock outstanding,
as adjusted to reflect the conversion of all outstanding shares of preferred
stock into common stock, the exercise of certain warrants, and the exchange of
all DrugAbuse Sciences SAS shares not owned by us for shares of our common stock
upon the closing of this offering. The preferred shares were held of record by
approximately 55 shareholders. There will be 16,502,131 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
assuming no exercise after January 20, 2000 of outstanding options or warrants,
after giving effect to the sale of the shares of common stock to the public
offered in this prospectus.
The holders of common stock are entitled to one vote per share on all matters to
be voted upon by the shareholders. Subject to preferences that may be applicable
to any outstanding preferred stock, the holders of common stock are entitled to
receive dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available. See "Dividend policy." In the event of
our liquidation, dissolution or winding up, the holders of 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. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and nonassessable.
OPTIONS
As of January 20, 2000, options to purchase a total of 1,042,729 shares of
common stock were outstanding at a weighted average exercise price of $0.36.
Options to purchase a total of 1,656,417 shares of common stock may be granted
under our stock plans. Please see "Management--Stock plans" and "Shares eligible
for future sale."
WARRANTS
Immediately following the closing of this offering there will be outstanding
warrants to purchase a total of 374,519 shares of common stock at an exercise
price of $0.06 per share. The warrants are only exercisable if our valuation at
the expiration of the 180 day period following the closing of this offering is
not at least $150,000,000. This valuation target is based on the average of the
closing prices of our common stock for the twenty trading days ending on the
expiration of such 180 day period and does not include the sale of any shares
sold in this offering, including those that may be exercised by the underwriters
pursuant to their over-allotment option. The warrants expire 220 days following
the closing of this offering if it is not a qualifying IPO.
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68
<PAGE>
DESCRIPTION OF SECURITIES
- --------------------------------------------------------------------------------
PREFERRED STOCK
The board of directors has the authority, without action by the shareholders, to
designate and issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and related restrictions, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of the series. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of us
without further action by the shareholders and may adversely affect the voting
and other rights of the holders of common stock. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. At
present, we have no plans to issue any of our preferred stock.
REGISTRATION RIGHTS
After this offering, the holders of approximately 7,305,769 shares of common
stock will be entitled to rights with respect to the registration of these
shares under the Securities Act. Under the terms of the agreement between us and
the holders of these registrable securities, if we propose to register any of
our securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of registration and are entitled to include their shares
of common stock in the registration. Holders of 7,305,769 shares of the
registrable securities are also entitled to specified demand registration rights
under which they may require us to file a registration statement under the
Securities Act at our expense with respect to our shares of common stock, and we
are required to use our best efforts to effect this registration. Further, the
holders of these demand rights may require us to file additional registration
statements on Form S-3. All of these registration rights are subject to
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in the registration and our
right not to effect a requested registration within six months following the
initial offering of our securities, including this offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Amended and Restated Articles of Incorporation limit the personal liability
of our directors for monetary damages to the fullest extent permitted by the
California General Corporation Law. Under California law, a director's liability
to a company or its shareholders may not be limited:
- - for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
- - for acts or omissions that a director believes to be contrary to the best
interests of the company or its shareholders or that involve the absence of
good faith on the part of the director;
- - for any transaction from which a director derived an improper personal
benefit;
- - for acts or omissions that show a reckless disregard for the director's duty
to the company or its shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of performing
the director's duties, of a risk of serious injury to the company or its
shareholders;
- - for acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to the company or its
shareholders;
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69
<PAGE>
DESCRIPTION OF SECURITIES
- --------------------------------------------------------------------------------
- - under Section 310 of the California General Corporation Law concerning
contacts or transactions between the company and a director; or
- - under Section 316 of the California General Corporation Law concerning
directors' liability for improper dividends, loans and guarantees.
The limitation of liability does not affect the availability of injunctions and
other equitable remedies available to our shareholders for any violation by a
director of the director's fiduciary duty to us or our shareholders.
Our Articles of Incorporation also include an authorization for us to indemnify
our "agents," as defined in Section 317 of the California General Corporation
Law, through bylaw provisions, by agreement or otherwise, to the fullest extent
permitted by law. Pursuant to this provision, our Amended and Restated Bylaws
provide for indemnification of our directors, officers and employees. In
addition, we may, at our discretion, provide indemnification to persons whom we
are not obligated to indemnify. The Amended and Restated Bylaws also allow us to
enter into indemnity agreements with individual directors, officers, employees
and other agents. Indemnity agreements have been entered into with all directors
and certain executive officers and provide the maximum indemnification permitted
by law. We also intend to obtain directors' and officers' liability insurance.
These agreements, together with our Amended and Restated Bylaws and Amended and
Restated Articles of Incorporation, may require us, among other things, to
indemnify our directors and executive officers, other than for liability
resulting from willful misconduct of a culpable nature, and to advance expenses
to them as they are incurred, provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled to
indemnification. Section 317 of the California General Corporation Law and our
Amended and Restated Bylaws and our indemnification agreements make provision
for the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons, under certain circumstances,
for liabilities, including reimbursement of expenses incurred, arising under the
Securities Act. We are not currently aware of any pending litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification will be required or permitted. Moreover, we are not
currently aware of any threatened litigation or proceeding that might result in
a claim for such indemnification. We believe that the foregoing indemnification
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is EquiServ.
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70
<PAGE>
- --------------------------------------------------------------------------------
Shares eligible for future sale
Upon completion of this offering, we will have 16,502,131 shares of common stock
outstanding, assuming no exercise of options after January 20, 2000. Of these
shares, the 4,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares held by persons that directly or indirectly control, or are
controlled by, or are under common control with us, may generally only be sold
in compliance with the limitations of Rule 144 described below.
The remaining 12,502,131 shares of common stock are deemed restricted shares
under Rule 144. The number of shares of common stock available for sale in the
public market is limited by restrictions under the Securities Act and lock-up
agreements under which the holders of the shares have agreed not to sell or
dispose of any of their shares for a period of 180 days after the date of this
prospectus without the prior written consent of Warburg Dillon Read. On the date
of this prospectus, no shares other than the 4,000,000 shares being sold in this
offering will be eligible for sale. Beginning 180 days after the date of this
prospectus, or earlier with the consent of Warburg Dillon Read, 7,539,786
restricted shares will become available for sale in the public market subject to
the limitations of Rule 144 of the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock,
approximately 165,021 shares after giving effect to this offering, and the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding this sale. Sales under Rule 144 of the
Securities Act are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us. A person who is not
our affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, would be entitled to sell
these shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of
Rule 144 of the Securities Act. However, the transfer agent may require an
opinion of counsel that a proposed sale of shares comes within the terms of
Rule 144 of the Securities Act before effecting a transfer of these shares.
Before this offering, there has been no public market for our common stock and
no predictions can be made of the effect, if any, that the sale or availability
for sale of shares of additional common stock will have on the market price of
our common stock. Nevertheless, sales of substantial amounts of these shares in
the public market, or the perception that these sales could occur, could
adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
As of January 20, 2000, options to purchase a total of 1,042,729 shares of
common stock, including 358,826 under the 1994 Stock Plan, 481,405 under the
1999 Stock Plan A, 202,498 under the 1999 Stock Plan B and 0 under the 2000
Stock Incentive Plan, were outstanding and exercisable. All of the shares
subject to options are subject to lock-up agreements. An additional 1,564,179
shares of common stock were available as of January 20, 2000 for future option
grants or direct issuances under the 2000 Stock Incentive Plan. In addition, in
January 20, 2000, 575,000 shares were reserved for issuance under our 2000
Employee Stock Purchase Plan and our 2000 Directors' Option Plan. See
"Management--Stock plans."
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71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
- --------------------------------------------------------------------------------
Rule 701 under the Securities Act provides that shares of common stock acquired
on the exercise of outstanding options may be resold by persons other than our
affiliates, beginning 90 days after the date of this prospectus, subject only to
the manner of sale provisions of Rule 144, and by affiliates, beginning 90 days
after the date of this prospectus, subject to all provisions of Rule 144 except
its one-year minimum holding period. We intend to file one or more registration
statements on Form S-8 under the Securities Act to register all shares of common
stock subject to outstanding stock options under our 1994 Stock Plan and our
1999 Stock Plans and all shares offered under the 2000 Stock Incentive Plan, the
2000 Employee Stock Purchase Plan and the 2000 Directors' Option Plan
approximately five days after the closing of this offering. This registration
statement is expected to become effective upon filing. Shares covered by this
registration statement will then be eligible for sale in the public markets,
subject to the lock-up agreements, if applicable.
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72
<PAGE>
- --------------------------------------------------------------------------------
Underwriting
We have entered into an underwriting agreement concerning the shares being
offered with the underwriters for the offering named below. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Warburg Dillon Read LLC and FleetBoston
Robertson Stephens Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ------------------------------------------------------------------------------
<S> <C>
Warburg Dillon Read LLC.....................................
FleetBoston Robertson Stephens Inc..........................
----------
Total...................................................
==========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional 600,000 shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional 600,000 shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Per Share................................................... $ $
Total................................................... $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $1,500,000. Shares
sold by the underwriters to the public will initially be offered at the initial
public offering price set forth on the cover of this prospectus. Any shares sold
by the underwriters to securities dealers may be sold at a discount of up to
$ per share from the initial public offering price. Any of these securities
dealers may resell any shares purchased from the underwriters to other brokers
or dealers at a discount of up to $ per share from the initial public
offering price. If all shares are not sold at the initial public offering price,
the representatives may change the offering price and the other selling terms.
The underwriters have informed us that they do not expect discretionary sales to
exceed 5% of the shares of common stock to be offered.
We and our directors, officers and certain of our shareholders have agreed with
the underwriters not to offer, sell, contract to sell, hedge or otherwise
dispose of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any of our common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, without the prior written consent of
Warburg Dillon Read LLC. This agreement does not apply to any securities issued
under existing employee benefit plans.
The underwriters have reserved for sale, at the initial public offering price,
up to 200,000 shares of our common stock being offered for sale to our customers
and business partners. At the discretion of our management, other parties,
including our employees, may participate in the reserved shares program. The
number of shares available for sale to the general public in the offering will
be reduced
- --------------------------------------------------------------------------------
73
<PAGE>
UNDERWRITING
- --------------------------------------------------------------------------------
to the extent these persons purchase reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be negotiated by us and the
representatives of the underwriters. The principal factors to be considered in
determining the public offering price include:
- - the information set forth in this prospectus and otherwise available to the
representatives;
- - our prospects for future earnings, the present state of our development, and
our current financial position;
- - the history and the prospects for the industry in which we compete;
- - the ability of our management;
- - the general condition of the securities markets at the time of this
offering; and
- - the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933 and to contribute to
payments that the underwriters may be required to make in respect thereof.
- --------------------------------------------------------------------------------
74
<PAGE>
- --------------------------------------------------------------------------------
Legal matters
The validity of the common stock being offered will be passed upon for DrugAbuse
Sciences, Inc. by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California and for the underwriters by Brobeck, Phleger & Harrison
LLP, Broomfield, Colorado. Attorneys at Brobeck, Phleger & Harrison LLP
beneficially own, through an investment trust, 20,032 shares of our common
stock.
Experts
The consolidated financial statements as of December 31, 1998 and 1999 and for
each of the three years in the period ended December 31, 1999 and the for the
cumulative period from December 21, 1993 (date of inception) to December 31,
1999 included in this Prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The statements in this prospectus relating to US and EU patent and other
intellectual property matters have been reviewed and approved by Raeventner Law
Group, our patent counsel, as experts on such matters and are included in this
prospectus in reliance upon that review and approval.
Bert Rowland, an attorney with Raeventner Law Group, beneficially owns 287,402
shares of our common stock.
Change in Independent Accountants
In January 2000, we engaged PricewaterhouseCoopers LLP as our independent
accountants to replace Deloitte & Touche LLP, who we dismissed as our
independent accountants effective December 1999. The report of Deloitte & Touche
LLP on our financial statements for the year ended 1998 and for the cumulative
period from December 21, 1993 (date of inception) to December 31, 1998, which is
not included herein and are not made part of the registration statement, did not
contain any adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with the audits of our financial statements for the fiscal year ended
December 31, 1998 and in the subsequent interim period preceding the dismissal
of Deloitte & Touche LLP there were no disagreements with Deloitte & Touche LLP
on any matters of accounting principles or practices, financial statements
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Deloitte & Touche LLP would have caused Deloitte & Touche LLP to
make a reference to the matter in their report. During the most recent fiscal
years and subsequent interim period preceding the dismissal of Deloitte & Touche
LLP, we have not been advised of any matters described in Regulation S-K,
Item 304(a)(1)(v) of the Securities Act, except that in 1999 Deloitte & Touche
LLP advised our Board of Directors in writing of certain significant
deficiencies in our internal controls noted in connection with their audit of
our 1998 financial statements, including, among other items, a lack of
comprehensive accounting and finance policies and procedures throughout our
organization, understaffing in our accounting department, and the non-timely
performance of account reconciliations, all of which conditions could adversely
affect our ability to prepare reliable financial statements. We requested that
Deloitte & Touche LLP furnish us with a letter addressed to the SEC stating
whether or not they agree with the above statements. A copy of such letter is
filed as an exhibit to the registration statement which includes this
prospectus.
Prior to engaging PricewaterhouseCoopers LLP as our new independent accountants,
we did not request any advice from PricewaterhouseCoopers LLP regarding any
matter related to accounting
- --------------------------------------------------------------------------------
75
<PAGE>
- --------------------------------------------------------------------------------
practice or accounting principles; and we did not consult with
PricewaterhouseCoopers LLP regarding the type of audit opinion that might be
rendered by them or items that were or should have been subject to the AICPA's
Statement on Auditing Standards No. 50, "Reports on the Application of
Accounting Principles."
We have requested that PricewaterhouseCoopers LLP review the above disclosures
regarding our change in accountants and have given them the opportunity to
furnish us with a letter addressed to the SEC in which PricewaterhouseCoopersLLP
may include new information, clarify our statements on the change in accountants
or disclose the respects in which they disagree with the statements made by us
in this prospectus regarding our change in accountants. If
PricewaterhouseCoopers LLP elects to submit such a letter to the SEC, we will
file the letter as an exhibit to the registration statement when received.
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76
<PAGE>
- --------------------------------------------------------------------------------
Where you can find more information
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
being offered. This prospectus does not contain all of the information presented
in the registration statement and the exhibits to the registration statement.
For further information with respect to DrugAbuse Sciences and our common stock
we are offering, reference is made to the registration statement and the
exhibits filed as a part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
referred to may be only summaries of these documents. The exhibits to this
registration statement should be referenced for the complete contents of these
contracts and documents. Each statement is qualified in all respects by
reference to the exhibit. The registration statement, including the exhibits,
may be inspected without charge at the public reference facilities maintained by
the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part may be obtained from this office after payment of fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants, including us, that file electronically with the
Commission. The address of the site is http://www.sec.gov.
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77
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY (COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
- ----------------------------------------------------------------------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
- --------------------------------------------------------------------------------
F-1
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of DrugAbuse Sciences, Inc.
(a company in the development stage)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of DrugAbuse
Sciences, Inc. and its subsidiary (companies in the development stage) at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 and for
the cumulative period from December 21, 1993 (date of inception) to
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 8, the 1999 financial statements have been revised to
record an additional dividend related to the recognition of a beneficial
conversion feature on certain shares of stock issued during 1999.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 6, 2000, except
as to the one-for-six reverse stock split
described in Note 1,
which is as of March 24, 2000 and
the additional beneficial
conversion feature dividend
described in Note 8, which is
as of April 3, 2000
- --------------------------------------------------------------------------------
F-2
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------- SHAREHOLDERS' EQUITY
1998 1999 DECEMBER 31, 1999
----------- ------------ --------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $1,039,315 $19,224,906
Grant receivable.................................. 416,040 1,014,638
Prepaid expenses and other current assets......... 135,248 372,628
----------- ------------
Total current assets............................ 1,590,603 20,612,172
Property and equipment, net......................... 297,445 314,981
Other assets........................................ 109,000 109,479
----------- ------------
Total assets.................................... $1,997,048 $21,036,632
=========== ============
LIABILITIES, MINORITY INTEREST CONVERTIBLE INTO
EQUITY SECURITIES OF THE PARENT AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable.................................. $436,625 $930,235
Accrued liabilities............................... 41,580 93,535
Current portion of long-term obligations.......... 80,393 108,282
Current portion of capital lease obligations...... 32,870 48,857
----------- ------------
Total current liabilities....................... 591,468 1,180,909
Long-term obligations............................... 435,127 264,610
Long-term capital lease obligations................. 107,963 103,179
----------- ------------
Total liabilities............................... 1,134,558 1,548,698
----------- ------------
Commitments (Note 7)
Minority interest convertible into equity securities
of the Parent..................................... -- 11,654,492 $--
Shareholders' Equity:
Convertible preferred stock: $0.001 par value;
Shares authorized: 7,707,414
Shares issued and outstanding: 1,691,625 in
1998, 4,860,638 in 1999 and none pro forma...... 1,692 4,861 --
(Liquidation value: $16,772,132)
Common Stock: $0.001 par value;
Shares authorized: 85,000,000
Shares issued and outstanding: 2,116,726 in
1998, 3,380,450 in 1999 and 12,502,131 pro
forma........................................... 1,457 2,721 10,027
Additional paid-in capital........................ 4,560,758 52,714,300 64,366,347
Deferred stock compensation....................... (320,080) (14,409,691) (14,409,691)
Notes receivable from shareholders................ -- (510,950) (510,950)
Accumulated other comprehensive loss.............. (9,304) (126,018) (126,018)
Deficit accumulated during the development
stage........................................... (3,372,033) (29,841,781) (29,841,781)
----------- ------------ ----------------
Total shareholders' equity...................... 862,490 7,833,442 $19,487,934
----------- ------------ ================
Total liabilities, minority interest and
shareholders' equity........................ $1,997,048 $21,036,632
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-3
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
CUMULATIVE
PERIOD FROM
DECEMBER 21,
1993 (DATE OF
FOR THE YEAR ENDED DECEMBER 31, INCEPTION) TO
------------------------------------------ DECEMBER 31,
1997 1998 1999 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Grant revenues...................... $-- $810,607 $1,224,605 $2,035,212
Operating expenses:
Research and development
(including non-cash stock
compensation of $0.1, $0.2 and
$1.3 million in 1997, 1998 and
1999, respectively)............. 1,103,174 1,463,046 5,491,289 8,716,713
General and administrative
(including non-cash stock
compensation of $0.6 million in
1999)........................... 279,238 620,507 2,112,369 3,239,090
----------- ----------- ------------ ------------
Total operating expenses........ 1,382,412 2,083,553 7,603,658 11,955,803
----------- ----------- ------------ ------------
Loss from operations................ (1,382,412) (1,272,946) (6,379,053) (9,920,591)
Interest income..................... 85,314 96,067 273,547 461,581
Interest expense.................... (3,065) (15,464) (122,496) (141,025)
----------- ----------- ------------ ------------
Net loss............................ (1,300,163) (1,192,343) (6,228,002) (9,600,035)
Dividend related to beneficial
conversion feature of preferred
stock............................. -- -- (20,241,746) (20,241,746)
----------- ----------- ------------ ------------
Net loss available to common
shareholders...................... (1,300,163) (1,192,343) (26,469,748) (29,841,781)
Other comprehensive income (loss):
Change in foreign currency
translation adjustments......... 35,760 (44,581) (116,714) (150,001)
----------- ----------- ------------ ------------
Comprehensive loss.................. $(1,264,403) $(1,236,924) $(26,586,462) $(29,991,782)
=========== =========== ============ ============
Net loss per share available to
common shareholders, basic and
diluted........................... $(0.61) $(0.56) $(12.40)
=========== =========== ============
Shares used in computing net loss
per share available to common
shareholders, basic and diluted... 2,114,506 2,116,728 2,134,073
=========== =========== ============
Pro forma net loss per share
available to common shareholders
(unaudited)....................... $(4.67)
============
Shares used in computing pro forma
net loss per share available to
common shareholders (unaudited)... 5,672,186
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-4
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Balances, December 21, 1993 (inception)
Issuance of founders common stock in June 1994 at
$0.0004998 per share.................................... -- $-- 1,320,000 $660
Issuance of common stock in August 1994 at $0.045 per
share................................................... -- -- 672,892 673
Issuance of Series A convertible preferred stock in
August 1994 at $1.33 per share, net of issuance costs of
$8,000.................................................. 375,556 376 -- --
Exercise of stock options in August 1995 at $0.045 per
share................................................... -- -- 90,000 90
Issuance of common stock in June 1996 in exchange for
license agreement....................................... -- -- 18,459 18
Exercise of stock options in July 1996 at $0.135 per
share................................................... -- -- 3,000 3
Net loss since inception.................................. -- -- -- --
--------- --------- --------- ----------
Balances, December 31, 1996................................. 375,556 376 2,104,351 1,444
Exercise of stock options in January 1997 at $0.135 per
share................................................... -- -- 6,000 6
Issuance of Series B convertible preferred stock in
March 1997 at $2.496 per share, net of issuance costs of
$56,183................................................. 1,316,069 1,316 -- --
Exercise of stock options in May 1997 at $0.135 per
share................................................... -- -- 8,500 9
Repurchase of common stock in July 1997 at $0.135 per
share................................................... -- -- (2,125) (2)
Stock options granted for services in 1997................ -- -- -- --
Deferred stock compensation............................... -- -- -- --
Amortization of deferred stock compensation............... -- -- -- --
Foreign currency translation adjustment................... -- -- -- --
Net loss.................................................. -- -- -- --
--------- --------- --------- ----------
Balances, December 31, 1997................................. 1,691,625 1,692 2,116,726 1,457
Stock options granted for services in 1998................ -- -- -- --
Stock compensation........................................ -- -- -- --
Foreign currency translation adjustment................... -- -- -- --
Deferred stock compensation............................... -- -- -- --
Amortization of deferred stock compensation............... -- -- -- --
Net loss.................................................. -- -- -- --
--------- --------- --------- ----------
Balances, December 31, 1998................................. 1,691,625 1,692 2,116,726 1,457
Issuance of common stock in January 1999 at $0.30 per
share................................................... -- -- 499 1
Issuance of Series C convertible preferred stock in
March 1999 at $2.496 per share, net of issuance costs of
$37,812................................................. 932,456 932 -- --
Issuance of common stock for services from April through
December 1999........................................... -- -- 7,334 7
Exercise of stock options in September 1999 at $0.30 per
share................................................... -- -- 48,683 49
Issuance of Series D convertible preferred stock in
October 1999 at $4.7664 per share, net of issuance costs
of $1,245,373........................................... 1,502,251 1,503 -- --
Conversion of notes payable into preferred stock in
October 1999 at $4.7664 per share, net of issuance costs
of $449,996............................................. 734,306 734 -- --
Exercise of stock options in exchange for notes receivable
from shareholders....................................... -- -- 1,207,208 1,207
Stock compensation........................................ -- -- -- --
Deferred stock compensation............................... -- -- -- --
Amortization of deferred stock compensation............... -- -- -- --
Foreign currency translation adjustment................... -- -- -- --
Dividend related to beneficial conversion feature of
preferred stock......................................... -- -- -- --
Net loss.................................................. -- -- -- --
--------- --------- --------- ----------
Balances, December 31, 1999................................. 4,860,638 $4,861 3,380,450 $2,721
========= ========= ========= ==========
<CAPTION>
ADDITIONAL DEFERRED NOTES RECEIVABLE
PAID-IN CAPITAL STOCK COMPENSATION FROM SHAREHOLDERS
--------------- -------------------- -------------------
<S> <C> <C> <C>
Balances, December 21, 1993 (inception)
Issuance of founders common stock in June 1994 at
$0.0004998 per share.................................... $-- $-- $--
Issuance of common stock in August 1994 at $0.045 per
share................................................... 29,607 -- --
Issuance of Series A convertible preferred stock in
August 1994 at $1.33 per share, net of issuance costs of
$8,000.................................................. 491,113 -- --
Exercise of stock options in August 1995 at $0.045 per
share................................................... 3,960 -- --
Issuance of common stock in June 1996 in exchange for
license agreement....................................... 9,951 -- --
Exercise of stock options in July 1996 at $0.135 per
share................................................... 402 -- --
Net loss since inception.................................. -- -- --
------------- ---------------- --------------
Balances, December 31, 1996................................. 535,033 -- --
Exercise of stock options in January 1997 at $0.135 per
share................................................... 804 -- --
Issuance of Series B convertible preferred stock in
March 1997 at $2.496 per share, net of issuance costs of
$56,183................................................. 3,227,409 -- --
Exercise of stock options in May 1997 at $0.135 per
share................................................... 1,139 -- --
Repurchase of common stock in July 1997 at $0.135 per
share................................................... (285) -- --
Stock options granted for services in 1997................ 20,000 -- --
Deferred stock compensation............................... 145,274 (145,274) --
Amortization of deferred stock compensation............... -- 64,863 --
Foreign currency translation adjustment................... -- -- --
Net loss.................................................. -- -- --
------------- ---------------- --------------
Balances, December 31, 1997................................. 3,929,374 (80,411) --
Stock options granted for services in 1998................ 15,000 -- --
Stock compensation........................................ 195,917 -- --
Foreign currency translation adjustment................... -- -- --
Deferred stock compensation............................... 420,467 (420,467) --
Amortization of deferred stock compensation............... -- 180,798 --
Net loss.................................................. -- -- --
------------- ---------------- --------------
Balances, December 31, 1998................................. 4,560,758 (320,080) --
Issuance of common stock in January 1999 at $0.30 per
share................................................... 149 -- --
Issuance of Series C convertible preferred stock in
March 1999 at $2.496 per share, net of issuance costs of
$37,812................................................. 2,288,666 -- --
Issuance of common stock for services from April through
December 1999........................................... 51,363 -- --
Exercise of stock options in September 1999 at $0.30 per
share................................................... 14,556 -- --
Issuance of Series D convertible preferred stock in
October 1999 at $4.7664 per share, net of issuance costs
of $1,245,373........................................... 5,913,453 -- --
Conversion of notes payable into preferred stock in
October 1999 at $4.7664 per share, net of issuance costs
of $449,996............................................. 2,999,266 -- --
Exercise of stock options in exchange for notes receivable
from shareholders....................................... 509,743 -- (510,950)
Stock compensation........................................ 196,252 -- --
Deferred stock compensation............................... 15,938,348 (15,938,348) --
Amortization of deferred stock compensation............... -- 1,848,737 --
Foreign currency translation adjustment................... -- -- --
Dividend related to beneficial conversion feature of
preferred stock......................................... 20,241,746 -- --
Net loss.................................................. -- -- --
------------- ---------------- --------------
Balances, December 31, 1999................................. $52,714,300 $(14,409,691) $(510,950)
============= ================ ==============
<CAPTION>
ACCUMULATED
OTHER DEFICIT ACCUMULATED
COMPREHENSIVE DURING THE
INCOME (LOSS) DEVELOPMENT STAGE TOTALS
----------------- -------------------- ------------
<S> <C> <C> <C>
Balances, December 21, 1993 (inception)
Issuance of founders common stock in June 1994 at
$0.0004998 per share.................................... $-- $-- $660
Issuance of common stock in August 1994 at $0.045 per
share................................................... -- -- 30,280
Issuance of Series A convertible preferred stock in
August 1994 at $1.33 per share, net of issuance costs of
$8,000.................................................. -- -- 491,489
Exercise of stock options in August 1995 at $0.045 per
share................................................... -- -- 4,050
Issuance of common stock in June 1996 in exchange for
license agreement....................................... -- -- 9,969
Exercise of stock options in July 1996 at $0.135 per
share................................................... -- -- 405
Net loss since inception.................................. -- (879,527) (879,527)
------------ --------------- ------------
Balances, December 31, 1996................................. -- (879,527) (342,674)
Exercise of stock options in January 1997 at $0.135 per
share................................................... -- -- 810
Issuance of Series B convertible preferred stock in
March 1997 at $2.496 per share, net of issuance costs of
$56,183................................................. -- -- 3,228,725
Exercise of stock options in May 1997 at $0.135 per
share................................................... -- -- 1,148
Repurchase of common stock in July 1997 at $0.135 per
share................................................... -- -- (287)
Stock options granted for services in 1997................ -- -- 20,000
Deferred stock compensation............................... -- -- --
Amortization of deferred stock compensation............... -- -- 64,863
Foreign currency translation adjustment................... 35,277 -- 35,277
Net loss.................................................. -- (1,300,163) (1,300,163)
------------ --------------- ------------
Balances, December 31, 1997................................. 35,277 (2,179,690) 1,707,699
Stock options granted for services in 1998................ -- -- 15,000
Stock compensation........................................ -- -- 195,917
Foreign currency translation adjustment................... (44,581) -- (44,581)
Deferred stock compensation............................... -- -- --
Amortization of deferred stock compensation............... -- -- 180,798
Net loss.................................................. -- (1,192,343) (1,192,343)
------------ --------------- ------------
Balances, December 31, 1998................................. (9,304) (3,372,033) 862,490
Issuance of common stock in January 1999 at $0.30 per
share................................................... -- -- 150
Issuance of Series C convertible preferred stock in
March 1999 at $2.496 per share, net of issuance costs of
$37,812................................................. -- -- 2,289,598
Issuance of common stock for services from April through
December 1999........................................... -- -- 51,370
Exercise of stock options in September 1999 at $0.30 per
share................................................... -- -- 14,605
Issuance of Series D convertible preferred stock in
October 1999 at $4.7664 per share, net of issuance costs
of $1,245,373........................................... -- -- 5,914,956
Conversion of notes payable into preferred stock in
October 1999 at $4.7664 per share, net of issuance costs
of $449,996............................................. -- -- 3,000,000
Exercise of stock options in exchange for notes receivable
from shareholders....................................... -- -- --
Stock compensation........................................ -- -- 196,252
Deferred stock compensation............................... -- -- --
Amortization of deferred stock compensation............... -- -- 1,848,737
Foreign currency translation adjustment................... (116,714) -- (116,714)
Dividend related to beneficial conversion feature of
preferred stock......................................... -- (20,241,746) --
Net loss.................................................. -- (6,228,002) (6,228,002)
------------ --------------- ------------
Balances, December 31, 1999................................. $(126,018) $(29,841,781) $7,833,442
============ =============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-5
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
CUMULATIVE
PERIOD FROM
DECEMBER 21,
1993 (DATE OF
FOR THE YEAR ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(1,300,163) $(1,192,343) $(6,228,002) $(9,600,035)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 3,881 38,575 43,129 90,665
Amortization of deferred stock
compensation............................ 64,863 180,798 1,848,737 2,094,398
Common stock and options issued for
services................................ 20,000 15,000 51,370 86,370
Common stock issued for license
agreement............................... -- -- -- 9,969
Compensation related to stock options..... -- 195,917 196,252 392,169
Changes in assets and liabilities:
Grant receivable........................ -- (394,772) (655,012) (1,071,052)
Prepaid expenses and other assets....... (236,134) (3,029) (237,859) (482,107)
Accounts payable........................ 351,473 42,792 493,610 930,235
Accrued liabilities..................... (268,941) 1,578 51,955 93,535
Other................................... (20,561) (19,766) (54,285) (42,508)
----------- ----------- ----------- ------------
Net cash used in operating
activities.......................... (1,385,582) (1,135,250) (4,490,105) (7,498,361)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment.......... (146,556) (32,759) -- (179,315)
----------- ----------- ----------- ------------
Net cash used in investing
activities.......................... (146,556) (32,759) -- (179,315)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from long-term obligations......... 568,164 -- 2,930,000 3,498,164
Payment of long-term obligations and capital
lease obligations......................... -- (98,558) (128,105) (226,663)
Proceeds from issuance of preferred stock... 3,228,725 -- 19,859,046 23,579,260
Proceeds from issuance of common stock...... 1,958 -- 14,755 52,108
Repurchase of common stock.................. (287) -- -- (287)
----------- ----------- ----------- ------------
Net cash provided by (used in)
financing activities................ 3,798,560 (98,558) 22,675,696 26,902,582
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................. 2,266,422 (1,266,567) 18,185,591 --
Cash and cash equivalents, beginning of
period...................................... 39,460 2,305,882 1,039,315 19,224,906
----------- ----------- ----------- ------------
Cash and cash equivalents, end of period...... $2,305,882 $1,039,315 $19,224,906 $19,224,906
=========== =========== =========== ============
ADDITIONAL CASH FLOW INFORMATION--INTEREST
PAID........................................ $3,065 $15,464 $122,496 $141,025
=========== =========== =========== ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases..... $-- $156,954 $60,665 $217,619
Conversion of notes payable for preferred
stock..................................... $-- $-- $3,000,000 $3,000,000
Stock options exercised in exchange for
notes receivable.......................... $-- $-- $510,950 $510,950
Dividend related to beneficial conversion
feature of preferred stock................ $-- $-- $20,241,746 $20,241,746
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-6
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BUSINESS OF THE COMPANY:
DrugAbuse Sciences Inc., (the "Company") is a biotechnology company dedicated to
developing and marketing novel biopharmaceutical products that address key
medical needs of alcohol abusers and drug addicts. For the period from inception
through December 31, 1999, the Company has been in the development stage as
planned operations had not yet begun to generate significant revenue. The
Company was incorporated in December 1993 and operates in one business segment.
On March 24, 2000, the Company received approval to effect a 1-for-6 reverse
stock split of its common and preferred stock. All share and per share amounts
in the accompanying financial statements have been adjusted retroactively.
In November 1994 and May 1996, the Board of Directors and shareholders of the
Company approved a 3-for-1 and a 4-for-1 stock split, respectively, of its
common and preferred stock.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All intercompany transactions have been eliminated
in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
INITIAL PUBLIC OFFERING
In January 2000, the Board of Directors authorized management of the Company to
file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all of
the preferred stock, including the 2,445,131 shares of Series D preferred stock
which were issued in exchange for 1,849 shares of common stock of DrugAbuse
Sciences, SAS, the French subsidiary, will automatically convert into
7,305,769 shares of common stock. The pro forma effect of this exchange and
conversion has been presented as a separate column on the Company's balance
sheet.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a concentration of
credit risk consist of cash and cash equivalents and accounts receivable. Cash
and cash equivalents are deposited in demand and money market accounts in one
financial institution in the United States and France.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable and accounts payable approximate
fair value due to their short maturities. Based on borrowing rates currently
available to the Company for loans with similar terms, the carrying value of its
debt obligations approximates fair value.
- --------------------------------------------------------------------------------
F-7
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net loss available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock options, warrants and other
convertible securities. The following table is a reconciliation of the numerator
(net loss available to common shareholders) and the denominator (number of
shares) used in the basic and diluted EPS calculations and sets forth potential
shares of common stock that are not included in the diluted net loss per share
available to common shareholders as their effect is antidilutive:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
BASIC AND DILUTED:
Net loss available to common shareholders........ $(1,300,163) $(1,192,343) $(26,469,748)
Weighted average common shares outstanding....... 2,114,506 2,116,728 2,134,073
----------- ------------ ------------
Net loss per share available to common
shareholders................................... $(0.61) $(0.56) $(12.40)
=========== ============ ============
ANTIDILUTIVE SECURITIES:
Convertible preferred stock...................... 1,691,625 1,691,625 4,860,638
Options to purchase common stock................. 369,459 598,489 680,280
Warrants......................................... 1,855,684 1,855,684 2,245,813
----------- ------------ ------------
3,916,768 4,145,798 7,786,731
=========== ============ ============
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share available to common shareholders for the year ended
December 31, 1999 was computed using the weighted average number of shares of
common stock outstanding, including the pro forma effects of the automatic
conversion of all of the company's preferred stock, including the 2,445,131
shares of Series D preferred stock which were issued in exchange for 1,849
shares of common stock of DrugAbuse Sciences, SAS, the French subsidiary, into
shares of the Company's common stock as if such conversion occurred on
January 1, 1999, or at the date of original issuance, if later.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components for
general-purpose financial statements. Comprehensive income is defined as net
income plus all revenues, expenses, gains and losses from non-owner sources that
are excluded from net income in accordance with generally accepted accounting
principles.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. To date, the Company has not engaged in derivative
and hedging activities.
- --------------------------------------------------------------------------------
F-8
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain financial statement items have been reclassified to conform to the
current year's format. These reclassifications had no impact on previously
reported net loss or shareholders equity.
NOTE 3 -- PROPERTY AND EQUIPMENT:
Property and equipment comprise:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
--------- ---------
<S> <C> <C>
Computer equipment................................ $9,039 $27,376
Furniture and fixtures............................ 2,493 21,605
Equipment......................................... 164,350 212,614
Leasehold improvements............................ 160,388 135,340
-------- --------
336,270 396,935
Less: Accumulated depreciation and amortization... (38,825) (81,954)
-------- --------
$297,445 $314,981
======== ========
</TABLE>
Included in computer equipment at December 31, 1998 and 1999 is equipment
acquired under capital leases totaling approximately $157,000 and $216,000,
respectively, net of accumulated amortization of $23,000 and $56,000,
respectively.
NOTE 4 -- GRANT RECEIVABLE
In December 1997, the Company received a grant from The Ministry of Research in
France (FRT) of approximately $2.8 million for the development and
commercialization of the COC-AB product. Under the terms of the grant the
Company is reimbursed for 50% of its expenses relating to COC-AB research and is
committed to pay royalties of 1% of worldwide net sales of the COC-AB product
for a period of 5 years up to a maximum amount of the grant.
NOTE 5--SPONSORED LICENSE AND RESEARCH AGREEMENTS:
In February 1997, the Company entered into a research agreement with Southern
Research Institute ("SRI") to help develop NALTREL and conduct animal studies.
Under the terms of the agreement, the Company pays SRI monthly for research
services performed during the three year agreement. Aggregate payments are
expected to be approximately $3.0 million. Expenses under the agreement were
$739,978, $671,580 and $1,270,087 for the years ended December 31, 1997, 1998
and 1999, respectively.
In connection with the research agreement, the Company entered into a license
agreement with SRI under which it obtained an exclusive, worldwide, royalty
bearing license to make, use and sell pharmaceutical products containing
sustained release Naltrexone and Naltrexone derivatives. The license agreement
terminates upon the later of December 31, 2010 or the last Naltrexone Patent or
Southern Patent Rights.
In June 1996, the Company entered into an exclusive worldwide license with the
Scripps Research Institute ("Scripps") for certain patents relating to the
development and marketing of diagnostic and therapeutic products within the
field of cocaine addiction treatment. In exchange for the exclusive
- --------------------------------------------------------------------------------
F-9
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
license, the Company paid Scripps $8,000 and issued 18,460 shares of common
stock. Upon the achievement of certain milestones, the Company will issue
additional common shares aggregating 55,382. As additional consideration,
Scripps will receive a royalty ranging from 1% to 2% of net sales of licensed
products.
- --------------------------------------------------------------------------------
F-10
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1999, the Company entered into manufacturing and license agreements with
Aventis Pasteur ("Pasteur"). Under the terms of the agreements, Pasteur has
agreed to manufacture and supply the COC-AB product, as well as license certain
patents for the treatment of drug addiction. As consideration for the license
agreement, the Company will pay Pasteur royalties ranging from 4% to 14%.
In June 1999, the Company entered into a research and development agreement with
the University of Paris V (the "University") whereby the Company is developing
COC-AB and related antibodies using the facilities and expertise of the
University. Under the terms of the agreement, the Company was granted worldwide
rights to all inventions related to and including COC-AB. In consideration for
the agreement, the Company will make royalty payments to the University at 1% of
COC-AB revenues, up to a maximum of the amount granted to the Company by the
University, for a period of five years from the date of the first commercial
sale of COC-AB.
NOTE 6--LONG-TERM OBLIGATIONS:
In June 1997, the Company entered into a multi-year research and development
loan, with a French government agency. The Company received approximately
$420,000 for the future research and development activities in 1997. The Company
performs research on a "best-effort" basis and the loan is repayable over a five
year period.
In November 1997, the Company entered into a line of credit with Banque
Nationale de Paris. The line of credit has a total capacity of approximately
$140,000 to finance research and development activities. The line of credit
bears interest at 6.25% with principal and interest payable semi-annually. The
line of credit terminates in November 2001.
In June 1999, the Company entered into a convertible note payable for $3,000,000
with a financial institution. The note and accrued interest (2% above US LIBOR)
is due on December 31, 2003. The note and accrued interest automatically convert
to Series D preferred stock in any private placement raising at least
$5 million prior to March 31, 2000 or into Series C preferred stock at the
option of the holder on March 31, 2000 (but not after) at a conversion price
equal to the Series C subscription price if no automatic conversion has taken
place. The Company may prepay the balance at any time after March 31, 2000. This
note converted into Series D preferred stock in connection with the preferred
round of financing.
Future repayments of the long-term obligations at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C>
2000........................................................ $108,282
2001........................................................ 142,492
2002........................................................ 122,118
---------
372,892
Less: current portion................................. 108,282
---------
$264,610
=========
</TABLE>
- --------------------------------------------------------------------------------
F-11
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS:
The Company leases office space and equipment under noncancelable operating and
capital leases with various expiration dates through March 2004. Capital lease
obligations are collateralized by the equipment subject to the leases. The
Company is responsible for maintenance costs and property taxes on certain of
the operating leases. Rent expense for the years ended December 31, 1997, 1998
and 1999 and for the cumulative period from December 21, 1993 (date of
inception) to December 31, 1999 was nil, $13,500, $54,000 and $67,500,
respectively.
Future minimum lease payments under noncancelable operating and capital leases
at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
FOR THE PERIODS CAPITAL OPERATING
ENDING DECEMBER 31, LEASES LEASES
- -----------------------------------------------------------------------------
<S> <C> <C>
2000.................................................. $48,857 $40,500
2001.................................................. 48,857 --
2002.................................................. 48,857 --
2003.................................................. 22,527 --
2004.................................................. 2,310 --
-------- --------
Total minimum lease payments.......................... 171,408 $40,500
========
Less: Amount representing interest.................... 19,372
--------
Present value of capital lease obligations............ 152,036
Less: Current portion................................. 48,857
--------
$103,179
========
</TABLE>
NOTE 8--SHAREHOLDERS' EQUITY:
COMMON STOCK
At December 31, 1999, the Company had reserved sufficient shares of common stock
for issuance upon conversion of preferred stock and the exercise of stock
options and warrants. Common shareholders are entitled to dividends as and when
declared by the Board of Directors subject to the prior rights of the preferred
shareholders. The holders of each share of common stock are entitled to one
vote.
CONVERTIBLE PREFERRED STOCK:
SERIES D PREFERRED STOCK
In October 1999, the Company issued 2,236,557 shares of Series D convertible
preferred stock at a price of $4.7664 raising gross proceeds of $10,660,325.
Additionally, the Company's subsidiary in France, DrugAbuse Sciences, SAS
("SAS"), issued 1,849 shares of common stock at a price of $6,303.1325 per share
raising gross proceeds of $11,654,492. The issuance of the subsidiary's common
shares were recorded in accordance with Staff Accounting Bulletin Topic 5:H,
"Accounting for Sales of Stock By a Subsidiary", as a capital transaction and
reflected in the consolidated balance sheet as minority interest convertible
into equity securities of the Parent. The subsidiary's common shares are
convertible into 2,445,131 shares of the Company's Series D preferred stock at
the option of the Company or the holders. The SAS common stock was issued with a
non-transferable Exchange
- --------------------------------------------------------------------------------
F-12
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Agreement that allowed the French investors to obtain the same economic rights
and privileges as a holder of the Company's Series D preferred stock. The
Exchange Agreement provides that either party could require and implement the
exchange of SAS common shares for Series D preferred shares of the Company.
Additionally, the agreement dictates a mandatory exchange upon certain trigger
events including (1) the filing of a registration statement with respect to an
underwritten public offering of the Company's securities, or (2) the execution
of a contractually binding letter of intent or other definitive understanding
regarding the merger or the consolidation of the Company with or into a third
party, or the sale of all or substantially all of the Company's capital stock or
assets, or (3) the automatic conversion of all outstanding shares of the
Company's preferred stock into shares of the Company's common stock. At the date
of issuance, 2,445,131 shares of Series D preferred stock were reserved for
issuance upon the exchange of SAS common stock. In addition, the Company has
committed to issue warrants to purchase 195,606 shares of its Series D preferred
stock upon conversion of the subsidiary's common stock.
The issuance of SAS common stock has been reflected in the consolidation balance
sheet as minority interest convertible into equity securities of the parent.
However, because the Exchange Agreement has the effect of giving the French
investors economic rights of the Series D preferred stockholders, the Company
did not record a change in interest transaction for the sale of the subsidiary
common stock, nor have losses of SAS been allocated to the minority interest
holder. At the date of exchange, the amount classified as minority interest
convertible into equity securities of the Parent will be reclassified as Series
D preferred stock.
The convertible preferred stock comprise the following series at December 31,
1999:
<TABLE>
<CAPTION>
COMMON SHARES
NUMBER OF NUMBER OF SHARES RESERVED FOR LIQUIDATION
SHARES AUTHORIZED ISSUED AND OUTSTANDING CONVERSION VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A............... 375,556 375,556 375,556 $499,489
Series B............... 1,316,069 1,316,069 1,316,069 3,284,908
Series C............... 932,456 932,456 932,456 2,327,410
Series D............... 5,083,333 2,236,557 5,083,333 10,660,325
------------ -------------- ----------- -----------
7,707,414 4,860,638 7,707,414 $16,772,132
============ ============== =========== ===========
</TABLE>
DIVIDENDS
The holders of shares of Series A, Series B, Series C and Series D convertible
preferred stock are entitled to receive dividends, out of any assets legally
available, prior and in preference to any declaration or payment of any dividend
on the common stock of the Company, at the rate of eight percent of the $1.33,
$2.496, $2.496 and $4.766 per share, respectively, when, as and if declared by
the Board of Directors. Dividends on the Series A, Series B, Series C and
Series D convertible preferred stock shall not accrue unless declared by the
Board of Directors.
LIQUIDATION
In the event of any liquidation, dissolution or winding up for the Company,
either voluntary or involuntary, the holders of Series A, Series B, Series C and
Series D convertible preferred stock are entitled to receive, prior and in
preference to any distribution of any of the assets of the Company to the
holders of common stock by reason of their ownership, an amount per share equal
to $1.33,
- --------------------------------------------------------------------------------
F-13
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$2.496, $2.496 and $4.766, respectively, for each outstanding share of
convertible preferred stock, as adjusted for stock splits, stock dividends or
similar events, plus any accrued but unpaid dividends on such shares. If the
assets and funds distributed among the holders of Series A, Series B, Series C
and Series D convertible preferred stock are insufficient to permit the payment
in the full preferential amounts, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of Series A, Series B, Series C and Series D convertible
preferred stock in proportion to the full amounts to which they would otherwise
be respectively entitled.
After payment has been made to the holders of Series A, Series B, Series C and
Series D convertible preferred stock, any remaining assets and funds are to be
distributed among the holders of common stock and convertible preferred stock
ratably until such time as the Series A, Series B, Series C and Series D
convertible preferred shareholders have received an aggregate of $2.66, $4.992,
$4.992, $9.534 per share, respectively, thereafter any remaining assets will be
distributed to the holders of common stock.
MERGERS
A merger, reorganization or sale of all or substantially all of the assets of
the Company in which the shareholders of the Company immediately prior to the
transaction possess less than 50% of the voting power of the surviving entity
(or its parent) immediately after the transaction shall be deemed to be a
liquidation, dissolution or winding up.
VOTING
The holder of each share of Series A, Series B, Series C and Series D
convertible preferred stock is entitled to the number of votes equal to the
number of shares of common stock into which each share of convertible preferred
stock could be converted, except as otherwise required by law, and has voting
rights and powers equal to the voting rights and powers of common stock. For as
long as fifty percent of the authorized shares of Series A and Series B
convertible preferred stock remain outstanding, each class shall have the right
to elect a member to the Board of Directors voting separately as individual
classes. For as long as forty-six percent of the authorized shares of Series D
convertible preferred stock remain outstanding, two directors shall be elected
by vote of the holders of the Series D convertible preferred stock voting as a
separate class. One director shall be elected by the holders of common stock and
the holders of Series A, Series B, Series C and Series D convertible preferred
stock, voting together with members of common stock as one class, shall be
entitled to elect the remaining directors.
CONVERSION
Each share of Series A, Series B, Series C and Series D convertible preferred
stock, at the option of the holder, is convertible into the number of fully paid
and nonassessable shares of common stock which results from dividing the
liquidation price for each respective series, $1.33, $2.496, $2.496 and $4.766,
respectively, by the respective conversion prices. The per share conversion
price of Series A Series B, Series C and Series D convertible preferred stock is
$1.33, $2.496, $2.496 and $4.766 respectively. Conversion is automatic
immediately (i) upon the closing of a sale of common stock by the Company in an
underwritten public offering pursuant to a registration statement under the
Securities Act of 1933, as amended, in which (a) the aggregate gross proceeds
exceed $15,000,000 and (b) the public offering price equals or exceeds $10.50 or
(ii) at the election of the holders of sixty-seven percent of the then
outstanding Series A, Series B, Series C and Series D convertible
- --------------------------------------------------------------------------------
F-14
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preferred stock, voting together as a single class on an as-converted basis, or
(iii) or at the election of the holders of two-thirds Series A and Series B
convertible preferred stock, voting together as a separate series and the
holders of two thirds of Series C and Series D convertible preferred stock,
voting separately as separate series.
PREFERRED STOCK DIVIDEND
In October 1999, the Company sold 2,236,557 shares of Series D convertible
preferred stock at $4.7664 per share. In addition, SAS issued 1,849 shares of
its common stock with a non-transferable Exchange Agreement that allowed the SAS
investors to exchange their common shares for 2,445,131 shares of the Company's
Series D preferred stock. The difference between the conversion price and the
fair value per share of the Company's common stock on the transaction date
resulted in a beneficial conversion feature in the amount of $20.2 million. The
beneficial conversion feature calculated in accordance with Emerging Issues Task
Force No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features of Contingently Adjustable Conversion Ratios," has been
reflected as a preferred stock dividend in the statement of operations for the
year ended December 31, 1999.
The beneficial conversion feature charge of $20.2 million has been revised from
the amount originally reported, $9.7 million, to include an incremental charge
of $10.5 million related to the issuance of the DrugAbuse Sciences, SAS, common
stock as measured and recorded at their date of issuance, October 6, 1999. This
charge was based upon the per share value of the same feature inherent in the
Series D preferred shares issued by the Company, for which those common shares
are exchangeable, as measured on this same October 6, 1999 commitment date.
SUBSEQUENT EVENT
On February 1, 2000, the shareholders of the Company's subsidiary in France
exchanged 1,849 shares of its common stock for 2,445,131 shares of the Company's
Series D preferred stock. At this time, the minority interest convertible into
equity securities of the Parent recorded upon the initial sale of the French
subsidiary's common stock was reclassified as additional paid-in-capital.
NOTES RECEIVABLE FROM SHAREHOLDERS
In December 1999, certain officers exercised stock options in exchange for
short-term advances that were repaid in February 2000.
STOCK OPTION PLAN
In July 1994 and December 1999, the Company adopted the 1994 Stock Plan, and the
1999 A and 1999 B Stock Plans (the "Plans"), respectively, under which the Board
of Directors may issue incentive and non-qualified stock options to employees,
directors and consultants. The Board of Directors has the authority to determine
to whom options will be granted, the number of shares, the term and exercise
price. Options are to be granted at an exercise price not less than fair market
value for incentive stock options or 85% of fair market value for non-qualified
stock options. For individuals holding more than 10% of the voting rights of all
classes of stock, the exercise price of incentive stock options will not be less
than 110% of fair market value. The options are exercisable immediately upon the
Optionee entering into a Restricted Stock Purchase Agreement with respect to any
unvested options. Options generally vest and become exercisable annually at a
rate of 25% after the first year and 1/48 per month thereafter. The term of the
options is no longer than five years for incentive stock
- --------------------------------------------------------------------------------
F-15
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options for which the grantee owns greater than 10% of the voting power of all
classes of stock and no longer than ten years for all other options.
Activity under the Plans are as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE
GRANT SHARES PRICE
<S> <C> <C> <C>
Balances, December 31, 1996.............................. 137,582 279,418 $0.14
Granted................................................ (72,333) 72,333 0.17
Exercised.............................................. -- (14,500) 0.14
Cancelled.............................................. 15,500 (15,500) 0.14
---------- ---------- ------
Balances, December 31, 1997.............................. 80,749 321,751 0.14
Additional options reserved............................ 166,666 -- --
Granted................................................ (236,725) 236,725 0.30
Cancelled.............................................. 73,367 (73,367) 0.14
---------- ---------- ------
Balances, December 31, 1998.............................. 84,057 485,109 0.22
Additional options reserved............................ 1,906,666 -- --
Granted................................................ (1,595,532) 1,595,532 0.43
Exercised.............................................. -- (1,255,891) 0.45
Cancelled.............................................. 144,470 (144,470) 0.30
---------- ---------- ------
Balances, December 31, 1999.............................. 539,661 680,280 $0.31
========== ========== ======
</TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
AT DECEMBER 31, 1999
-------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
- --------------- ----------- ------------ --------
<S> <C> <C> <C>
$0.14 187,959 6.48 years $0.14
$0.30 194,828 8.72 years $0.30
$0.45 297,493 9.96 years $0.45
----------
680,280
==========
</TABLE>
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation." Had compensation cost for the Incentive Stock Plan been
determined based on the fair value at the grant date for awards during 1997,
1998 and 1999, consistent with the provisions of SFAS No. 123, the
- --------------------------------------------------------------------------------
F-16
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's pro forma net loss available to common shareholders and pro forma net
loss per share available to common shareholders would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1998 1999
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss available to common
shareholders as reported......... $(1,300,163) $(1,192,343) $(26,469,748)
Net loss available to common
shareholders pro forma........... $(1,302,972) $(1,195,984) $(26,492,927)
Net loss per share available to
common shareholders, as reported,
basic and diluted................ $(0.61) $(0.56) $(12.40)
Net loss per share available to
common shareholders, pro forma,
basic and diluted................ $(0.62) $(0.57) $(12.41)
</TABLE>
Such pro forma disclosures may not be representative of future compensation cost
because options vest over several years and additional grants are anticipated to
be made each year.
At December 31, 1997, 1998 and 1999, all options under the Plan were
exercisable. The Plan provides for employees to exercise their options at any
time. Unvested options are subject to repurchase by the Company at their
original exercise price upon termination of employment. The weighted average
fair values of options granted during 1997, 1998 and 1999 were $0.06, $0.07 and
$0.09, respectively.
The fair value of each option grant is estimated on the date of grant using the
minimum value method with the following weighted average assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998 1999
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate........................... 6.1% 6.2% 6.4%
Expected life..................................... 4 years 4 years 4 years
Expected dividends................................ -- -- --
</TABLE>
2000 STOCK INCENTIVE PLAN
In January 2000, the Board of Directors adopted the 2000 Stock Incentive
Plan (the "2000 Plan"). The Company reserved 750,000 shares of common stock for
issuance under the 2000 Plan. Additionally, any shares not yet issued under the
1999 Stock Plans are also available under the 2000 Plan. Beginning on
January 1, 2001, the number of shares in the reserve will automatically increase
by the lesser of 6% of the total number of shares of common stock that are
outstanding or by 2,000,000 shares. The 2000 Plan allows for the issuance of
nonstatutory and incentive stock options which will generally vest over the four
year period following the date of the grant and expire ten years after they are
granted. Upon a change of control, options will become fully vested if the
surviving corporation fails to assume an outstanding option or replace it with a
comparable option.
2000 EMPLOYEE STOCK PURCHASE PLAN
In January 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan ("2000 Purchase Plan"). The 2000 Purchase Plan is intended to
qualify under Section 423 of the Internal
- --------------------------------------------------------------------------------
F-17
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Code. The Company has reserved 375,000 shares of common stock for
issuance under the plan. On May 1 of each year, starting with the year 2001, the
number of shares in the reserve will automatically be restored to 375,000. All
employees are eligible to participate if they are employed by the Company for
more than 20 hours per week and for more than five months per year. Eligible
employees may begin participating in the 2000 Purchase Plan at the start of any
offering period, which lasts 24 months. Overlapping offering periods start on
May 1 and November 1 of each year. However, the first offering period will start
on the effective date of this offering and end on April 30, 2002.
The 2000 Purchase Plan permits each eligible employee to purchase common stock
through payroll deductions up to 15% of the employee's salary and commissions.
Purchases of our common stock will occur on April 30 and October 31 of each
year. The price of each share of common stock purchased under our 2000 Purchase
Plan will be 85% of the lower of the fair market value per share of common stock
on the date immediately before the first day of the applicable offering period,
or the fair market value per share of common stock on the purchase date.
Employees may end their participation in the 2000 Purchase Plan at any time,
although participation ends automatically upon termination of employment with
the Company.
2000 DIRECTORS' OPTION PLAN
Also in January 2000, the Board of Directors adopted the 2000 Directors'
Option Plan ("2000 Directors' Plan"). The Company has reserved 200,000 shares of
common stock for issuance under the plan. On January 1 of each year, starting
with the year 2001, the number of shares in the reserve will automatically be
restored to 200,000. Only the non-employee members of the Board of Directors
will be eligible for option grants under the 2000 Directors' Plan. Each
non-employee director who first joins the board after the effective date of the
offering will receive an initial option for 20,000 shares. That grant will occur
when the director takes office. The initial options vest in equal monthly
installments over the four-year period following the date of grant, except that
all vesting for the first year occurs at the close of that year. At the time of
each of the annual shareholders' meetings, beginning in 2001, each non-employee
director who will continue to be a director after that meeting will
automatically be granted an annual option for 5,000 shares of common stock.
The exercise price of each non-employee director's option will be equal to the
fair market value of common stock on the option grant date. The non-employee
directors' options have a 10-year term, except that they expire one year after a
director leaves the board. If a change in control of the Company occurs, a
non-employee director's option granted under the 2000 Directors' Plan will
become fully vested. Vesting also accelerates in the event of the optionee's
death or disability.
DEFERRED STOCK COMPENSATION
During the period from inception through December 31, 1999, the Company recorded
$16,504,089 of deferred stock compensation in accordance with APB No. 25,
SFAS No. 123 and EITF 96-18, related to options granted to consultants and
employees in 1997, 1998 and 1999. The Company will record additional deferred
compensation of $4.2 million related to options to purchase common stock issued
subsequent to December 31, 1999. During this period the Company determined the
fair value of options granted to consultants using the Black-Scholes option
pricing model with the following assumptions: expected lives of four years;
weighted average risk-free rate of 5.75%; expected dividend yield of zero
percent; expected volatility of 50% and deemed values of common stock between
$0.14 and $11.05 per share. Stock compensation expense is being recognized in
accordance with FIN 28, an
- --------------------------------------------------------------------------------
F-18
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accelerated amortization method, over the vesting periods of the related
options, generally four years. The Company recognized stock compensation expense
of $64,863, $180,798, $1,848,737 and $2,094,398 for the years ended
December 31, 1997, 1998 and 1999 and for the cumulative period from
December 21, 1993 (date of inception) to December 31, 1999, respectively.
WARRANTS
In connection with its license agreement with the Scripps Research Institute in
June 1996, the Company issued warrants to purchase 55,382 shares of common stock
at an exercise price of $0.14. The warrants expire in June 2016. The fair value
of these warrants determined using the Black-Scholes valuation model was not
considered material, and accordingly, no value was ascribed to them for
financial reporting purposes.
In connection with the Series B preferred stock issuance, the Company issued
warrants to purchase 1,815,912 shares of common stock with an exercise price of
$0.30. The warrants will become exerciseable only in the event of a merger or
sale of substantially all of the Company's assets or an initial public offering
with gross proceeds to the Company of $10 million and a price per share of at
least $12.00. The term of the warrants is five years.
In connection with the Series D convertible preferred stock issuance, the
Company issued 178,913 warrants to purchase Series D convertible preferred
stock. The warrants have an exercise price of $0.06 per share and will terminate
on November 30, 2001 or earlier upon the closing of certain events. The warrants
become exercisable only in the event that the Company has not completed on or
before April 26, 2001 either (i) an initial public offering with a valuation at
the expiration of the 180 day lock-up period following the closing of the
initial public offering of at least $150 million based on the average of the
closing prices of the Company's common stock for the twenty trading days ending
on the expiration of such 180 day period, or (ii) a merger or sale of all or
substantially all of the Company's assets resulting in proceeds of
$150 million.
In addition, the Company has committed to issue warrants to purchase 195,606
shares of Series D preferred stock upon conversion of the subsidiary's common
stock.
The warrants to purchase Series D preferred stock issued in connection with the
Series D financing are exercisable only in the event that the Company has not
successfully completed a qualified public offering by April 2001. As such, in
order to assign value to these warrants at the date of issuance, a probability
factor was given to the warrants related to probability of a public offering.
Based on various economic factors, the Company assigned a high probability to
the completion of a qualified public offering which results in an immaterial
value for the warrants. No expense has been recorded for the Series D warrants
and all the proceeds related to the Series D issuance have been allocated to
preferred stock and additional paid in capital.
NOTE 9--INCOME TAXES:
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $7.5 million for federal and state income tax purposes. The net
operating loss carryforwards expire primarily in the year 2019 for federal and
in 2006 for state purposes.
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income will be subject to annual limitations resulting from
changes in ownership, as defined in the Tax Reform Act of 1986.
- --------------------------------------------------------------------------------
F-19
<PAGE>
DRUGABUSE SCIENCES, INC. AND SUBSIDIARY
(COMPANIES IN THE DEVELOPMENT STAGE)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $1,172,000 $1,450,000
Other....................................................... 1,600 38,000
----------- -----------
Gross deferred tax asset................................ 1,173,600 1,488,000
Valuation allowance......................................... (1,173,600) (1,488,000)
----------- -----------
Net deferred tax assets................................. $-- $--
=========== ===========
</TABLE>
Under SFAS 109, "Accounting for Income Taxes", deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Based upon the weight of available evidence, which includes the Company's
historical operating performance, the reported net losses for the period from
inception through December 31, 1999 and for the three years ended December 31,
1999, and the uncertainties regarding the Company's future results of
operations, a full valuation allowance has been provided against its net
deferred tax assets as it is more likely than not that the deferred tax assets
will not be realized.
- --------------------------------------------------------------------------------
F-20
<PAGE>
[DRUGABUSE SCIENCES LOGO]
Until , 2000 (25 days after the date of this prospectus), all
dealers selling shares of our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the dealer's obligation to deliver a prospectus when acting as an
underwriter and with respect to their unsold allotments or subscriptions.
<PAGE>
- --------------------------------------------------------------------------------
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table presents the costs and expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $18,216
NASD fee.................................................... 7,400
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 300,000
Legal fees and expenses..................................... 600,000
Accounting fees and expenses................................ 350,000
Blue sky fees and expenses.................................. 15,000
Custodian and transfer agent fees........................... 10,000
Miscellaneous fees and expenses............................. 104,384
----------
Total................................................... $1,500,000
==========
</TABLE>
- ---------
* Information to be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended and Restated Articles of Incorporation limit the personal liability
of our directors for monetary damages to the fullest extent permitted by the
California General Corporation Law (the "California Law"). Under the California
Law, a director's liability to a company or its shareholders may not be limited:
- - for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law,
- - for acts or omissions that a director believes to be contrary to the best
interest of our company or our shareholders or that involve the absence of
good faith on the part of the director,
- - for any transaction from which a director derived an improper personal
benefit,
- - for acts or omissions that show a reckless disregard for the director's duty
to our company or our shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of a serious injury to the Registrant or its
shareholders,
- - for acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to our company or our
shareholders,
- - under Section 310 of the California Law concerning contacts or transactions
between our company and a director, or
- - under Section 316 of the California Law concerning directors' liability for
improper dividends, loans and guarantees.
- --------------------------------------------------------------------------------
II-1
<PAGE>
PART II
- --------------------------------------------------------------------------------
The limitation of liability does not affect the availability of injunctions and
other equitable remedies available to our shareholders for any violation by a
director of the director's fiduciary duty to our company or our shareholders.
Our Articles of Incorporation also include an authorization for the company to
indemnify our "agents" (as defined in Section 317 of the California Law),
through bylaw provisions, by agreement or otherwise, to the fullest extent
permitted by law. Pursuant to this provision, the company's Bylaws provide for
indemnification of the company's directors, officers and employees. In addition,
the company, at its discretion, may provide indemnification to persons whom we
are not obligated to indemnify. The Bylaws also allow the company to enter into
indemnity agreements with individual directors, officers, employees and other
agents. These indemnity agreements have been entered into with all directors and
executive officers and provide the maximum indemnification permitted by law.
These agreements, together with the company's Bylaws and Articles of
Incorporation, may require us, among other things, to indemnify these directors
or executive officers (other than for liability resulting from willful
misconduct of a culpable nature), to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to indemnification,
and to obtain directors' and officers' insurance if available on reasonable
terms. Section 317 of the California Law and the company's Bylaws make provision
for the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons, under certain circumstances,
for liabilities (including reimbursement of expense incurred) arising under the
Securities Act. We currently maintain directors' and officers' liability
insurance.
There is no pending litigation or proceeding involving any of our directors,
officers, employees or agent in which indemnification will be required or
permitted. Moreover, we are not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification. We believe that the
foregoing indemnification provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers. The Underwriting
Agreement (the form of which is filed as Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of our company and our officers and
directors, and by us of the Underwriters, for certain liabilities arising under
the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, we have issued and sold the following securities:
1. On March 28, 1997, we issued and sold an aggregate of 1,316,069 shares of
Series B Preferred Stock to a group of 26 investors for an aggregate
purchase price of $3,284,908.
2. On March 28, 1997, in connection with the Series B Preferred Stock
Financing, we issued and sold warrants to purchase 1,855,684 shares of
common stock to a group of 17 investors.
3. On March 17, 1999, we issued and sold an aggregate of 932,456 shares of
Series C Preferred Stock to a group of 29 investors for an aggregate
purchase price of $2,327,410.
4. On October 6, 1999, we issued and sold an aggregate of 2,236,557 shares of
Series D Preferred Stock to a group of 27 investors for an aggregate
purchase price of $10,660,409.49.
5. On October 6, 1999, in connection with the Series D Preferred Stock
Financing, we issued and sold warrants to purchase 178,913 shares of
Series D Preferred Stock to a group of 26 investors.
6. On October 6, 1999, our French subsidiary, DrugAbuse Sciences, SAS, issued
and sold an aggregate of 1,849 shares of the common stock of DrugAbuse
Sciences, SAS to a group of 9
- --------------------------------------------------------------------------------
II-2
<PAGE>
PART II
- --------------------------------------------------------------------------------
investors for an aggregate purchase price of $11,654,492.35. These shares
convert into 2,445,131 shares of our Series D Preferred Stock upon certain
circumstances.
8. On February 1, 2000, we issued 2,445,131 shares of our Series D Preferred
Stock in connection with the exchange of 1,849 shares of DrugAbuse
Sciences, SAS.
9. On February 1, 2000, and in connection with the exchange of the DrugAbuse
Sciences, SAS shares, our French subsidiary, DrugAbuse Sciences, SAS issued
warrants to purchase 195,606 shares of Series D Preferred Stock to a group
of 9 investors.
From inception through January 20, 2000, we granted options to purchase
2,680,024 shares of common stock at exercise prices ranging from $0.045 to $0.45
per share to employees, consultants, directors, and other service providers
pursuant to our 1994 and 1999 stock plans.
The sale of the above securities was deemed to be exempt from registration under
the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions under compensation benefit plans and contracts relating
to compensation as provided under Rule 701. The recipients of securities in each
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution and appropriate legends were affixed to the share certificates
issued in these transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Our Amended and Restated Articles of Incorporation.
3.2** Form of Amended and Restated Articles of Incorporation to be
filed upon the closing of the offering made under this
Registration Statement.
3.3** Our Bylaws.
3.4** Our Amended and Restated Bylaws to be effective upon the
closing of the offering made under this Registration
Statement.
4.1** Amended and Restated Investors' Rights Agreement, dated
October 6, 1999.
4.2** Form of our Common Stock certificate.
5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1** Form of Indemnification Agreement entered into between us
and each of our directors and executive officers.
10.2** 1994 Stock Option Plan.
10.3** 1999 Stock Plan A.
10.4** 1999 Stock Plan B.
10.5** 2000 Stock Incentive Plan.
10.6** 2000 Employee Stock Purchase Plan.
</TABLE>
- --------------------------------------------------------------------------------
II-3
<PAGE>
PART II
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------------------------------------------------------------------
<C> <S>
10.7** 2000 Directors' Option Plan.
10.8** Sublease between Etak, Inc. and us dated October 1, 1998, as
amended.
10.9**+ Clinical Supply Agreement by and between the Registrant and
SP Pharmaceuticals, L.L.C. dated November 24, 1999.
10.10**+ Research Agreement with Option to License by and between us
and Southern Research Institute dated February 28, 1997.
10.11**+ Product License Agreement by and between us and Southern
Research Institute dated July 1, 1999.
10.12**+ Research Agreement with Option to License by and between us
and Southern Research Institute dated January 21, 2000.
10.13**+ Product License Agreement by and between us and Southern
Research Institute dated January 21, 2000.
10.14**+ License Agreement by and between us and SCRIPPS dated
June 18, 1996.
10.15**+ License Agreement by and between us and Pasteur Meriux
Serums & Vaccins dated June 8, 1999.
10.16**+ Manufacturing and Supply Agreement by and between us and
Pasteur Meriux Serums & Vaccins dated June 8, 1999.
10.17**+ Research and Development Agreement by and between us and
University of Paris V dated June 8, 1999.
10.18**+ Research and Development Agreement by and between us and
University of Paris V dated March 3, 2000.
16.1** Letter regarding change in certifying accountant.
21.1** List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
23.3 Consent of Patent Counsel.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ---------
** Previously filed.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission ("SEC"). The omitted information has been filed
separately with the SEC pursuant to the application for confidential
treatment.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be presented
in them is not applicable or is shown in the consolidated financial statements
or related notes.
- --------------------------------------------------------------------------------
II-4
<PAGE>
PART II
- --------------------------------------------------------------------------------
ITEM 17. UNDERTAKINGS
We undertake to provide to the underwriters at the closing specified in the
underwriting agreement, certificates in the denominations and registered in the
names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
under the California Corporations Code, the Certificate of Incorporation or our
bylaws, the underwriting agreement, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against these
liabilities, other than the payment by us of expenses incurred or paid by a
director, officer, or controlling person of ours 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 in this
offering, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether this indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
We undertake 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 us under 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, and
the offering of these securities at that time shall be deemed to be the
initial bona fide offering.
- --------------------------------------------------------------------------------
II-5
<PAGE>
- --------------------------------------------------------------------------------
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 5 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Menlo
Park, State of California, on this 5th day of April, 2000.
<TABLE>
<S> <C>
DRUGABUSE SCIENCES, INC.
By: /s/ PHILIPPE POULETTY, M.D.
--------------------------------------------
Philippe Pouletty, M.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 5 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C>
/s/ PHILIPPE POULETTY, M.D.
--------------------------------- Chairman of the Board and Chief April 5, 2000
Philippe Pouletty, M.D. Executive Officer
* Chief Financial Officer, Senior Vice
--------------------------------- President, Business Development and
Elizabeth M. Greetham Director
*
--------------------------------- Medical Director and Director
David E. Smith, M.D.
*
--------------------------------- Director
Raffy Kazandjian
*
--------------------------------- Director
Fred P. Phillips IV
*
--------------------------------- Director
Russell Ricci
*
--------------------------------- Director
Gordon Russell
*
--------------------------------- Director
Vincent Worms
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ PHILIPPE POULETTY, M.D.
--------------------------------------
Philippe Pouletty, M.D. April 5, 2000
ATTORNEY-IN-FACT
</TABLE>
- --------------------------------------------------------------------------------
II-6
<PAGE>
- --------------------------------------------------------------------------------
Index to exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Our Amended and Restated Articles of Incorporation.
3.2** Form of Amended and Restated Articles of Incorporation to be
filed upon the closing of the offering made under this
Registration Statement.
3.3** Our Bylaws.
3.4** Our Amended and Restated Bylaws to be effective upon the
closing of the offering made under this Registration
Statement.
4.1** Amended and Restated Investors' Rights Agreement, dated
October 6, 1999.
4.2** Form of our Common Stock certificate.
5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1** Form of Indemnification Agreement entered into between us
and each of our directors and executive officers.
10.2** 1994 Stock Option Plan.
10.3** 1999 Stock Plan A.
10.4** 1999 Stock Plan B.
10.5** 2000 Stock Incentive Plan.
10.6** 2000 Employee Stock Purchase Plan.
10.7** 2000 Directors' Option Plan.
10.8** Sublease between Etak, Inc. and us dated October 1, 1998, as
amended.
10.9**+ Clinical Supply Agreement by and between the Registrant and
SP Pharmaceuticals, L.L.C. dated November 24, 1999.
10.10**+ Research Agreement with Option to License by and between us
and Southern Research Institute dated February 28, 1997.
10.11**+ Product License Agreement by and between us and Southern
Research Institute dated July 1, 1999.
10.12**+ Research Agreement with Option to License by and between us
and Southern Research Institute dated January 21, 2000.
10.13**+ Product License Agreement by and between us and Southern
Research Institute dated January 21, 2000.
10.14**+ License Agreement by and between us and SCRIPPS dated June
18, 1996.
10.15**+ License Agreement by and between us and Pasteur Meriux
Serums & Vaccins dated June 8, 1999.
10.16**+ Manufacturing and Supply Agreement by and between us and
Pasteur Meriux Serums & Vaccins dated June 8, 1999.
10.17**+ Research and Development Agreement by and between us and
University of Paris V dated June 8, 1999.
10.18**+ Research and Development Agreement by and between us and
University of Paris V dated March 3, 2000.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
16.1** Letter regarding change in certifying accountant.
21.1** List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
23.3 Consent of Patent Counsel.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ---------
** Previously filed.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission ("SEC"). The omitted information has been filed
separately with the SEC pursuant to the application for confidential
treatment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 6, 2000, except as to the one-for-six reverse stock split
described in Note 1, which is as of March 24, 2000 and the additional beneficial
conversion feature dividend described in Note 8, which is as of April 3, 2000,
relating to the consolidated financial statements of DrugAbuse Sciences, Inc.
and its subsidiary (companies in the development stage), which appear in such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
April 5, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF COUNSEL
We consent to the reference to us under the heading "Experts" in this
Registration Statement on Form S-1.
/s/ RAEVENTER LAW GROUP
Raeventner Law Group
April 5, 2000
