<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RIBAPHARM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2834 95-4805655
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3300 HYLAND AVENUE
COSTA MESA, CA 92626
(714) 545-0100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------------
HARRY A. ROOSJE
3300 HYLAND AVENUE
COSTA MESA, CA 92626
(714) 545-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------------------
Copies to:
<TABLE>
<S> <C>
Jeffrey Bagner Frederick W. Kanner
Fried, Frank, Harris, Shriver & Jacobson Dewey Ballantine LLP
One New York Plaza 1301 Avenue of the Americas
New York, New York 10004 New York, New York 10019
(212) 859-8000 (212) 259-8000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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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, check
the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
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<S> <C> <C>
Class A Common Stock, $.01 par value.... $250,000,000 $66,000
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</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the
registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information in this preliminary 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 becomes effective. This
preliminary 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. You should rely only on the information
contained in this preliminary prospectus.
PRELIMINARY PROSPECTUS Subject to completion June 15, 2000
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Shares
RIBAPHARM INC.
Class A Common Stock
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This is an initial public offering of shares of our Class A Common Stock. No
public market currently exists for our Class A Common Stock. We expect the
public offering price to be between $ and $
per share.
UPON COMPLETION OF THIS OFFERING, ICN PHARMACEUTICALS, INC. WILL OWN AT LEAST
80% OF THE COMBINED VOTING POWER AND AT LEAST 80% OF THE VALUE OF OUR
OUTSTANDING SHARES OF COMMON STOCK.
We intend to file an application to have our Class A Common Stock listed on the
Nasdaq National Market under the symbol " "
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR CLASS A COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 6.
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
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<S> <C> <C>
Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to Ribapharm Inc. $ $
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</TABLE>
The underwriters may also purchase up to shares of Class A 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 $ and the
total proceeds, before expenses, to us will be $ .
Delivery of the shares will be made on or about , 2000
UBS WARBURG LLC CIBC WORLD MARKETS
<PAGE> 3
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You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of Class A Common Stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the Class A Common Stock.
Until , 2000 (25 days after the date of this prospectus), all
dealers selling shares of our Class A Common Stock, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus summary.................... 1
The offering.......................... 4
Summary financial data................ 5
Risk factors.......................... 6
Forward-looking information........... 20
Use of proceeds....................... 21
Dividend policy....................... 21
Capitalization........................ 22
Dilution.............................. 23
Selected financial data............... 24
Management's discussion and analysis
of financial condition and results
of operations....................... 25
Business.............................. 29
Management............................ 51
Relationship with ICN................. 60
Description of ICN indentures......... 66
Principal stockholders................ 75
Description of securities............. 76
Shares eligible for future sale....... 81
Underwriting.......................... 82
Legal matters......................... 84
Experts............................... 84
Where you can find more information... 85
Index to financial statements......... F-1
</TABLE>
ABOUT THIS PROSPECTUS
Virazole(R), Levovirin(TM) and Viramidine(TM) are our trademarks. All other
brand names, trademarks or service marks referred to in this prospectus are the
property of their owners.
Ribavirin is sold by Schering-Plough Ltd. under the trade name Rebetol and as
part of a combination therapy with Schering-Plough's interferon alfa-2b under
the trade name Rebetron in the United States. For ease of presentation, we will
refer to Rebetol and the ribavirin component of Rebetron in this prospectus as
ribavirin.
Unless otherwise stated herein, all information contained in this prospectus
assumes no exercise of the over-allotment to the underwriters. The assumed
initial offering price of $ used in this prospectus is the
midpoint of the range shown on the cover page of this prospectus.
<PAGE> 4
Prospectus summary
This summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information that you should consider before
deciding to invest in our Class A Common Stock. We urge you to read this entire
prospectus carefully, including the "Risk Factors" section, before making an
investment decision. Financial and other information contained in this
prospectus has been derived from our historical performance as a division within
the ICN Pharmaceuticals, Inc. consolidated group.
OUR BUSINESS
We are a biotechnology company that seeks to discover, develop and commercialize
innovative products for the treatment of significant unmet medical needs,
principally in the antiviral and anticancer areas. Our product ribavirin is an
antiviral drug that Schering-Plough Ltd. markets under license from us in
combination with its interferon alfa-2b under the trade name Rebetron as a
therapy for the treatment of hepatitis C. Our royalties from sales of ribavirin
by Schering-Plough were $110 million in 1999.
Ribavirin came from our extensive library of chemical compounds, of which at
least 3,500 are nucleoside analog compounds. Nucleoside analogs are
small-molecule-type chemicals that resemble the natural building blocks of human
and viral DNA and RNA. We believe that our library contains one of the largest
collections of nucleoside analogs in the world. We intend to combine our
scientific expertise with advanced drug screening techniques in an effort to
discover and develop new product candidates from our nucleoside analog library.
ADVANTAGES OF NUCLEOSIDE ANALOGS
We believe nucleoside analogs present significant opportunities for drug
development. Nucleoside analogs treat viruses and cancers by modifying the
natural structure of DNA and RNA in a way that disrupts the replication of
viruses and cancer cells. Over ten nucleoside analogs have been approved to date
by the U.S. Food and Drug Administration, or FDA, for antiviral and anticancer
indications. Some of these nucleoside analogs are marketed as monotherapy
treatments and others, like ribavirin, are marketed as part of a combination
therapy with other drugs. Estimated 1999 U.S. revenues for the top five selling
nucleoside analogs were $1.2 billion. We also believe that our nucleoside analog
library provides a potentially greater opportunity for successful antiviral and
anticancer drug discovery when compared to the random screening of large numbers
of diverse chemical compounds used by many pharmaceutical and biotechnology
companies in their drug discovery efforts. We base our belief on the fact that
the chance of fitting molecules like nucleoside analogs to closely related
viruses and cancer cells is higher than the fitting of random unrelated small
molecules to these same target virus and cancer cells.
RIBAVIRIN FOR HEPATITIS C
In 1995, we granted an exclusive license to Schering-Plough for all oral forms
of ribavirin for the treatment of chronic hepatitis C. We also granted to
Schering-Plough an option to license oral forms of ribavirin for additional
indications developed by us. In 1998, Schering-Plough received FDA approval to
market ribavirin in the United States in combination with Schering-Plough's
interferon alfa-2b for the treatment of chronic hepatitis C in patients with
compensated liver disease. Most hepatitis C patients have compensated liver
disease, which means that they have relatively normal liver function. In May
1999, Schering-Plough received approval from the European Union to market the
combination therapy in the European Union for the same patient populations as
those approved in the United
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1
<PAGE> 5
States. According to the World Health Organization, as many as 170 million
people worldwide are infected by the hepatitis C virus. In addition, it is
estimated that approximately 10 million people in the United States, Europe and
Japan are infected with hepatitis C.
RESEARCH AND DEVELOPMENT PROGRAM
Our research and development efforts seek to capitalize on our nucleoside analog
library. We believe this library may provide us with a large supply of potential
new drug candidates. Our nucleoside analog library has never been fully screened
for our target indications, hepatitis C, hepatitis B, HIV and cancer.
In March 2000, we hired Johnson Y.N. Lau, Ph.D., M.D., to lead our research and
development efforts. Dr. Lau, an expert in viruses and liver diseases, was
formerly senior director in antiviral research at the Schering-Plough Research
Institute. We believe we currently have the scientific, technological and
financial resources necessary to screen our nucleoside analog library for our
target indications. We plan to continue to expand our research team to over 100
scientists within 24 months of this offering. In addition, we plan to spend
approximately $20 million in 2000 to upgrade and modernize our research
laboratories and equipment.
We have two product candidates in preclinical studies which were derived from
our nucleoside analog library, Levovirin and Viramidine. Based on preclinical
studies, we believe Levovirin may have an ability to stimulate an immune
response to some viral infections without the anemia associated with ribavirin.
Based on preclinical studies, we believe that Viramidine may generate an
antiviral and immune response to viral infections similar to ribavirin, but with
less significant side effects. We are also engaged in clinical trials for two
additional nucleoside analog compounds that were developed from our nucleoside
analog library: Tiazole and Adenazole. Tiazole has completed Phase I/II trials
to evaluate its effectiveness in the treatment of the late stages of chronic
myelogenous leukemia. We are also evaluating Tiazole for the treatment of
ovarian cancer and multiple myeloma. Adenazole is scheduled to begin additional
Phase I trials for the treatment of colon cancer by the end of this year,
subject to FDA acceptance of a revised protocol. You should read "Risk
Factors -- Our rights to Tiazole and Adenazole may be adversely affected by
ongoing litigation involving ICN and the contribution of these rights may be
subject to approval by the Office of Foreign Assets Control" for a description
of legal proceedings that may affect our rights to Tiazole and Adenazole.
OUR STRATEGY
Our objective is to be a leader in the discovery, development and
commercialization of nucleoside analogs and other novel drugs that are useful in
the treatment of viral diseases, cancer and other unmet medical needs. We plan
to pursue this objective by:
+ continuing to discover, develop and commercialize novel drug candidates from
our nucleoside analog library;
+ focusing on diseases that represent large unmet medical needs that we believe
provide substantial commercial opportunities;
+ maximizing the value of our new product candidates by leveraging our internal
development capabilities;
+ accelerating development of identified drug candidates from our current
product pipeline; and
+ expanding our existing product pipeline and technologies through acquisitions
and in-licensing opportunities.
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2
<PAGE> 6
RELATIONSHIP WITH ICN
We were incorporated on April 14, 2000. Prior to that, we were a division of
ICN. On , 2000, ICN contributed to us our assets and operations.
However, ICN's contribution to us of its rights and obligations under the
license agreement with Schering-Plough was made subject to the prior approval of
the holders of ICN's outstanding debt securities. On , we issued
a $
million note to ICN as a dividend. We will repay this note with some of the
proceeds from this offering. After this offering, ICN will continue to own at
least 80% of the combined voting power and at least 80% of the value of our
outstanding shares of common stock.
Effective upon the closing of this offering, we and ICN will be subject to:
+ an affiliation agreement, which will require us to comply with the terms of
ICN's outstanding debt securities, place restrictions on our ability to issue
capital stock and detail ICN's obligation to elect independent directors to
our board of directors;
+ a management services agreement, which details ICN's agreement to provide us
with interim administrative and corporate services;
+ a confidentiality agreement, which provides that we and ICN will not disclose
to third parties confidential and proprietary information concerning each
other;
+ a registration rights agreement, which grants ICN rights to require us to
register shares of our common stock owned by ICN under the Securities Act of
1933;
+ a tax sharing agreement, which will set forth our rights and obligations as a
member of ICN's consolidated tax group;
+ a contract services agreement, which details ICN's agreement to conduct
various clinical trials on our behalf; and
+ a lease, under which we have agreed for an interim period to lease office
space in our building to ICN.
See "Relationship with ICN."
OUR CAPITAL STRUCTURE
We presently have a single class of common stock, all outstanding shares of
which are held by ICN. At the closing of this offering, we will have two classes
of common stock. To achieve this, we will effect a recapitalization before the
closing of this offering. The recapitalization includes the amendment of our
certificate of incorporation to establish the Class A Common Stock and the Class
B Common Stock and the reclassification of existing shares of common stock held
by ICN as shares of Class B Common Stock, followed by a stock split of the Class
B Common Stock. The Class A Common Stock and the Class B Common Stock will be
identical, except that the holders of Class A Common Stock will have one vote
per share and the holders of Class B Common Stock will have votes per share
and the Class B Common Stock is convertible into Class A Common Stock. Unless
otherwise indicated, all information in this prospectus gives effect to this
recapitalization. See "Description of Securities."
ICN presently does not intend, nor does it have the ability, to effect a
tax-free spin-off of its interest in us to ICN's stockholders. However, ICN has
created a two-class structure for our common stock to preserve its ability to
effect a tax-free spin-off to the extent that ICN has the ability to do so at
some point in the future. If all of the legal requirements for a tax-free
spin-off are met at some point in the future, ICN may choose to distribute its
interest in us to ICN's stockholders on a tax-free basis.
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<PAGE> 7
The offering
Class A Common Stock offered by
us.................................. shares
Common Stock to be outstanding after
the offering:
Class A Common Stock.............. shares
Class B Common Stock.............. shares
Voting rights....................... The Class A Common Stock and the Class
B Common Stock vote as a single class
on all matters, except as otherwise
required by law. Each share of Class A
Common Stock is entitled to one vote
and each share of Class B Common Stock
is entitled to votes. All shares of
Class B Common Stock are beneficially
owned by ICN. After this offering, ICN
will beneficially own at least 80% of
the combined voting power and at least
80% of the value of our outstanding
shares of common stock.
Proposed Nasdaq National Market
symbol..............................
Use of proceeds..................... We intend to use the proceeds from this
offering for the following purposes:
+ to prepay in full the outstanding
amount under the $ note we
issued to ICN as a dividend;
+ to expand our research facilities
and staff;
+ to fund research and product
development, including clinical
trials;
+ for potential acquisitions of
product candidates, technologies and
businesses that complement our
business; and
+ for general corporate purposes and
working capital requirements.
See "Use of Proceeds" and "Relationship
with ICN."
The number of shares of Class A Common Stock to be outstanding after this
offering does not include the following:
+ up to shares which the underwriters have the option to purchase
from us to cover over-allotments.
+ shares reserved for issuance under our 2000 Stock Option Plan,
including shares issuable upon the exercise of options to be
granted at the time of this offering with an exercise price equal to the
offering price;
+ shares of Class B Common Stock held by ICN convertible into an
equal number of shares of Class A Common Stock.
HOW TO CONTACT US
Our principal executive offices are located at 3300 Hyland Avenue, Costa Mesa,
California 92626 and our telephone number is (714) 545-0100.
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<PAGE> 8
Summary 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 financial statements and related notes included elsewhere in
this prospectus. We derived the statement of operations data for the years ended
December 31, 1997, 1998 and 1999 from our financial statements which are
included elsewhere in this prospectus. We derived the statement of operations
data for the years ended December 31, 1995 and 1996 from unaudited financial
statements not included in this prospectus. We derived the statement of
operations data for the three months ended March 31, 1999 and 2000 and the
balance sheet data as of March 31, 2000 from our unaudited financial statements,
which are included elsewhere in this prospectus. In the opinion of management,
the unaudited financial statements from which the data below is derived contain
all adjustments, which consist only of normal recurring adjustments, necessary
to present fairly our financial position and results of operations as of the
applicable dates and for the applicable periods. Historical results are not
necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
STATEMENT OF OPERATIONS DATA 1995 1996 1997 1998 1999 1999
--------------------------------------------------------------------------------------- 2000
(in thousands, except per share data) -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Royalties....................... $ 354 $ 1,753 $ 3,223 $36,830 $109,592 $16,208 $34,272
Costs and expenses:
Research and development.......... 6,846 6,589 7,011 9,530 5,523 635 1,141
General and administrative........ 3,301 6,253 9,676 7,392 5,608 1,443 1,519
------- ------- ------- ------- ------- ------- -------
Total costs and expenses.......... 10,147 12,842 16,687 16,922 11,131 2,078 2,660
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations... (9,793) (11,089) (13,464) 19,908 98,461 14,130 31,612
Interest expense.................. 862 775 683 609 396 91 --
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................... (10,655) (11,864) (14,147) 19,299 98,065 14,039 31,612
Provision (benefit) for income
taxes........................... (3,836) (4,271) (5,093) 6,948 35,303 5,054 11,381
------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $ (6,819) $ (7,593) $ (9,054) $12,351 $ 62,762 $ 8,985 $20,231
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Unaudited pro forma net income per
share...........................
------- -------
------- -------
Unaudited pro forma shares
outstanding.....................
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
PRO FORMA
BALANCE SHEET DATA PRO FORMA(1) AS ADJUSTED(2)
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(in thousands)
<S> <C> <C>
Cash........................................................
Working capital.............................................
Total assets................................................
Current liabilities.........................................
Total liabilities...........................................
Total equity (deficit)......................................
Total liabilities and equity................................
</TABLE>
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(1) The pro forma balance sheet data above reflects the $ note paid as
a dividend by us to ICN on , 2000.
(2) The pro forma as adjusted balance sheet data above gives effect to our sale
of shares of Class A Common Stock by us in this offering at
an assumed offering price of $ per share less the estimated
underwriting discounts and offering expenses, and the prepayment in full of
the $ note we issued to ICN as a dividend.
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5
<PAGE> 9
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Risk factors
An investment in our Class A Common Stock is risky. You should carefully
consider the following risks, as well as the other information contained in this
prospectus. If any of the following risks occur, our business could be harmed.
In that case, the trading price of our Class A Common Stock could decline and
you might lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR EFFORTS TO DISCOVER, DEVELOP AND COMMERCIALIZE NEW PRODUCT CANDIDATES USING
OUR NUCLEOSIDE ANALOG LIBRARY ARE IN A VERY EARLY STAGE AND ARE SUBJECT TO HIGH
RISK OF FAILURE.
A key component of our strategy is to discover, develop and commercialize new
product candidates using our nucleoside analog library. We have only recently
begun to direct significant efforts toward the expansion of our scientific staff
and research capabilities in order to pursue this strategy. We cannot assure you
that we will identify any additional compounds from the library that we believe
have sufficient commercial promise to warrant further development. There is also
no guarantee that compounds selected from the library for development will be
patentable, or that our development work will identify patentable uses. Even if
we identify compounds that we believe have further development potential, we may
never successfully complete their development or commercialize them. Because our
efforts in this area are in a very early stage, they are subject to high risk of
failure.
WE MAY NEVER SUCCESSFULLY COMMERCIALIZE ANY OF OUR CURRENT OR FUTURE PRODUCT
CANDIDATES AND ANY SUCCESSFUL COMMERCIALIZATION COULD TAKE MANY YEARS.
Successful pharmaceutical product development is highly uncertain, can take many
years and requires significant expense. Success is dependent on numerous
factors, many of which are beyond our control. Products that appear promising
may fail to reach the market for numerous reasons, including:
+ they may be found to be ineffective or to have harmful side effects in
preclinical or clinical testing;
+ they may fail to receive necessary regulatory approvals;
+ they may turn out to be uneconomical because of manufacturing costs or other
factors;
+ they may be precluded from commercialization by the proprietary rights of
others or by competing products or technologies for the same disease;
+ they may be dependent on third parties for clinical testing, research and
development, manufacturing and marketing;
+ they may fail to be developed prior to the successful marketing of similar
products by competitors;
+ they may not be as effective as alternative treatment methods; and
+ they may not qualify for reimbursement from governmental and other
third-party payors.
OUR ABILITY TO COMMERCIALIZE OUR PRODUCTS AND TO INCREASE OUR REVENUES IS
DEPENDENT UPON THE RESULTS OF OUR CLINICAL TRIALS AND OUR ABILITY TO OBTAIN AND
MAINTAIN REQUIRED REGULATORY APPROVALS.
Many factors could delay or terminate our clinical trials. For example, a
clinical trial may experience slow patient enrollment or lack of sufficient drug
supplies. Patients may experience adverse medical
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<PAGE> 10
RISK FACTORS
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events or side effects. There may also be a real or perceived lack of
effectiveness of the drug we are testing. Future governmental action or changes
in FDA policy may also result in delays or rejection.
In addition, the development and sale of our products is subject to extensive
governmental regulation. Obtaining and maintaining regulatory approval typically
is costly and may take many years. Regulatory authorities have substantial
discretion to terminate clinical trials, delay or withhold registration and
marketing approval, and mandate product recalls. Failure to comply with
regulatory requirements may result in criminal prosecution, civil penalties,
injunction, recall or seizure of products, total or partial suspension of
production, as well as other action affecting our potential products or us.
Outside the United States, we can market a product only if we receive a
marketing authorization from the appropriate regulatory authorities. This
foreign regulatory approval process includes similar risks.
To gain regulatory approval from the FDA and foreign regulatory authorities for
the commercial sale of any of our products, we must demonstrate the safety and
efficacy of the product in clinical trials. To accomplish this in developing a
product to treat a long-lasting disease like cancer, we must gather data over an
extended period of time. There are many risks associated with our clinical
trials. For example, we may be unable to achieve the same level of success in
later trials as we did in earlier ones. Additionally, data we obtain from
preclinical and clinical activities are susceptible to varying interpretations
that could impede regulatory approval. Further, some patients have a high risk
of death, age-related disease or other adverse medical events that may or may
not be related to our products. These events may affect the statistical analysis
of the safety and efficacy of our products.
If we obtain regulatory approval for a product, the approval will be limited to
those diseases for which our clinical trials demonstrate the product is safe and
effective. Further, we may not promote or advertise an approved product for uses
not within the scope of its approval. If the FDA disagrees with our promotional
claims, the FDA may call for their deletion and revision and may take
enforcement action against us based upon our labeling and promotional materials.
To date, ribavirin is our only product that has received regulatory approval for
commercial sale. We may not be able to obtain regulatory approval for any other
products. A more detailed discussion regarding government regulation of our
products is included in this prospectus under the heading
"Business -- Government Regulation."
ALL OF OUR REVENUES CURRENTLY ARE ROYALTIES WE RECEIVE FROM SCHERING-PLOUGH
RELATING TO SALES OF RIBAVIRIN AND THESE ROYALTIES COULD FLUCTUATE OR DECLINE IN
THE FUTURE; ANY FUTURE LICENSING ARRANGEMENTS MAY BE SUBJECT TO SIMILAR RISKS.
We will be dependent in large part upon royalties from our license arrangement
with Schering-Plough to fund our research and development programs. Any
significant decrease in royalties from this license arrangement could require us
to cut back on our research and development expenditures. Our ability to raise
capital from outside sources is restricted under our affiliation agreement with
ICN. Royalties we receive from the sale of ribavirin by Schering-Plough could
decline in the future for a variety of reasons, including:
+ reductions in the pricing of ribavirin by Schering-Plough or in reimbursement
by health care payors;
+ the expiration or invalidation of the patents related to ribavirin;
+ the approval of competing therapies;
+ a decrease in Schering-Plough's marketing efforts;
+ quarterly or yearly fluctuations in the prevalence of hepatitis C;
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RISK FACTORS
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+ fluctuations in foreign currency exchange rates;
+ the failure or refusal of Schering-Plough to pay royalties, including in
connection with any contract dispute;
+ the termination of our license arrangements with Schering-Plough; and
+ an increase in the severity or frequency of side effects associated with
ribavirin or interferon alfa-2b or the discovery of other harmful effects
attributable to these drugs.
The amount and timing of resources devoted by Schering-Plough to the marketing
of ribavirin is not within our control. We cannot assure you that
Schering-Plough will not pursue alternative technologies or treatments, either
alone or in collaboration with others, for hepatitis C. In addition, pursuant to
the license agreement, Schering-Plough has sole discretion to determine the
pricing and other sales terms of ribavirin. Schering-Plough and F. Hoffmann-La
Roche Ltd. developed a modified form of interferon, called pegylated interferon
for the treatment for hepatitis C. Pegylated interferon recently was approved
for sale in the European Union as a monotherapy for the treatment of hepatitis C
patients who cannot take ribavirin because of intolerance or counterindications.
An application has also been submitted to the FDA for approval of pegylated
interferon for sale in the United States as a monotherapy. Pegylated interferon
is also being evaluated in clinical trials in combination with ribavirin. It is
unclear what effect the development of pegylated interferon may have on sales of
ribavirin by Schering-Plough.
Similar risks may apply to any future royalty arrangements for other products
with third parties.
WE HAVE LIMITED PATENT AND REGULATORY PROTECTION AND AFTER THESE PROTECTIONS
EXPIRE, THIRD PARTIES MAY BE ABLE TO SELL GENERIC FORMS OF OUR DRUGS.
We depend in part on the protection afforded by our patents relating to
ribavirin and other compounds for market exclusivity. No assurance, however, can
be given as to the breadth or degree of protection which these patents will
afford us. Schering-Plough currently has regulatory protection under the
Waxman-Hatch Act in the United States for the treatment of hepatitis C using the
combination therapy. This protection means that the FDA cannot approve a generic
form of the combination therapy until December 2001. Schering-Plough is
currently conducting pediatric studies for the use of the combination therapy
that, if successful, may extend this regulatory protection until June 2002. We
also have two issued U.S. patents that relate to methods of using ribavirin in
dosages that can enhance a patient's immune system in a manner that is
particularly useful for treating hepatitis C in combination with interferon
alpha. These patents both expire in January 2016. A third U.S. patent
application related to that subject matter has also been allowed. We have
patents in foreign countries covering various antiviral uses of ribavirin.
Coverage and expiration of these patents vary, with patents expiring at various
times through June 2005. We have no, or limited, patent rights relating to the
antiviral use of ribavirin in selected foreign countries where ribavirin is
currently, or in the future may be, approved for commercial sale, including
countries in the European Union. However, the use of oral forms of ribavirin for
combination therapy was granted a favorable review classification by the
European Union. This classification may make it more difficult for competing
drugs not previously approved to gain entry to the European markets. There can
be no assurance that the expiration of patent rights related to the use of
ribavirin in the United States and elsewhere, or the expiration of U.S. patent
rights relating to Adenazole between May 2008 and December 2015, Tiazole in
February 2005, and any subsequently issued patents for Levovirin and Viramidine
or other products, will not result in competition from other drug manufacturers.
In addition to issued patents and regulatory protections, we have numerous
patent applications for compounds and uses in various stages of prosecution in
the United States and foreign countries. However, there can be no assurance that
any patents applied for will be granted. We expect that many additional patent
applications will
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be filed in the United States and foreign countries that claim priority to the
pending applications. In addition, there can be no assurance as to the
commercial value of any patent granted to us, or the breadth or the degree of
protection which these patents will afford us. Marketing approvals in some
foreign countries may provide an additional level of protection for products
approved for sale in these countries. As a general policy, we expect to seek
patents, where available, on inventions concerning novel drugs, techniques,
processes or other products which we may develop or acquire in the future. We
cannot ensure that others will not independently develop similar or alternative
technologies or duplicate any of our technologies in a manner that does not
infringe our patents. In addition, there is a substantial backlog of
biotechnology patent applications in the U.S. Patent and Trademark Office, and
the approval or rejection of patent applications may take several years. Patent
claims for the treatment of humans are not available in some countries in which
we market our products.
We may not be able to obtain patent protection for the drugs we discover and
develop from our nucleoside analog library. Some of the compounds in our
nucleoside analog library may have been patented previously or otherwise
disclosed to the public. This would prevent us from obtaining patent protection
for the compounds themselves. In these cases, we intend to seek patent
protection for our intended uses of these compounds and/or for derivatives of
these compounds. There can be no guarantee, however, that we will be able to
obtain patents on any compounds we identify from our nucleoside analog library.
In addition to patent protection, we rely on trade secrets, proprietary
know-how, and confidentiality provisions in agreements with our employees and
consultants to protect our intellectual property. We also rely on invention
assignment provisions in agreements with employees and some consultants. It is
possible that these agreements could be breached and that we might not have
adequate remedies for any of these breaches.
PROTECTING OUR PROPRIETARY RIGHTS IS DIFFICULT AND COSTLY.
The patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. Accordingly, the
breadth of claims allowed in these patents cannot be predicted. We cannot be
certain that the named applicants or inventors of the subject matter covered by
our patent applications or patents, whether directly owned by us or licensed to
us, were the first to invent or the first to file patent applications for these
inventions. Patent disputes are frequent and can preclude commercialization of
products. Patent litigation is costly and could subject us to significant
liabilities to third parties. These may include the need to obtain licenses from
these third parties. This would reduce our profits since some of the revenues
from the sale of the product will be retained by that third party. Adverse
results may also require us to cease selling the product in dispute. The
presence of patents or other proprietary rights belonging to other parties may
lead to the termination of the research and development of a particular product.
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING UPON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
Our success will depend, in part, on our ability to operate without infringing
on or misappropriating the proprietary rights of others. There can be no
assurance that our activities, or those of our licensees, will not infringe
patents owned by others. We could face legal action seeking damages and seeking
to enjoin clinical testing, manufacturing and marketing of our alleged
infringing product. This type of litigation could consume a substantial portion
of our resources. If there were an adverse outcome in the litigation, our
business would be harmed. As the biotechnology and pharmaceutical industries
expand, more patents are issued, and consequently, more of our products could
generate patent infringement claims. In the event that any claims of third party
patents are upheld as valid and enforceable with respect to our products, we
could be prevented from making or selling our products
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or could be required to obtain licenses or redesign our products. As a result,
we could be liable to pay damages that may exceed our resources. We cannot be
assured that licenses would be available or, if available, would be on
commercially reasonable terms. We may not be successful in any attempt to
redesign our products to avoid infringement of third party patents.
In January 2000, Hoffmann-La Roche filed suits against Schering-Plough in the
United States District Court in New Jersey and in France. These lawsuits allege
that Schering-Plough's pegylated interferon infringes Hoffmann-La Roche's
patents on pegylated interferons. Schering-Plough's pegylated interferon has
recently been approved in the European Union for sale as a monotherapy for the
treatment of hepatitis C patients who cannot take ribavirin because of
intolerance or counterindications. An application has also been submitted to the
FDA for approval of pegylated interferon for sale in the United States.
Pegylated interferon is also undergoing clinical trials as combination therapy
with ribavirin for the treatment of hepatitis C. If Schering-Plough loses either
of these lawsuits, it may not be able to market a combination therapy of
pegylated interferon and ribavirin if this combination therapy is eventually
approved by the FDA.
SINCE WE HAVE NEVER OPERATED AS A STAND-ALONE ENTITY, OUR BUSINESS COULD SUFFER
IF WE FAIL TO DEVELOP THE SYSTEMS AND INFRASTRUCTURE NECESSARY TO SUPPORT OUR
BUSINESS AS A STAND-ALONE ENTITY.
Prior to this offering, we have not operated as a stand-alone entity.
Accordingly, we must develop and implement the systems and infrastructure
necessary to support our current and future business. ICN has historically
provided us with operational, financial and other support. Although ICN will
provide us with the various interim and ongoing services described in
"Relationship with ICN", we may not be able to replace these interim and ongoing
services on terms and conditions, including costs, as favorable to us as those
that we had as a part of ICN or pursuant to these arrangements.
WE EXPECT OUR EXPENSES TO INCREASE SIGNIFICANTLY FROM LEVELS REFLECTED IN OUR
HISTORICAL FINANCIAL STATEMENTS AS A RESULT OF THE IMPLEMENTATION OF OUR
BUSINESS STRATEGY AND OUR SEPARATION FROM ICN; IN ADDITION, OUR HISTORICAL
FINANCIAL INFORMATION MAY NOT OTHERWISE BE REPRESENTATIVE OF OUR RESULTS AS A
SEPARATE COMPANY.
The historical financial information we have included in this prospectus may not
reflect what our results of operations, financial position and cash flows would
have been had we been a separate, stand-alone entity during the periods
presented. This information may also not be indicative of what our results of
operations, financial position and cash flows will be in the future. As a
result, you have limited information on which to evaluate our business and your
investment decision. This is because:
+ as a division of ICN, ICN provided us with various services and allocated
expenses for these services to us in amounts that may not have been the same
as the expenses we would have incurred had we performed or acquired these
services ourselves;
+ the information does not reflect other events and changes that will occur as
a result of our separation from ICN, including the establishment of our
capital structure and changes in our expenses as a result of new employee
plans, our tax sharing arrangement with ICN, and other matters; and
+ we are in the process of significantly expanding our research and development
activities in connection with the implementation of our business strategy and
we expect to incur significant and increasing expenses in connection with
this effort for the foreseeable future.
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WE FACE INTENSE COMPETITION FROM BIOTECHNOLOGY AND PHARMACEUTICAL COMPANIES.
The biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. Ribavirin and many of the
drugs that we are attempting to discover will be competing with new and existing
therapies. Many companies in the United States and abroad are pursuing the
development of pharmaceuticals that target the same diseases and conditions that
we are targeting. We believe that a significant number of drugs are currently
under development and may become available in the future for the treatment of
hepatitis C, hepatitis B, HIV and cancer. Our competitors may utilize discovery
technologies and techniques or partner with collaborators in order to develop
products more rapidly or successfully than we or our collaborators are able to
do. Many of our competitors, particularly large pharmaceutical companies, have
substantially greater financial, technical and human resources than we do. In
addition, academic institutions, government agencies, and other public and
private organizations conducting research may seek patent protection with
respect to potentially competitive products and may establish exclusive
collaborative or licensing relationships with our competitors.
We believe that our ability to compete depends upon:
+ our ability to discover, develop and commercialize pharmaceutical products;
+ our ability to attract and retain qualified personnel, obtain patent
protection or otherwise develop proprietary technology or processes; and
+ the availability of sufficient capital resources for the expected substantial
time period between technological conception and commercial sales of
products.
Our competitors might develop products that are more effective or less costly to
manufacture than our products. If this were to occur, our drugs may become
obsolete or noncompetitive. In addition, our competitors may succeed in
obtaining FDA or other regulatory approvals for drug candidates before we do.
This would give them a significant competitive advantage, including the
potential for FDA marketing exclusivity rights that might delay or prevent our
ability to market our products. Any drugs resulting from our research and
development efforts might not be able to compete successfully with competitors'
existing or future products or products under development or obtain regulatory
approval in the United States or elsewhere.
OUR ABILITY TO DISCOVER AND DEVELOP NEW PRODUCTS DEPENDS ON OUR ABILITY TO
ATTRACT AND RETAIN KEY RESEARCH SCIENTISTS AND OTHER RESEARCH AND DEVELOPMENT
PERSONNEL.
We depend on the principal members of our scientific staff, including Dr.
Johnson Y.N. Lau. The loss of services of any of these persons could delay or
reduce our product development and commercialization efforts. Our success
depends upon our ability to attract, train, motivate and retain qualified
scientific personnel. Qualified personnel are in great demand throughout the
biotechnology and pharmaceutical industries. The competition for these employees
is intense. If we fail to attract and retain qualified personnel for our
scientific and technical teams, the rate at which we can discover, develop and
commercialize drugs will be limited. We currently plan to expand our research
team from 18 scientists on March 1, 2000 to over 100 scientists within 24 months
of this offering. There can be no assurance that we will be able to attract
additional personnel or retain existing employees.
In addition, the existence of non-competition agreements between prospective
employees and their previous employers may prevent us from hiring these
individuals, or subject us to suit from their former employers.
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OUR AGREEMENT WITH ICN TO COMPLY WITH THE COVENANTS CONTAINED IN ICN'S PUBLIC
INDENTURES AND OUR AGREEMENT TO REMAIN PART OF THE ICN CONSOLIDATED TAX GROUP
MAY RESTRICT OUR ABILITY TO RAISE ADDITIONAL FUNDS, MAKE ACQUISITIONS AND
CONDUCT OUR BUSINESS.
ICN has outstanding debt securities that were issued in Rule 144A offerings. As
a subsidiary of ICN as well as under our affiliation agreement with ICN, we are
subject to the restrictions and covenants under the ICN indentures that govern
these debt securities. These restrictions will limit our ability to:
+ incur indebtedness;
+ pay dividends or make other distributions;
+ create liens;
+ sell our assets;
+ make investments, including some acquisitions, joint ventures and other
strategic transactions; and
+ issue, sell or repurchase our stock or other equity interests.
Although the terms of the ICN indentures provide for exceptions to these
restrictions, we will not be permitted to take advantage of many of these
exceptions without the prior consent of ICN.
We cannot assure you that the restrictions imposed on us by these agreements
will not materially interfere with our ability to conduct our business. By
limiting our ability to incur debt and to sell our capital stock, these
provisions will restrict our ability to raise additional funds which we may need
in the future to complete commercialization of our products and continue our
research and development programs. The limitations on our ability to enter into
some acquisitions and other strategic transactions may adversely affect our
ability to execute the acquisition component of our business strategy. If we
take any action that leads to an event of default under either indenture, ICN
may have a claim for damages against us. The debt to which these restrictions
relate matures in 2005 and 2008. See "Relationship with ICN" and "Description of
ICN indentures."
In addition, our ability to raise additional funds by selling shares of our
stock is restricted because we have agreed to remain part of ICN's consolidated
tax group. In general, to remain part of ICN's consolidated tax group, ICN must
own at least 80% of the combined voting power and value of our outstanding
shares of stock. Accordingly, pursuant to the affiliation agreement, we have
agreed not to issue any stock if it would result in ICN owning less than 80.5%
of the combined voting power or value of our outstanding shares of stock. This
agreement may also limit our ability to use our stock as a currency to make
acquisitions.
OUR RIGHTS RELATED TO TIAZOLE AND ADENAZOLE MAY BE ADVERSELY AFFECTED BY ONGOING
LITIGATION INVOLVING ICN AND THE CONTRIBUTION OF THESE RIGHTS IS SUBJECT TO
APPROVAL BY THE OFFICE OF FOREIGN ASSETS CONTROL.
In connection with our separation from ICN, ICN contributed to us its rights
related to Tiazole and Adenazole. These are two of the four compounds in our
product development pipeline. However, ICN is involved in litigation with the
Republic of Serbia and the Federal Republic of Yugoslavia that could impact
those rights. In this litigation, ICN has taken the position that rights related
to Tiazole and Adenazole were previously validly transferred to ICN Yugoslavia,
a joint venture between ICN and Yugoslavian entities. Depending on the
resolution of this litigation, we may not have valid rights related to Tiazole
and Adenazole. We may be required to obtain licenses from, or grant licenses to,
third parties prior to any effort by us to commercialize these products. In
addition, it may be difficult for us to license Tiazole and Adenazole to third
parties for commercialization if rights related to these compounds remain
unclear. See "Business -- Legal Proceedings."
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The U.S. Government has issued sanctions against the Federal Republic of
Yugoslavia. These sanctions are monitored by the Office of Foreign Assets
Control of the U.S. Department of the Treasury. Accordingly, ICN's contribution
of its rights in Tiazole and Adenazole was made subject to the prior approval of
the Office of Foreign Assets Control, to the extent necessary. If, for any
reason, any required approval from the Office of Foreign Assets Control is not
obtained, then ICN's rights in Tiazole and Adenazole may never be contributed to
us.
WE MAY BE ADVERSELY AFFECTED BY AN ONGOING LITIGATION AND INVESTIGATION
INVOLVING ICN AND OUR CHAIRMAN.
ICN and our chairman are defendants in a pending civil lawsuit by the SEC. They
also are targets of a criminal investigation by the U.S. Attorney's Office. As a
company controlled by ICN, any adverse result in these proceedings may affect
the conduct of our business. Furthermore, the pending SEC civil lawsuit seeks to
bar our chairman from acting as an officer or director of any publicly traded
company, which would include us. See "Business -- Legal Proceedings" for a
description of this litigation and investigation.
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 NOT COVERED BY INSURANCE.
The nature of our business exposes us to potential liability risks inherent in
the testing, manufacturing and marketing of pharmaceutical products. Using our
drug candidates in clinical trials may expose us to product liability claims.
These risks will expand with respect to drugs, if any, that receive regulatory
approval for commercial sale.
In the event that anyone alleges that any of our products are harmful, we may
experience reduced consumer demand for our products or our products may be
recalled from the market. In addition, we may be forced to defend lawsuits and,
if unsuccessful, to pay a substantial amount in damages. We do not currently
have insurance against product liability risks. Insurance is expensive and, if
we seek insurance in the future, it may not be available on acceptable terms.
Even if obtained, insurance may not fully protect us against potential product
liability claims.
OUR FAILURE TO SUCCESSFULLY INTEGRATE ANY FUTURE ACQUISITIONS COULD HARM OUR
BUSINESS AND OPERATING RESULTS.
To remain competitive in our industry or to expand our business, we may find it
necessary or desirable to acquire other complementary businesses, products or
technologies. If we identify an appropriate acquisition candidate, we may not be
able to negotiate the terms of the acquisition successfully, to finance the
acquisition or to integrate the acquired businesses, products or technologies
into our existing business and operations. Further, completing a potential
acquisition and integrating an acquired business may strain our resources and
require significant management time. In addition, we may be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions which would reduce our earnings in future periods.
WE LACK SALES, MARKETING AND DISTRIBUTION CAPABILITIES, AND MAY DEPEND ON THIRD
PARTIES TO COMMERCIALIZE OUR PRODUCTS.
We currently have no sales, marketing or distribution capabilities. We may rely
on third parties to sell, market and distribute some or all of our products.
These third parties may not be able to market our products successfully. If we
choose to develop our own sales, marketing or distribution capabilities, we will
need to build a marketing and sales force with technical expertise and with
supporting distribution capabilities.
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WE ARE SUBJECT TO UNCERTAINTY RELATED TO HEALTH CARE REFORM MEASURES AND
REIMBURSEMENT POLICIES.
The levels at which government authorities, private health insurers and other
organizations, including HMOs, reimburse the costs of developing and
manufacturing drugs and treatments related to those drugs will have an effect on
the successful commercialization of our drug candidates. We cannot be sure that
reimbursement in the United States or elsewhere will be available for any drugs
we may develop or, if already available, will not be decreased in the future.
Also, we cannot be sure that reimbursement amounts will not reduce the demand
for, or the price of, our drugs. If reimbursement is not available or is
available only to limited levels, we may not be able to obtain collaborative
partners to manufacture and commercialize drugs, and may not be able to obtain a
satisfactory financial return on our own manufacture and commercialization of
any future drugs. In recent years, there have been numerous proposals to change
the health care system in the United States. Some of these proposals have
included measures that would limit or eliminate payments for medical procedures
and treatments or subject the pricing of pharmaceuticals to government control.
In addition, as a result of the trend towards managed health care in the United
States, as well as legislative proposals to reduce government insurance
programs, third party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement of new drug
products. Consequently, significant uncertainty exists as to the reimbursement
status of newly-approved health care products. We cannot assure you that
third-party payors will establish and maintain price levels sufficient for
realization of an appropriate return on our investment in product development.
IF WE FAIL TO MANAGE OUR EXPANSION, OUR BUSINESS COULD BE IMPAIRED.
We are in the process of significantly increasing the number of our employees
and expanding the scope of our operations. This expansion will result in an
increase in responsibilities for both existing and new management personnel. Our
ability to manage our expansion effectively will require us to continue to
implement and improve our operational, financial and management information
systems and to recruit, train, motivate and manage our employees. We may not be
able to adequately manage our expansion, which would impair our business.
OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE
OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR
FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR CURTAIL OPERATIONS.
Our facilities are located in Southern California near known earthquake fault
zones and are vulnerable to significant damage from earthquakes. If this damage
were to occur, our ability to operate our business at our facilities could be
seriously, or potentially completely, impaired, and our research could be lost
or destroyed. In addition, the unique nature of our research activities and of
much of our equipment could make it difficult for us to recover from a disaster.
Any insurance we maintain may not be adequate to cover our losses.
IF WE USE BIOLOGICAL AND HAZARDOUS MATERIALS IN A MANNER THAT CAUSES INJURY OR
VIOLATES LAWS, WE MAY BE LIABLE FOR DAMAGES NOT COVERED BY INSURANCE.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate the
risk of accidental contamination or injury from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for damages that result. Any liability could exceed our
resources. We are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of these materials and
specified
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waste products. The cost of compliance with, or any potential violation of,
these laws and regulations could be significant. Any insurance we maintain may
not be adequate to cover our losses.
RISKS RELATING TO OUR SEPARATION FROM ICN
WE WILL BE CONTROLLED BY ICN AS LONG AS IT OWNS OVER 50% OF THE COMBINED VOTING
POWER OF OUR STOCK AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE
OUTCOME OF STOCKHOLDER VOTING DURING THAT TIME.
Prior to this offering, we were a wholly-owned subsidiary of ICN. After the
completion of this offering, ICN will beneficially own at least 80% of the
combined voting power and 80% of the value of our outstanding shares of common
stock. Under the affiliation agreement with ICN, ICN will have the right to
maintain 80.5% of the combined voting power and 80.5% of the value of our
outstanding shares of stock. Accordingly, after this offering ICN will continue
to be able to elect our entire board of directors and generally to determine the
outcome of all corporate actions requiring stockholder approval. As a result,
ICN will be in a position to continue to control all matters affecting us. ICN
may exercise this ability in a manner that advances its best interests and not
those of our other stockholders. ICN has committed to elect independent
directors under the affiliation agreement. ICN has advised us that it currently
intends to maintain ownership of at least 80% of the combined voting power and
value of our outstanding shares of stock in order to consolidate us for federal
income tax purposes. In addition, ICN may in the future, through open market
purchases or otherwise, acquire additional shares of our common stock.
SOME OF OUR DIRECTORS, INCLUDING MILAN PANIC, OUR CHAIRMAN, MAY HAVE CONFLICTS
OF INTEREST BECAUSE OF THEIR RELATIONSHIPS WITH ICN.
Milan Panic, our chairman, is also chairman and chief executive officer of ICN.
Mr. Panic will have obligations to both companies and may have conflicts of
interest with respect to matters involving or affecting us, including
acquisitions and other corporate opportunities that may be suitable for both us
and ICN. In addition, after this offering, a number of our directors and
executive officers will continue to own ICN stock and options on ICN stock they
acquired as employees of ICN. This ownership could create, or appear to create,
potential conflicts of interest when these directors and officers are faced with
decisions that could have different implications for our company and ICN. While
there are provisions in our certificate of incorporation designed to deal with
these matters, these conflicts may not ultimately be resolved in a manner fair
to us. See "Description of Securities-- Corporate Opportunities."
WE MAY HAVE CONFLICTS WITH ICN WITH RESPECT TO OUR PAST AND ONGOING
RELATIONSHIPS.
We may have conflicts with ICN after this offering that we cannot resolve and,
even if we are able to do so, the resolution of these conflicts may not be as
favorable as if we were dealing with an unaffiliated party. Upon the completion
of this offering, we will have contractual arrangements with ICN requiring ICN
and its affiliates to provide us with various interim, ongoing and other
services. In addition, we will have a contract services relationship with ICN in
which ICN will agree to continue early-phase proof-of-concept studies of Tiazole
for the treatment of ovarian cancer. As a result, conflicts of interest may
arise between ICN and us in a number of areas relating to our past and ongoing
relationships, including:
+ ICN's ability to control our management and affairs;
+ the incurrence of debt by us;
+ major business combinations by us;
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+ sales or distributions by ICN of all or any portion of its ownership interest
in us;
+ our need to obtain ICN's consent to take actions restricted by the
affiliation agreement;
+ the nature, quality and pricing of transitional services ICN has agreed to
provide us;
+ business opportunities that may be attractive to both ICN and us;
+ litigation, labor, tax, employee benefit and other matters arising from our
separation from ICN; and
+ the terms of our contract with ICN to conduct early-phase proof-of-concept
studies of Tiazole and other interim and ongoing agreements with ICN.
In addition, the contractual agreements we have with ICN may be amended from
time to time upon agreement between the parties. So long as ICN is our
controlling stockholder, it will have the ability to require us to agree to any
amendments, subject to approval by a majority of our independent directors.
These agreements were made in the context of an affiliated relationship and were
negotiated in the overall context of our separation from ICN. The prices and
other terms under these agreements may be less favorable to us than what we
could have obtained in arm's-length negotiations with unaffiliated third parties
for similar services or under similar agreements. For more information about
these arrangements, see "Relationship with ICN."
WE FACE RISKS ASSOCIATED WITH BEING A MEMBER OF ICN'S CONSOLIDATED GROUP FOR
FEDERAL INCOME TAX PURPOSES.
For so long as ICN continues to own 80% or more of the combined voting power and
value of our outstanding shares of stock, we will be included in ICN's
consolidated group for federal income tax purposes. Under a tax sharing
agreement with ICN that will become effective upon completion of this offering,
we will pay ICN the amount of federal income taxes that we would be required to
pay if we were a separate taxpayer not included in ICN's consolidated returns.
Also, we will pay ICN the amount of state and local income taxes based upon
ICN's worldwide apportionment schedule. In addition, by virtue of its
controlling ownership and the tax sharing agreement, ICN will effectively
control substantially all of our tax decisions. Under the tax sharing agreement,
ICN will have sole authority to respond to and conduct all tax proceedings. This
authority would include control of tax audits relating to ICN consolidated or
combined income tax returns in which we are included. Moreover, notwithstanding
the tax sharing agreement, federal law provides that each member of a
consolidated group is jointly and severally liable for the group's entire
federal income tax obligation. Thus, to the extent ICN or other members of the
group fail to make any federal income tax payments required of them by law, we
could be liable for the shortfall. Similar principles may apply for state income
tax purposes in many states.
ICN'S ABILITY TO SPIN-OFF ITS INTEREST IN US ON A TAX-FREE BASIS TO ITS
SHAREHOLDERS AT SOME POINT IN THE FUTURE MAY BE RESTRICTED IF CURRENTLY PROPOSED
LEGISLATION IS ADOPTED.
ICN currently does not have the ability to spin-off its interest in us on a
tax-free basis to its shareholders. However, if all of the legal requirements to
effect a tax-free spin-off of its interest in us are satisfied at some point in
the future, ICN may determine to effect a tax-free spin-off. One of these legal
requirements is that ICN would need to own at least 80% of the voting power of
our stock, which it currently does. However, if adopted, currently proposed
legislation would require ICN to own at least 80% of both the voting power and
value of our stock in order to effect a tax-free spin-off. This legislation is
proposed to be effective for transactions on or after the date of enactment. If
this legislation is enacted, and if ICN owns less than 80% of the voting power
or 80% of the value of our stock, ICN may not be able to effect a tax-free
spin-off of its interest in us.
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<PAGE> 20
RISK FACTORS
--------------------------------------------------------------------------------
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR STOCK COULD DECLINE
IN VALUE.
Prior to this offering, there has been no public market for our Class A Common
Stock. An active public market for our Class A Common Stock may not develop or
be sustained after the offering. The initial public offering price will be
determined by negotiations between the representatives of the underwriters and
us and may not be indicative of future market prices. You may not be able to
resell your Class A Common Stock at or above the initial offering price due to
fluctuation in the market price of the Class A Common Stock arising from changes
in our operating performance or prospects. In addition, the stock market in
general has recently experienced extreme volatility that often has been
unrelated to the operating performance or prospects of specific companies. In
particular, the market prices for securities of biotechnology companies in
general have been highly volatile and may continue to be highly volatile in the
future. The market price of our Class A Common Stock may be subject to
substantial volatility depending upon many factors, many of which are beyond our
control, including:
+ announcements regarding the results of discovery efforts and preclinical and
clinical activities by us or our competitors;
+ announcements regarding the acquisition of technologies or companies by us or
other biotechnology companies;
+ changes in our relationship with Schering-Plough;
+ establishment of additional corporate partnerships or licensing arrangements;
+ technological innovations or new commercial products developed by us or our
competitors;
+ changes in our intellectual property portfolio;
+ developments or disputes concerning our proprietary rights;
+ changes in government regulations affecting us or our industry;
+ progress or withdrawal of regulatory approvals with respect to our product
candidates;
+ issuance of new or changed securities analysts' reports and/or
recommendations;
+ economic and other external factors;
+ additions or departures of key personnel;
+ actual or anticipated fluctuations in our quarterly financial and operating
results; and
+ developments with respect to legal proceedings that we or ICN may be involved
in.
One or more of these factors could significantly harm our business and/or cause
a decline in the price of our Class A Common Stock in the public market.
FUTURE SALES BY ICN COULD CAUSE OUR COMMON STOCK PRICE TO DECLINE.
Sales of a substantial number of shares of our Class A Common Stock by ICN in
the public market or the perception that sales by ICN could occur following this
offering could adversely affect the market price of our Class A Common Stock.
Pursuant to a registration rights agreement, ICN has the right to require us to
register its shares of our common stock under the Securities Act. You should
read "Shares eligible for future sale."
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17
<PAGE> 21
RISK FACTORS
--------------------------------------------------------------------------------
WE MAY HAVE TO TAKE ACTIONS THAT ARE DISRUPTIVE TO OUR BUSINESS TO AVOID
REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940.
The Investment Company Act of 1940 requires registration as an investment
company for companies that are engaged primarily in the business of investing,
reinvesting, owning, holding or trading in securities. Unless an exemption or
safe harbor applies, a company may be deemed to be an investment company if it
owns "investment securities" with a value exceeding 40% of the value of its
total assets on an unconsolidated basis, excluding government securities and
cash items. Securities issued by companies other than majority-owned
subsidiaries are generally counted as investment securities for purposes of the
Investment Company Act.
Upon completion of this offering, our assets will total $ million and we
will have a large amount of cash on hand. If we were to invest even a small
percentage of this cash in speculative investment securities we could be
considered an investment company. However, under interpretations by the staff of
the SEC, we would not be considered an investment company if we invest this cash
in various non-speculative investment securities and engage in activities that
are consistent with our goal of discovering, developing and commercializing
antiviral and anticancer medications.
Registration as an investment company would subject us to restrictions that are
inconsistent with our fundamental business strategies. We may have to take
actions, including buying, refraining from buying, selling or refraining from
selling securities, when we would otherwise not choose to in order to continue
to avoid registration under the Investment Company Act.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW MAY
MAKE AN ACQUISITION OF US, WHICH MAY BE BENEFICIAL TO OUR STOCKHOLDERS, MORE
DIFFICULT.
Provisions of our certificate of incorporation and bylaws, as well as provisions
of Delaware law, could make it more difficult for a third party to acquire us,
even if doing so would benefit our stockholders. These provisions:
+ establish that members of the board of directors may be removed only for
cause upon the affirmative vote of stockholders owning at least two-thirds of
our capital stock;
+ authorize the issuance of "blank check" preferred stock that could be issued
by our board of directors to increase the number of outstanding shares and
thwart a takeover attempt;
+ limit who may call a special meeting of stockholders;
+ establish advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted upon at
stockholder meetings; and
+ provide for a board of directors with staggered terms.
WE MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY
NOT AGREE.
We will retain broad discretion over the use of proceeds from this offering. You
may not agree with how we spend the proceeds. Our use of the proceeds may not
yield a significant return or any return at all. We intend to use the proceeds
from this offering to prepay in full the outstanding amount under the
$ note we issued to ICN as a dividend. We also intend to use the
proceeds to expand our research facilities and staff, to fund research and
product development, for potential acquisitions of product candidates,
technologies and businesses that complement our business and for general
corporate purposes and working capital requirements. Because of the number and
variability of factors that determine our use of the net proceeds from this
offering, we cannot assure you that these uses will not vary substantially from
our currently planned uses.
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18
<PAGE> 22
RISK FACTORS
--------------------------------------------------------------------------------
THIS OFFERING WILL CAUSE DILUTION IN NET TANGIBLE BOOK VALUE.
Purchasers in this offering will experience immediate and substantial dilution
in our pro forma net tangible book value in the amount of $ per share. On a
pro forma basis, our net tangible book value at March 31, 2000 was $ per
share of Class A Common Stock. After giving effect to this offering, our net
tangible book value at March 31, 2000 would be $ per share of Class A Common
Stock.
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19
<PAGE> 23
--------------------------------------------------------------------------------
Forward-looking information
Some of the statements under the captions "Prospectus summary," "Risk factors,"
"Use of proceeds," "Management's discussion and analysis of financial condition
and results of operations" and "Business" and elsewhere in this prospectus are
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "seeks," "should", "will" or "would" or the negative of these terms or
similar expressions are generally intended to identify forward-looking
statements.
Forward-looking statements necessarily involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the
forward-looking statements due to a number of factors, including those set forth
above under "Risk Factors" and elsewhere in this prospectus. The factors set
forth above in the "Risk Factors" section and other cautionary statements made
in this prospectus should be read and understood as being applicable to all
related forward-looking statements wherever they appear in this prospectus. The
forward-looking statements contained in this prospectus represent our judgment
as of the date of this prospectus. We caution readers not to place undue
reliance on these statements. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
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20
<PAGE> 24
--------------------------------------------------------------------------------
Use of proceeds
We estimate that our net proceeds from the sale of the shares of Class A
Common Stock that we are selling in this offering will be approximately $ ,
or approximately $ if the underwriters' over-allotment option is exercised
in full. This estimate is based on an assumed initial public offering price of
$ per share and after deducting the estimated underwriting discount,
commissions and estimated offering expenses payable by us.
We anticipate using the net proceeds from this offering:
+ to prepay in full the outstanding amount of the $ note we issued to
ICN as a dividend;
+ to expand our research facilities and staff;
+ to fund research and product development, including clinical trials;
+ for potential acquisitions of product candidates, technologies and businesses
that complement our business; and
+ for general corporate purposes and working capital requirements.
We have not allocated any specific portion of the proceeds for the foregoing
purposes, other than for the repayment of the note issued by us to ICN. While we
may use an unspecified portion of the net proceeds to acquire or invest in
products, technologies or companies that complement our business, we have no
current plans, agreements or commitments with respect to these matters.
The timing and amount of our actual expenditures will be based on many factors.
Until we use the net proceeds of this offering, we currently intend to invest
the funds in short-term, investment grade, interest-bearing securities in a
manner consistent with the Investment Company Act of 1940.
The note payable to ICN bears interest at a rate of LIBOR plus 30 basis points
per annum and matures . See "Relationship with ICN."
Dividend policy
We currently intend to retain our future earnings, if any, to support the growth
and development of our business. We do not anticipate paying dividends for the
foreseeable future. In addition, our ability to declare or pay dividends is
restricted by the terms of the indentures of ICN and by the affiliation
agreement with ICN. The affiliation agreement prohibits us from declaring or
paying dividends without the prior consent of ICN until the debt securities
issued under these indentures are paid in full. The latest date of maturity of
these debentures is 2008. Furthermore, any future determination relating to our
dividend policy will be made at the discretion of our board of directors. This
determination will depend on a number of other factors, including future
earnings, capital requirements, financial conditions and future prospects and
other factors our board of directors may deem relevant. Pursuant to our
certificate of incorporation, all cash dividends are required to be declared
pro-rata on the Class A Common Stock and the Class B Common Stock. See "Risk
Factors -- Our agreement with ICN to comply with the covenants contained in
ICN's indentures may restrict our ability to conduct our business."
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21
<PAGE> 25
--------------------------------------------------------------------------------
Capitalization
The following table shows our capitalization as of March 31, 2000
+ on a pro forma basis to give effect to the note paid as a dividend by us to
ICN on , 2000; and
+ on a pro forma as adjusted basis to give effect to the sale of shares of
Class A Common Stock by us in this offering at an assumed price of $ per
share less the estimated underwriting discounts and offering expenses, the
recapitalization of our capital stock into two classes of common stock and
the prepayment in full of the note we issued to ICN as a dividend.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
PRO FORMA
PRO FORMA AS ADJUSTED
--------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Current debt:
Note payable to ICN....................................... $ $ --
Total debt.................................................. --
Stockholders' equity:
Preferred Stock, $0.01 par value.......................... -- --
Class A Common Stock...................................... --
Class B Common Stock...................................... --
Common Stock.............................................. -- --
Additional paid in capital.................................. --
Total stockholders' equity.................................. --
Total capitalization...................................... --
</TABLE>
The number of shares of Class A Common Stock to be outstanding after this
offering set forth in the table above does not include the following:
+ up to shares which the underwriters have the option to purchase from us
to cover over-allotments.
+ shares reserved for issuance under our 2000 Stock Option Plan, including
shares issuable upon the exercise of options to be granted at the time
of this offering with an exercise price equal to the offering price;
+ shares of Class B Common Stock held by ICN convertible into an equal
number of shares of Class A Common Stock.
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22
<PAGE> 26
--------------------------------------------------------------------------------
Dilution
The pro forma net tangible book value of our Class A Common Stock on
, 2000, giving effect to the contribution of assets to us by ICN,
the issuance by us of the $ note to ICN and the issuance of the Class B
Common Stock to ICN, was approximately $ , or approximately $
per share. Pro forma net tangible book value per share represents the amount of
our total tangible assets less total liabilities divided by the total number of
shares of Class A Common Stock and Class B Common Stock outstanding. Dilution in
pro forma net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of Class A Common Stock in
this offering and the net tangible book value per share of our Class A Common
Stock immediately afterwards. Assuming our sale of shares of Class A Common
Stock offered by this prospectus at an assumed initial public offering price of
$ per share, and after deducting estimated underwriting discounts and
commissions and estimated offering expenses, our pro forma as adjusted net
tangible book value at , 2000 would have been approximately $ or
$ per share of Class A Common Stock. This represents an immediate decrease
in net tangible book value of $ per share to new investors purchasing shares
of Class A Common Stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at ,
2000...................................................... $
Increase per share attributable to new investors..........
-------- --------
Pro forma, as adjusted net tangible book value per share
after this offering.......................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table summarizes, on a pro forma basis as of , 2000,
the differences between the total consideration paid and the price per share
paid by ICN and the new investors with respect to the number of shares of Class
A Common Stock purchased from us. We have assumed an initial public offering
price of $ per share and have not deducted estimated underwriting discounts
and commissions and estimated offering expenses in our calculations.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
Existing Investors.................
New Investors......................
Total.........................
</TABLE>
The foregoing discussion and tables assume no exercise of any outstanding stock
options. If the underwriters exercise their over-allotment option in full, the
pro forma, as adjusted net tangible book value per share after the offerings
would be $ per share, the increase in net tangible book value per share to
existing stockholders would be $ per share and the dilution in net tangible
book value to new investors would be $ per share.
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23
<PAGE> 27
--------------------------------------------------------------------------------
Selected financial data
The following selected financial data should be read in conjunction with the
financial statements and the notes to the statements and "Management's
discussion and analysis of financial condition and results of operations'
included elsewhere in this prospectus.
We derived the statement of operations data for the years ended December 1997,
1998 and 1999, and the balance sheet data as of December 31, 1998 and 1999 from
our financial statements which are included elsewhere in this prospectus. We
derived the statement of operations data for the years ended December 31, 1996
and 1995 and the balance sheet data as of December 31, 1995, 1996 and 1997 from
unaudited financial statements not included in this prospectus. We derived the
statement of operations data for the three months ended March 31, 1999 and 2000
and the balance sheet data as of March 31, 2000 from our unaudited financial
statements, which are included elsewhere in this prospectus. Unaudited pro forma
net income per share has been calculated using the shares of Class B Common
Stock that will be owned by ICN at the completion of this offering which will be
convertible into shares of Class A Common Stock. In the opinion of
management, the unaudited financial statements from which the data below are
derived contain all adjustments, which consist only of normal recurring
adjustments, necessary to present fairly our financial position and results of
operations as of the applicable dates and for the applicable periods. Historical
results are not necessarily indicative of the results to be expected in the
future.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
STATEMENT OF OPERATIONS DATA 1995 1996 1997 1998 1999 1999 2000
--------------------------------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except per share
data)
Revenue:
Royalties....................... $ 354 $ 1,753 $ 3,223 $36,830 $109,592 $16,208 $34,272
Costs and expenses:
Research and development........ 6,846 6,589 7,011 9,530 5,523 635 1,141
General and administrative...... 3,301 6,253 9,676 7,392 5,608 1,443 1,519
-------- -------- -------- ------- -------- ------- -------
Total costs and
expenses............... 10,147 12,842 16,687 16,922 11,131 2,078 2,660
-------- -------- -------- ------- -------- ------- -------
Income (loss) from operations..... (9,793) (11,089) (13,464) 19,908 98,461 14,130 31,612
Interest expense.................. 862 775 683 609 396 91 --
-------- -------- -------- ------- -------- ------- -------
Income (loss) before income
taxes........................... (10,655) (11,864) (14,147) 19,299 98,065 14,039 31,612
Provision (benefit) from income
taxes........................... (3,836) (4,271) (5,093) 6,948 35,303 5,054 11,381
-------- -------- -------- ------- -------- ------- -------
Net income (loss)................. $ (6,819) $ (7,593) $ (9,054) $12,351 $ 62,762 $ 8,985 $20,231
======== ======== ======== ======= ======== ======= =======
Unaudited pro forma net income per
share...........................
======== =======
Unaudited pro forma shares
outstanding.....................
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, THREE MONTHS ENDED
BALANCE SHEET DATA 1995 1996 1997 1998 1999 MARCH 31, 2000
--------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Working capital.............. $(4,696) $(3,897) $(2,828) $6,889 $33,350 $33,337
Total assets................. 27,885 27,361 27,127 29,561 55,177 54,882
Current liabilities.......... 6,628 6,457 6,096 1,454 1,112 935
Total liabilities............ 32,297 29,407 27,010 13,591 3,777 3,624
Total equity (deficit)....... (4,412) (2,046) 117 15,970 51,400 51,258
</TABLE>
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<PAGE> 28
--------------------------------------------------------------------------------
Management's discussion and analysis of financial condition
and results of operations
RESULTS OF OPERATIONS
Financial information for our business is set forth below. This discussion
should be read in conjunction with our financial statements included elsewhere
in this prospectus.
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
ROYALTY REVENUES
Royalty revenues represent amounts earned under our exclusive license and supply
agreement with Schering-Plough. Under the license agreement, we exclusively
licensed to Schering-Plough all oral forms of ribavirin for the treatment of
chronic hepatitis C. In 1998, Schering-Plough received FDA approval to market
ribavirin in the United States in combination with Schering-Plough's interferon
alfa-2b for the treatment of chronic hepatitis C in patients with compensated
liver disease. In May 1999, Schering-Plough received approval from the European
Union to market the combination therapy in the European Union for the same
patient populations as those approved in the United States. Royalty revenues for
the three months ended March 31, 1999 were $16,208,000 compared to $34,272,000
for the same period in 2000. The increase was mainly due to additional sales of
Rebetron by Schering-Plough resulting from the 1999 launch into some European
markets.
RESEARCH AND DEVELOPMENT
Research and development expenditures were $635,000 and $1,141,000 for the three
months ended March 31, 1999 and 2000. The increase resulted from the expansion
of research and development, primarily in the area of antiviral and anticancer
drugs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1,443,000 for the three months ended
March 31, 1999 compared to $1,519,000 for the same period in 2000. Those
expenses principally consisted of legal expenses, facility and central service
charges and other general and administrative expenses. Legal expenses were
$390,000 and $388,000 for the three months ended March 31, 1999 and 2000.
Facility and central services charges were $568,000 and $499,000 for the three
months ended March 31, 1999 and 2000. Excluding legal and facility and central
service costs, general and administrative expenses were $485,000 and $632,000
for the three months ended March 31, 1999 and 2000. The increase over 1999 was
due to increases in compensation and corporate development costs.
INTEREST EXPENSE
Interest expense declined as a result of the repayment of the mortgage payable
in 1999.
INCOME TAXES
The effective tax rate was 36% for each of the three months ended March 31, 1999
and 2000. We were not a separate taxable entity for federal, state or local
income tax purposes. Our operations were included in the consolidated ICN tax
returns. Income tax provisions and benefits have been calculated on a separate
return basis for federal income tax purposes and based upon ICN's worldwide
apportionment California State rate of 1%.
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25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
ROYALTY REVENUES
Royalty revenues for 1998 were $36,830,000 compared to $109,592,000 for 1999.
The 1999 royalty amount reflected increased U.S. commercial sales of Rebetron by
Schering-Plough subsequent to receipt of initial FDA approval in June 1998,
inception of commercial sales in the European Union and an increase in
compassionate use sales, primarily in Western Europe. Royalty revenues for 1998
also include a one-time payment of $13,467,000, which we received from
Schering-Plough for settlement of past royalties due on samples and free product
distributed by Schering-Plough ($8,467,000) and forgiveness of a $5,000,000
obligation to them. In addition, we gave up the right to co-market in the
European Union in exchange for an increase in worldwide royalty rates.
We recorded the entire amount of the one-time payment as revenue as well as the
previously unamortized portion of the 1995 license revenue paid to us by
Schering-Plough of $3,689,000 that was being deferred. At the time of the
initial sale of the rights and technology to Schering-Plough in 1995, we
maintained the rights to co-market in the European Union, were obligated under a
supply and manufacturing agreement and participated on scientific advisory
committees during the clinical trial process being conducted by Schering-Plough.
In 1998 when we gave up the rights to co-market in the European Union in
exchange for increased royalty rates, we no longer had any continuing
obligations with respect to the transfer of the rights and technology to
Schering-Plough.
Royalty revenues for 1997 were $3,223,000 compared to $36,830,000 in 1998. The
increase was mainly due to the launch of Rebetron in the U.S. market during the
second quarter of 1998 after Schering-Plough received approval from the FDA to
market the combination therapy and a one-time payment of $13,467,000 from
Schering-Plough, discussed above.
RESEARCH AND DEVELOPMENT
Research and development expenditures were $7,011,000, $9,530,000 and $5,523,000
for the years ended December 31, 1997, 1998 and 1999. The decrease from 1998 to
1999 reflected lower spending in clinical trials as we evaluated our overall
research strategy. The increase in 1998 compared to 1997 reflected our increased
investment in the development of products and clinical trials of several
compounds.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $9,676,000, $7,392,000 and $5,608,000
for the years ended December 31, 1997, 1998 and 1999. General and administrative
expenses included legal expenses, facility and central service charges and other
general and administrative expenses. Legal expenses were $7,155,000, $2,460,000
and $2,844,000 for the years ended December 31, 1997, 1998 and 1999. The legal
expenses were mainly related to the SEC and Grand Jury investigations and
Hepatitis C and AIDS class actions lawsuits previously paid by ICN, for which
50% was allocated to us. The decrease in legal expenses from 1997 to 1998 was
due primarily to a class action settlement of $5,500,000 in 1997. Facility and
central service charges were $2,167,000, $2,376,000 and $1,963,000 for the years
ended December 31, 1997, 1998, and 1999. Excluding legal and facility and
central service costs, general and administrative expenses were $354,000,
$2,556,000 and $801,000 for the years ended December 31, 1997, 1998, and 1999.
The decrease from 1998 to 1999 related to compensation expense related to the
extension of stock options to an ICN Director who was acting as the senior vice
president of research and development in the amount of $1,625,000 in 1998. The
increase from 1997 to 1998 was due to increased compensation expense including
the amount related to the stock option extension, bonuses and the charges
associated with the long-term incentive plan.
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26
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense declined from 1998 to 1999 as a result of the repayment of the
mortgage payable in 1999. The slight decrease in interest expense from 1997 to
1998 relates to principal payments made in 1998 on the mortgage payable.
INCOME TAXES
Our effective income tax rate was 36% for each of the years ended December 31,
1997, 1998 and 1999. We were not a separate taxable entity for federal, state or
local income tax purposes. Our operations were included in the consolidated ICN
tax returns. Income tax provisions and benefits have been calculated on a
separate return basis for federal income tax purposes and based upon ICN's
worldwide apportionment California state rate of 1%.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
Cash provided by operating activities was $28,000 for the three months ended
March 31, 2000 compared to $127,000 for the same period in 1999. Operating cash
flows in 2000 reflected net income of $20,231,000, offset by advances to ICN of
$20,373,000. For the same period in 1999, operating cash flow reflected net
income of $8,985,000, offset by deferred income of $4,323,000 and a decrease in
royalties receivable of $3,838,000.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Cash provided by operating activities was $1,139,000, $1,581,000, and $7,681,000
for the years 1997, 1998 and 1999. Operating cash flows in 1999 reflected net
income of $62,762,000, partially offset by an increase in royalties receivable
of $26,119,000, an increase in advances to ICN of $27,332,000 and a change of
$4,323,000 in deferred income. In 1998, cash provided by operating activities
was $1,581,000. This reflected net income of $12,351,000 and an increase in
advances from ICN in the amount of $3,502,000, partially offset by an increase
in royalties receivable of $6,875,000, a decrease in deferred income of
$13,619,000 and an increase in trade payables and accrued liabilities of
$664,000. In 1997, cash provided by operating activities was $1,139,000,
primarily consisting of the net loss of $9,054,000 and $11,217,000 in advances
from ICN.
Cash used in investing activities was $346,000, $103,000 and $53,000 for the
years 1997, 1998 and 1999, principally related to the purchases of equipment
related to our research and development activities.
We paid off the remaining balances of our building mortgage during 1999, which
totaled $7,628,000. The mortgage debt payments were $793,000 and $1,478,000 in
1997 and 1998.
Historically, we did not maintain cash and cash equivalents balances. We
received cash from ICN on an as needed basis. During 2000 and 1999, excess cash
provided by operating activities was transferred to ICN.
Management believes that our cash generated from the royalties and the proceeds
from this offering will be sufficient to fund our research and development
activities, potential acquisitions and capital expenditures for the near and
medium term.
We anticipate using a certain amount of the net proceeds from this offering, to
repay in full the outstanding amount of the $ note we issued to ICN as a
dividend.
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27
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
We expect to spend up to approximately $120,000,000 over the next two years on
research and development activities, which represents a substantial increase. We
plan to continue to expand our research team to over 100 scientists within 24
months of this offering.
We will expand our research facilities and will spend approximately $35,000,000
in capital expenditures over the next three years.
We have not allocated any specific portion of the proceeds for the foregoing
purposes, other than for the repayment of the note issued by us to ICN. While we
may use an unspecified portion of the net proceeds to acquire or invest in
products, technologies or companies that complement our business, we have no
current plans, agreements or commitments with respect to these matters.
The timing and amount of the actual expenditures will be based on many factors.
Until we use the net proceeds of this offering, which will also be used for
general corporate purposes and working capital requirements, we currently intend
to invest the funds in short-term, investment grade, interest-bearing securities
in a manner consistent with the Investment Company Act of 1940. Our ability to
raise additional capital is limited by various agreements with ICN. See
"Relationship with ICN."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to foreign currency fluctuations as certain sales made by
Schering-Plough are denominated in foreign currencies which impact the dollar
amounts of royalties we receive.
THE YEAR 2000 ISSUE
As with most industries, biotechnology and pharmaceutical companies use
information systems that had the potential to misidentify dates beginning
January 1, 2000. This could have resulted in systems or equipment failures or
miscalculations. We engaged in a comprehensive project to upgrade computer
software and equipment and systems to be Year 2000 compliant. This project was
successfully completed with no major difficulties encountered.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and becomes
effective for us in the first quarter of 2001. We do not currently engage in any
program of hedging or hold derivative instruments and consequently we do not
expect the adoption of SFAS No. 133 to have a material effect on our financial
position, cash flows, or results of operations.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. We are required to be in conformity
with the provisions of Staff Accounting Bulletin No. 101 no later than second
quarter 2000 and do not expect a material change in our financial condition or
results of operations as a result of SAB 101.
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Business
OVERVIEW
We are a biotechnology company that seeks to discover, develop and commercialize
innovative products for the treatment of significant unmet medical needs,
principally in the antiviral and anticancer areas. Our product ribavirin is an
antiviral drug that Schering-Plough markets under license from us in combination
with its interferon alfa-2b under the trade name Rebetron as a therapy for the
treatment of hepatitis C. Our royalties from sales of ribavirin by
Schering-Plough were $110 million in 1999.
Ribavirin came from our extensive library of chemical compounds, of which at
least 3,500 are nucleoside analog compounds. Nucleoside analogs are
small-molecule-type chemicals that resemble the natural building blocks of human
and viral DNA and RNA. We believe that our library contains one of the largest
collections of nucleoside analogs in the world. We intend to combine our
scientific expertise with advanced drug screening techniques in an effort to
discover and develop new product candidates from our nucleoside analog library.
We are expanding our research facilities and assembling an experienced research
and development team under the leadership of Johnson Y.N. Lau, Ph.D., M.D. Dr.
Lau joined us in March 2000. Dr. Lau is an expert in viruses and liver diseases.
He was formerly senior director in antiviral research at the Schering-Plough
Research Institute. At that institute, he was involved in the development and
approval of the Rebetron combination therapy for hepatitis C. Under Dr. Lau's
leadership, we have already hired five scientists with over 70 years in combined
experience to lead our molecular biology, enzymology, pharmacology/toxicology
and regulatory affairs departments. We plan to expand our research team from 18
scientists on March 1, 2000 to over 100 scientists within 24 months of this
offering. In addition, we plan to spend approximately $20 million in 2000 on
upgrading and modernizing our research laboratories and equipment. This will
include the expansion of our physical research and development facilities and
the purchase of equipment for sophisticated molecular, biological and animal
experiments. Furthermore, we intend to accelerate our drug discovery and
development process by utilizing advanced screening techniques and equipment, or
biological assays, and sophisticated computer assisted drug design. We believe
these steps are key components of our strategy.
We previously were a division of ICN. On , 2000, ICN contributed to
us our assets and operations. However, ICN's contribution to us of its rights
and obligations under the license agreement with Schering-Plough was made
subject to the prior approval of the holders of ICN's outstanding debt
securities. After this offering, we will continue to be controlled by ICN, which
will own at least 80% of the combined voting power and at least 80% of the value
of our outstanding shares of common stock. As our controlling stockholder, ICN
will be able to approve or reject major corporate transactions without the
support of any other stockholder, including a merger, consolidation or sale of
substantially all our assets. See "Relationship with ICN" for a description of
agreements between us and ICN.
ADVANTAGES OF NUCLEOSIDE ANALOGS
We believe nucleoside analogs present significant opportunities for drug
development. Nucleoside analogs are chemical compounds created by modifying
nucleosides, which are the natural building blocks of human and viral DNA and
RNA. Much antiviral and anticancer research has focused on nucleoside analogs
because nucleosides are used by viruses and cells to multiply. By mimicking the
role
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of nucleosides in the cell division process, nucleoside analogs have been used
to treat viruses and cancers by modifying the natural structure of DNA and RNA
in a way that disrupts the viral and cellular replication machinery. Some
nucleoside analogs have also been found to stimulate an antiviral immune
response.
Drug discovery efforts of many pharmaceutical and biotechnology companies are
commonly focussed on the random screening of large numbers of diverse chemical
compounds. We believe researchers screening nucleoside analogs may be more
likely to discover compounds for antiviral and anticancer drug development
because nucleoside analogs resemble the building blocks of human and viral DNA
and RNA. This approach has attracted significant attention by a number of
academic and pharmaceutical investigators. Antiviral and anticancer nucleoside
analogs approved by the FDA include:
+ ICN's antiviral Virazole and Schering-Plough's antiviral Rebetol;
+ Glaxo Wellcome's antivirals Retrovir, Epivir, and Zovirax;
+ Bristol-Myers Squibb's antivirals Videx and Zerit;
+ SmithKline Beecham's antiviral Famvir;
+ F. Hoffmann-La Roche's antiviral Hivid and anticancer Xeloda;
+ Eli Lilly's anticancer Gemzar; and
+ Pharmacia's anticancer Cytarabine.
It is estimated that 1999 U.S. revenues for the top five selling nucleoside
analogs were over $1 billion. We believe that nucleoside analogs may capture
larger portions of the antiviral and anticancer markets in the future.
MARKET OPPORTUNITY
We intend to focus our product discovery efforts on treatments for hepatitis C,
hepatitis B, HIV, cancer and other life threatening diseases. We believe that
the hepatitis C, hepatitis B, HIV and cancer markets are attractive for us
because these diseases are highly prevalent and there are few treatment
alternatives. In addition, drugs that treat these diseases may qualify for
accelerated FDA review procedures and have a potential for premium pricing in
the marketplace and favorable pricing reimbursement policies from third party
payors.
HEPATITIS C
Hepatitis C is a highly infectious and potentially fatal virus that can be
contracted through blood and bodily fluid contact. It is one of the most
prevalent chronic infectious diseases in the United States. The disease attacks
the liver and can cause liver scarring, liver failure and liver cancer. Most
people infected with hepatitis C have no symptoms and are unaware that they
carry this potentially deadly virus. Because they are symptomless carriers, they
can unknowingly infect others. The hepatitis C virus also has the ability to
adapt rapidly to antiviral treatment and host immune response. For this reason,
mutants which are resistant to treatment can arise. In most cases, the body is
not able to fight off the hepatitis C infection and the infected individual
becomes a chronic hepatitis C carrier. According to the World Health
Organization, as many as 170 million people worldwide are infected by the
hepatitis C virus. In addition, it is estimated that approximately 10 million
people are infected with hepatitis C in the United States, Europe and Japan, the
world's leading pharmaceutical markets. According to the Centers for Disease
Control, approximately 36,000 people become infected and approximately 10,000
people die from complications of hepatitis C each year in the United States. The
hepatitis C virus was
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not specifically identified until 1989. Approximately 20% of infected persons
develop cirrhosis of the liver within 10 to 20 years after infection. For
others, the rate of disease progression is much slower and may extend over 20 to
40 years or more. Aside from the fact that this is a blood borne disease, the
proliferation of hepatitis C within a population is not fully understood.
Without improved prevention and treatment, the American Liver Foundation and the
Centers for Disease Control and Prevention estimate the number of deaths from
hepatitis C in the United States will more than triple to 38,000 annually by
2010. Currently, there is no approved vaccine to prevent hepatitis C.
We believe that the hepatitis C market is important not only because of the
potential size of the market, but because of the growing public awareness
campaigns that are focusing the public's attention on the scale and severity of
the disease. With increasing awareness of hepatitis C virus infection through
education and public awareness campaigns, we believe the market potential of
hepatitis C will expand further and the demand for effective treatments will
increase.
We believe that Rebetron combination therapy is currently the most effective
treatment for patients with chronic hepatitis C. However, only approximately 41%
of patients with chronic hepatitis C respond to the Rebetron combination
therapy. In addition, interferon alfa-2b can cause flu-like symptoms and malaise
while ribavirin causes patients to experience anemia. Therefore, we believe that
newer and more effective treatments for hepatitis C will have significant market
potential.
HEPATITIS B
Hepatitis B, which causes inflammation of the liver and is potentially fatal, is
one of the most common chronic infectious diseases in the world. Hepatitis B is
transmitted through contaminated needles or blood and also through sexual
contact. According to the American Liver Foundation, 90% of adults are able to
defeat the hepatitis B virus on their own. However, 5% to 10% of those infected
with hepatitis B will become chronic carriers of the virus. Children are
particularly susceptible to the virus and as many as 50% of those children
exposed to the virus become chronic carriers. The World Health Organization
estimates that approximately 2 billion people have evidence of past or current
hepatitis B virus infection and 350 million individuals worldwide, or 5% of the
world's population, are long term carriers of hepatitis B in their blood. There
are over 1 million carriers of hepatitis B in the United States and an estimated
200,000 people in the United States contract acute hepatitis B each year. Most
people who contract acute hepatitis B remain in good health, have no symptoms,
and completely recover. However, chronic carriers of the hepatitis B virus have
a 200-fold increased chance of developing liver cancer and a significant number
develop cirrhosis of the liver.
A safe and effective vaccine against hepatitis B is available. However, the
vaccine only benefits those who have not yet been infected by the hepatitis B
virus. There are two FDA approved therapies for patients infected with hepatitis
B: interferon alpha and lamivudine. Interferon alpha has the ability to reduce
the amount of hepatitis B virus in the blood for long periods of time in
approximately 40% of patients, but it has side effects such as flu-like symptoms
and malaise. Lamivudine, which is a nucleoside analog, decreases the amount of
hepatitis B virus in the blood in a majority of patients. However, if lamivudine
therapy is discontinued, hepatitis B virus levels in the blood can rebound and
liver disease can result. In addition, a significant number of patients taking
lamivudine rapidly develop drug resistance. Therefore, we believe that more
effective drugs, including drugs that are effective against lamivudine resistant
hepatitis B, will have significant market potential.
HIV
AIDS, acquired immune deficiency syndrome, is caused by the human
immunodeficiency virus, or HIV. HIV attacks cells of the immune system, and
thereby destroys the body's ability to fight infections and some cancers.
Individuals diagnosed with AIDS are susceptible to life-threatening diseases
called
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opportunistic infections. These infections are caused by microbes that usually
do not cause illness in healthy people. According to the World Health
Organization, by the end of 1999, 33.4 million people worldwide were living with
HIV or AIDS. More than 600,000 cases of AIDS have been reported in the United
States since 1981, and as many as 900,000 Americans may be infected with HIV.
HIV is spread most commonly by sexual contact with an infected partner. HIV is
also spread through contact with infected blood, including by the sharing of
needles or syringes contaminated with minute quantities of blood of someone
infected with the virus.
The life cycle of HIV is still not fully understood. It has been deciphered to a
level where a number of targets for potential antiviral activity have been
identified. An enzyme crucial to the replication of HIV, reverse transcriptase,
has been the focus of intense study by many groups. This has resulted in the
development of several reverse transcriptase inhibitors as antiviral therapies.
AZT is the best known and most widely used reverse transcriptase inhibitor. More
recently, inhibitors of a second enzyme required for viral replication, HIV
protease, have been approved as treatments for HIV infection. The market for HIV
protease inhibitors is highly competitive. Five different protease inhibitors
compete for a share of a $1 billion U.S. market. Worldwide sales of HIV protease
inhibitors were an estimated $1.8 billion in 1998.
Initially, HIV was treated with monotherapy. This means that only one drug was
used at a time. However, in an effort to combat resistance to drugs, the
combination of two or more drugs is now often used. Often called a "cocktail,"
combination therapy is useful for any number of reasons. These include because
combination therapy reduces the likelihood of developing resistant strains, the
effect of the drugs is cumulative, and combination therapy may result in
clinical improvement and a reduction of virus in the blood. Current combination
therapy is usually composed of two nucleoside analogs and either a protease
inhibitor or a non-nucleoside reverse transcriptase inhibitor. We believe that
more effective therapies for HIV infection will require the identification of
additional molecular targets in the HIV replication process. We believe that
novel potent antiviral drugs to treat HIV, and in particular treatments that are
less susceptible to drug resistance, will have significant market potential if
approved by regulatory authorities.
CANCER
Cancer is characterized by uncontrolled division of cells and can occur in
almost any tissue or organ in the body. Cancerous cells can grow into a mass
known as a tumor. If not destroyed, cancer cells can spread throughout the body.
Cancer is the second leading cause of death in the United States. The National
Cancer Advisory Board reports that more than 8 million people in the United
States have cancer.
The three most prevalent methods of treating patients with cancer are surgery,
radiation therapy and chemotherapy. A cancer patient often receives a
combination of two or all three of these treatment methods. Surgery and
radiation therapy are particularly effective in patients in whom the disease has
not yet spread to other tissues or organs. Chemotherapy is the principal
treatment for tumors that have spread. These tumors are referred to as having
metastasized. The purpose of chemotherapy is to interfere with the molecular and
cellular processes that control the development, growth and survival of
malignant tumor cells. Chemotherapy involves the administration of drugs
designed to kill cancer cells or the administration of hormone analogs to either
reduce the production of, or block the action of, some hormones, including
estrogens and androgens. These hormones affect the growth of tumors. In many
cases, chemotherapy consists of the administration of several different drugs in
combination. Use of these agents often has adverse effects since
chemotherapeutic agents generally attack rapidly dividing cells
indiscriminately. As a result, normal as well as cancerous cells are damaged.
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Although several types of tumors can now be treated effectively with drugs,
survival rates for the most common tumors have only begun to improve slightly.
In recent years, however, there have been significant advances in molecular
biology, immunology and other related fields of biotechnology. These advances
have led to a better understanding of the processes that regulate the
proliferation and metastasis of malignant cells and by which malfunctioning
genes can result in the formation of tumors.
The anti-cancer pharmaceutical market is expanding due to aging demographics,
early detection and new treatments. According to the National Cancer Institute,
total U.S. anti-cancer pharmaceutical sales were estimated at $6 billion in
1999, representing 50% of the global market.
OUR STRATEGY
Our objective is to be a leader in the discovery, development and
commercialization of nucleoside analogs and other novel drugs that are useful in
the treatment of viral diseases, cancer and other unmet medical needs. We plan
to pursue this objective by implementing the following principal elements of our
strategy:
CONTINUE TO DISCOVER, DEVELOP AND COMMERCIALIZE NOVEL DRUG CANDIDATES FROM OUR
NUCLEOSIDE ANALOG LIBRARY. We plan to screen our library of at least 3,500
nucleoside analogs for compounds that may have therapeutic uses for the
treatment of viral infections and cancer and other unmet medical needs. We
intend to pursue development and commercialization of compounds that show
therapeutic efficacy. We intend to employ the latest cell based screening assays
to discover the potential of these compounds as antiviral and anticancer drugs
against specific disease targets. Our nucleoside analog library has never been
fully screened for compounds that have activity against hepatitis C, hepatitis
B, HIV and cancer. In addition, we intend to build a computer-assisted drug
design team to facilitate the design of more effective and selective compounds.
FOCUS ON DISEASES THAT REPRESENT LARGE UNMET MEDICAL NEEDS THAT WE BELIEVE
PROVIDE SUBSTANTIAL COMMERCIAL OPPORTUNITIES. We intend to continue to focus our
drug discovery and development efforts on serious diseases that represent large
potential markets for our drug products. Our current program areas include
hepatitis C, hepatitis B, HIV and cancer, each of which affects a large number
of patients. Drugs that treat some of these life-threatening diseases may be
eligible for accelerated FDA review procedures. These drugs may also have the
potential for premium pricing in the marketplace and favorable reimbursement
policies from third party payors.
MAXIMIZE THE VALUE OF OUR NEW PRODUCT CANDIDATES BY LEVERAGING OUR INTERNAL
DEVELOPMENT CAPABILITIES. We intend to retain control of our product candidates
through preclinical development and as far into the clinical trial process as
our resources permit in order to obtain the maximum value for our research
efforts. We believe that our royalty revenues from sales of ribavirin by
Schering-Plough may give us the financial flexibility to develop our product
candidates through the clinical trial process without being compelled to
prematurely out-license our product candidates to third parties. We may choose
to market and sell our products on our own and develop an internal sales force
in connection with these efforts. Alternatively, we may choose to collaborate
with other pharmaceutical companies to market and sell our products. If we
choose to collaborate with third parties, we believe we may be in a stronger
position to negotiate more favorable terms if we can demonstrate our new product
candidate's commercial potential in clinical testing.
ACCELERATE DEVELOPMENT OF IDENTIFIED DRUG CANDIDATES FROM OUR CURRENT PRODUCT
PIPELINE. We intend to expedite the development of the drug candidates in our
current pipeline by committing additional resources to the preclinical and
clinical evaluation of these compounds. We are currently evaluating Levovirin
and Viramidine for the treatment of hepatitis C. Our focus is on comparing the
nature and incidence of side effects caused by these compounds with those
experienced by some patients who take
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ribavirin. We are also working to develop Tiazole for the treatment of the late
stages of chronic myelogenous leukemia in patients who are not responding to
traditional chemotherapy treatments as well as for the treatment of ovarian
cancer and multiple myeloma. Finally, we are working to develop Adenazole for
the treatment of colon cancer.
EXPAND OUR EXISTING PRODUCT CANDIDATE PIPELINE AND TECHNOLOGIES THROUGH
ACQUISITIONS AND IN-LICENSING OPPORTUNITIES. In addition to our in-house
development efforts, we plan to selectively license or acquire product
candidates, technologies and businesses from third parties that complement our
business. We believe that our drug development expertise may allow us to
recognize licensing opportunities and to capitalize on research initially
conducted and funded by others. In addition, our existing technologies and
product pipeline may be expanded through acquisitions that present additional
commercial opportunities.
RIBAVIRIN FOR HEPATITIS C
INTRODUCTION
Ribavirin is a nucleoside analog that we discovered from our library of
nucleoside analog compounds. Ribavirin was one of the first antiviral drugs ever
discovered and was first approved by the FDA in 1985 for the treatment of a
respiratory virus infection in children. In 1995, we granted an exclusive
license to Schering-Plough for all oral forms of ribavirin for the treatment of
chronic hepatitis C. Prior to that time, clinical studies had indicated that
ribavirin, in combination with Schering-Plough's interferon alfa-2b, was
potentially an effective treatment for hepatitis C. When approved by the FDA in
1998, the Rebetron combination therapy represented a significant advance in the
treatment of patients with chronic hepatitis C. We believe the Rebetron
combination therapy is currently the most effective treatment for patients with
chronic hepatitis C. The mechanism of action of ribavirin in conjunction with
interferon alpha for the treatment of hepatitis C is not clear. Recently
published data suggest that ribavirin not only has an antiviral effect, but it
also may stimulate some aspects of the body's immune responses to viruses. Under
the license agreement, Schering-Plough is responsible for all clinical
development and regulatory activities relating to oral forms of ribavirin.
Schering-Plough markets ribavirin under the trade name Rebetol.
On , 2000, ICN contributed to us some of its rights with respect to
ribavirin, including all of its rights under the license agreement with
Schering-Plough. ICN has retained perpetual, exclusive and royalty-free rights
to all indications for ribavirin in a given jurisdiction to the extent currently
approved in that jurisdiction, but not in other jurisdictions for which that
indication is not currently approved. However, ICN will not retain any rights to
any indications or forms of ribavirin licensed to Schering-Plough. ICN has also
retained perpetual and royalty-free rights with respect to the use of ribavirin
in aerosol form for the treatment of bone marrow transplant patients with
respiratory infections caused by respiratory syncytial virus, or RSV. Any future
indications for ribavirin that are developed by us will be our property and are
not subject to ICN's retained rights. However, Schering-Plough will have an
option to exclusively license from us oral indications for ribavirin developed
by us in the future. See "Relationship with ICN."
CLINICAL TRIALS AND APPROVALS
In June 1998, Schering-Plough received FDA approval to market the interferon
alfa-2b and ribavirin combination therapy under the brand name Rebetron for the
treatment of chronic hepatitis C in patients with compensated liver disease who
had relapsed following interferon alpha therapy. In December 1998,
Schering-Plough received FDA approval to market the combination therapy for the
treatment of chronic hepatitis C in patients with compensated liver disease
previously untreated with interferon alpha therapy, or treatment-naive patients.
Clinical trials evaluating the efficacy of the
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Rebetron combination therapy indicated that the combination therapy, as opposed
to treatment with interferon alfa-2b alone, produced a greater sustained
response to the hepatitis C virus. In two clinical trials involving hepatitis C
patients who had relapsed following interferon alfa-2b therapy, 45.7% of the
patients had no detectable hepatitis C virus in their blood after receiving
interferon alfa-2b plus ribavirin, as compared to 4.7% who received interferon
alfa-2b alone. In two clinical trials involving treatment-naive hepatitis C
patients, 41% of the patients who received combination therapy responded
compared to 16% of the patients who received interferon alfa-2b alone. These
results represented a significant advancement in the treatment of patients with
chronic hepatitis C.
In May 1999, the European Union granted marketing authorization to
Schering-Plough to market ribavirin capsules for use in combination with
interferon alfa-2b injection for the treatment of both relapsed and treatment
naive chronic hepatitis C patients. As opposed to the United States, where the
combination therapy is sold as a package, ribavirin and interferon alfa-2b are
sold separately in European Union countries. The European Union approval was
immediately valid in all 15 European Union-Member States. The 15 members of the
European Union are Germany, Italy, the United Kingdom, France, Spain, Portugal,
Austria, Sweden, Finland, Greece, the Netherlands, Belgium, Luxembourg, Denmark
and Ireland. After receiving this approval, Schering-Plough commenced marketing
ribavirin in Germany in May 1999, the United Kingdom in July 1999, Italy in
October 1999, France in May, 2000 and Spain in May 2000 after receiving pricing
approvals in these countries. We anticipate that Schering-Plough will introduce
ribavirin in other European Union markets upon receiving pricing approvals.
Schering-Plough also markets the combination therapy in Canada and Argentina.
NEW DEVELOPMENTS
Both Schering-Plough and Hoffmann-La Roche have developed a modified form of
interferon, called pegylated interferon. Pegylated interferon differs from
interferon in that a substance called polyethylene glycol is attached to the
interferon protein, which is believed to result in longer-acting, sustained
activity of interferon. By prolonging the activity of interferon, patients could
potentially take pegylated interferon only once a week, as opposed to the three
times per week regimen currently followed with the combination therapy.
Schering-Plough publicly announced on May 1, 2000 that results from a Phase II
clinical trial evaluating the efficacy of pegylated interferon in combination
with ribavirin, or Pegatron, showed that ribavirin enhanced the antiviral effect
of pegylated interferon. 72 hepatitis C patients were enrolled in the Phase II
clinical trial and were given either pegylated interferon alone or Pegatron.
Three groups of patients taking the Pegatron combination therapy were given
different dosage levels of the pegylated interferon component of Pegatron. The
results indicated that 17%, 53% and 60% of patients from the three groups had a
sustained response to the hepatitis C virus 24 weeks after treatment, with those
receiving higher doses of pegylated interferon having the greater sustained
response. In contrast, three groups of patients taking pegylated interferon
alone at the dosage levels administered to the three groups of patients
receiving Pegatron showed a 0%, 44% and 42% sustained response to the hepatitis
C virus 24 weeks after treatment. Phase III trials are now underway to further
evaluate Pegatron. If the clinical trials ultimately demonstrate safety and
better efficacy than Rebetron and Pegatron is approved by the FDA and other
regulatory authorities, Pegatron could become the preferred treatment for
hepatitis C.
Phase III clinical trial results publicly announced by Schering-Plough on May 1,
2000 indicated that pegylated interferon taken once per week alone was twice as
effective as taking interferon alfa-2b three
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times per week alone. According to these results, 24 weeks after a 48 week
period of taking either pegylated interferon once per week or interferon alfa-2b
three times per week:
+ 11% of patients with the most severe type of hepatitis C had no detectable
hepatitis C virus in their blood after taking pegylated interferon, as
opposed 6% of patients taking interferon alfa-2b; and
+ 49% of patients with less severe types of hepatitis C had no detectable
hepatitis C virus in their blood after taking pegylated interferon, as
opposed to 28% of patients taking interferon alfa-2b.
In addition, the Phase III study showed that side effects experienced by
patients taking pegylated interferon were similar to those patients taking
interferon alfa-2b.
On May 30, 2000, Schering-Plough announced that it had received approval from
the European Union to market pegylated interferon as a monotherapy for the
treatment of hepatitis C patients who cannot take ribavirin because of
intolerance or counterindications. This European Union approval specified that
the optimal treatment for chronic hepatitis C is still considered to be the
interferon alfa-2b and ribavirin combination therapy.
Hoffmann-La Roche has alleged that Schering-Plough's pegylated interferon
violates Hoffmann-LaRoche's patents in pegylated interferon. See "Risk
Factors -- Our success will depend partly on our ability to operate without
infringing upon or misappropriating the proprietary rights of others" and
"Business -- Patents and Proprietary Technology."
The conduct of the clinical trials and regulatory approval process related to
the pegylated interferon and ribavirin combination therapy is not within our
control. We cannot assure you that Schering-Plough will successfully complete
its clinical trials and obtain regulatory approval for this product nor can we
make any prediction as to the timing of these events.
PATENT AND REGULATORY STRATEGY
Schering-Plough currently has regulatory protection under the Waxman-Hatch Act
in the United States for the treatment of hepatitis C using the combination
therapy. This protection means that the FDA cannot approve a generic form of the
combination therapy until December 2001 for treatment-naive patients.
Schering-Plough is currently conducting pediatric studies for the use of the
combination therapy that, if successful, would extend this regulatory protection
until June 2002. We have two issued U.S. patents that relate to methods of using
ribavirin in dosages that can enhance a patient's immune system in a manner that
is particularly useful for treating hepatitis C in combination with interferon
alpha. These patents both expire in January 2016. A third U.S. patent
application related to that subject matter has also been allowed. We have
corresponding patent applications in many foreign countries, but it is unknown
when or if any of those patent applications will ever issue. We have no, or
limited, patent rights relating to the antiviral use of ribavirin in selected
foreign countries where ribavirin is currently, or in the future may be,
approved for commercial sale, including countries in the European Union.
However, the use of oral forms of ribavirin for combination therapy was granted
a favorable review classification by the European Union. This classification
will make it more difficult for competing drugs not previously approved to gain
entry to the European markets. We have an issued patent in Japan relating to the
use of ribavirin for treatment of numerous viruses, including hepatitis C. That
patent expires in 2005.
SCHERING-PLOUGH LICENSE AGREEMENT
The license agreement with Schering-Plough was contributed to us by ICN on
, 2000, subject to the prior approval of the holders of ICN's
outstanding debt securities. A copy of this
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agreement is filed as an exhibit to this prospectus. Some portions of the
agreement have been removed because of the terms of our confidentiality
agreement with Schering-Plough. Under the license agreement, we are entitled to
receive royalty revenues associated with Schering-Plough's sale of ribavirin
throughout the world. The license agreement provides for two royalty rates: one
rate that is associated with sales in the European Union and another that is
associated with sales in the United States and the rest of the world. Pursuant
to the license agreement, each calendar year the royalty rates reset to a
baseline rate, which is the same each year. These rates increase during the
course of the year upon the achievement by Schering-Plough of different revenue
milestones.
Schering-Plough's exclusive license expires on the earlier of the tenth
anniversary of the first commercial sale of ribavirin by Schering-Plough in the
last country among the United States, Western Europe or Japan in which ribavirin
is introduced by Schering-Plough into commerce and July 2010. After the
expiration of exclusivity, Schering-Plough will have a perpetual non-exclusive
license to oral forms of ribavirin. Pursuant to the license agreement,
Schering-Plough can terminate the license agreement at any time upon giving
prior written notice to us. If Schering-Plough were to terminate the license
agreement pursuant to this provision, our license to Schering-Plough would
become a perpetual non-exclusive license. We would be free to license oral forms
of ribavirin to third parties. However, if Schering-Plough terminates pursuant
to this provision, Schering-Plough would not be relieved from its obligation to
pay us royalties on their sales of ribavirin.
If we develop an additional indication for oral forms of ribavirin, the license
agreement gives Schering-Plough an option to expand its exclusive license to
include the new indication. In addition, Schering-Plough can itself develop
additional indications for oral forms of ribavirin.
RESEARCH AND DEVELOPMENT PROGRAM
NUCLEOSIDE ANALOG LIBRARY
Our efforts are focused on developing product candidates from our nucleoside
analog library, which we believe contains one of the largest collections of
nucleoside analogs in the world. The majority of the compounds in our library
were created by the late Roland K. Robins, Ph.D., a prominent nucleoside chemist
who worked in ICN's Nucleic Acid Research Institute, or NARI, division. Dr.
Robins was the Director of the Cancer Research Center at Brigham Young
University and Professor of Chemistry and Biochemistry. During his affiliation
with ICN, Dr. Robins was responsible for the discovery and development of
ribavirin, other compounds. Dr. Robins and NARI created more than half of the
compounds from 1968 through 1976, and later created additional nucleoside
analogs from 1985 through 1988 with funding from the Eastman Kodak Company in
Kodak's joint venture with NARI. ICN received all rights to the nucleoside
analogs created during the NARI-Kodak joint venture when that arrangement was
terminated in 1988. We believe that we may be able to synthesize additional
nucleoside analogs using modern technologies and our scientific expertise.
Between 1970 and 1980, a number of compounds in the library were screened for
activity against the virus that causes the common cold, herpes viruses, and
adenoviruses. Ribavirin was selected from a large panel of nucleoside analogs
for development because it demonstrated broad-spectrum antiviral activity and
because the financial resources of ICN at that time only permitted the
development of one compound.
We believe that our nucleoside analog library may provide us with a large supply
of potential new drug candidates. Our nucleoside analog library has never been
fully screened for our target indications, hepatitis C, hepatitis B, HIV and
cancer. With our investments in our research and development facilities and
equipment, together with our royalty revenues from sales of ribavirin by
Schering-Plough, we believe we now have the financial resources and
technological equipment necessary to perform this
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screening. We intend to pursue U.S. and foreign patent protection with respect
to both compounds and uses of nucleoside analogs from our library that show
promise for development.
Our chemical compound library also consists of several thousand non-nucleoside
analog compounds. However, we currently intend to focus on our nucleoside
analogs.
OUR DRUG DISCOVERY PROGRAM
SCREENING
The initial step in the drug development process entails identification of
compounds for potential future development. Our initial screening is
accomplished through the use of cell-based assays and biochemical assays. We use
cell-based assays to analyze a drug candidate's activity in an environment
similar to the cells in which the drug would act. In addition, cell-based assays
help us to assess the toxicity of drug candidates and their ability to penetrate
cellular membranes. Prior to conducting screening with cell-based assays, we may
need to resynthesize some of our nucleoside analogs to the extent that our
library does not contain the necessary physical samples to perform the
cell-based assay. After a potentially promising drug candidate is identified
through the use of cell based assays, we will screen the compound using
biochemical assays.
Using biochemical assays, components and mechanism of action of the drug
candidates are identified. Use of biochemical assays can help accelerate the
optimization process by minimizing inaccurate results and false positive
readings.
After performing our initial cell-based assays and biochemical assays, we screen
compounds using secondary assays. Secondary assays are designed to eliminate
those compounds that lack potency or specificity, or have unwanted
characteristics. If a compound survives the secondary assay screening process,
it is then subjected to further testing and, ultimately, chemistry optimization.
We intend to develop the appropriate secondary assays for initial
counterscreening. We intend to engage contract research organizations to further
test the compounds that pass the initial screening for a broader secondary
screening. Generally, compounds with promising results in animal models and
desirable chemical characteristics become lead compounds.
LEAD OPTIMIZATION
After identifying a compound with activity, we will attempt to improve the
pharmaceutical properties of that compound before clinical development. This is
the process of lead optimization.
Using traditional structure-activity relationship studies for lead optimization,
we seek to synthesize new analogs of a lead compound with improved properties
using chemistry techniques. In addition, we utilize computational chemistry
capabilities, including molecular modeling, to support lead optimization. To
further expand our drug discovery capability, we also intend to generate a small
non-nucleoside molecule library biased towards polymerase inhibitors within the
next two years to prepare for the next phase of antiviral and anticancer drug
discovery. We believe our significant knowledge of the chemical aspects of
nucleoside analogs will help us to modify lead compounds in an attempt to create
more potent and selective compounds.
We also will use structural biology techniques to aid in drug design and
optimization by providing molecular "snapshots" that allow scientists to
visualize the interactions between a lead compound and its protein target.
Nuclear magnetic resonance, spectroscopy and X-ray crystallography comprise the
essential techniques of structural biology. We are in the process of upgrading
our laboratory facilities to allow for the use of these tools for lead
optimization. All the instruments necessary to conduct these activities have
been ordered and we expect these instruments to be installed before the end of
2000. Utilizing structural information, we may be able to design and synthesize
new analogs of lead
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compounds that have a better fit with the target protein, and therefore have
greater potency. By combining the latest biology and computer technologies, we
feel that we will be better positioned to maximize the value of our nucleoside
analog library.
PHARMACOLOGY AND PRE-CLINICAL DEVELOPMENT
Once we have identified a lead compound, animal pharmacokinetics and toxicology
studies are performed on the compound. Since March 2000, we have established
drug safety and metabolism, pharmacokinetics, and toxicology teams to address
these needs. We have already hired four Ph.D. scientists and are in the process
of hiring more support staff to lead these activities. As programs move forward
for selected compounds, we expect that our pharmacology and pre-clinical
development group will support our chemists and biologists by performing the
necessary studies essential for investigational new drug application, or IND,
submissions.
CLINICAL DEVELOPMENT AND REGULATORY AFFAIRS
We also plan to make use of early phase proof of principle studies to evaluate
promising compounds early in the development process. These studies are designed
to preliminarily determine the safety and efficacy of product candidates prior
to incurring the expense of clinical trials. We have assembled a drug
development team to design and implement clinical trials and to analyze the data
derived from these studies.
PRODUCTS IN DEVELOPMENT
Our current product candidates, all of which were derived from our nucleoside
analog library, are as follows:
LEVOVIRIN
Levovirin is a nucleoside analog that we intend to develop in oral form for the
treatment of hepatitis C. We intend to test Levovirin's effect on the hepatitis
C virus both on its own and in combination with interferon alpha. Levovirin is
currently in preclinical development.
Preclinical studies suggest that Levovirin may have an ability to stimulate an
immune response to viral infections but without a direct antiviral effect and
without the anemia associated with ribavirin. In preliminary toxicology studies
on animals, Levovirin appeared to have less side effects than ribavirin at the
same dosage levels. We are presently conducting chemical development and
formulation studies, as well as the ancillary pharmacology and toxicology
studies, on Levovirin. We plan to submit an investigational new drug, or IND,
application by the end of this year. If that filing is accepted by the FDA, we
intend to initiate Phase I studies of Levovirin.
Our patent efforts are directed at patent applications relating to the compound
itself, regardless of use, as well as related nucleosides. These efforts are
also focused on various activities related to the enhancement of a patient's
immune response, as well as related antiviral and other indications, including
infections, cancer and autoimmune disease. Patent applications for Levovirin
have been submitted in the United States and in many foreign countries, relating
both to the compound and for numerous indications.
VIRAMIDINE
Viramidine is a nucleoside analog that we intend to develop in oral form for the
treatment of hepatitis C. We expect to test Viramidine's effect on the hepatitis
C virus both on its own and in combination with interferon alpha. Viramidine is
currently in preclinical development.
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Preclinical studies suggest that Viramidine may be similar to ribavirin in that
it appears to stimulate an immune response to viral infections while also having
a direct antiviral effect. In addition, in preclinical studies on animals
conducted by a third party, Viramidine appeared to have less side effects than
ribavirin. We are currently conducting a number of preclinical studies to
determine the potential of this compound. These studies include experiments on
Viramidine's biological activities, virologic studies, drug metabolism studies,
pharmacology studies and toxicology studies. If these studies are successful,
and if Viramidine proves to have less side effects than ribavirin, patients may
be able to tolerate higher levels of this compound in their blood. This could
improve patients' response to the clearance of the hepatitis C virus from their
blood. The results of these preclinical studies should be available by the end
of this year. We expect to file an IND with the FDA in 2001. If that filing is
accepted by the FDA, we intend to initiate Phase I studies of Viramidine.
We have filed two patent applications for the use of Viramidine and its related
compounds. The structure of Viramidine was disclosed many years ago, and cannot
itself be patented. Patent efforts are therefore directed to claiming related
compounds, and novel indications including immunomodulatory activity and
activity against specific viruses.
TIAZOLE (TIAZOFURIN)
Tiazole is a nucleoside analog being developed for the treatment of chronic
myelogenous leukemia with blast crisis, ovarian cancer and multiple myeloma. We
believe Tiazole may cause inhibition of the biosynthesis of guanosine
triphosphate, which is a building block essential for tumor cell growth in
various cancer cell lines. We believe that the resulting reduction in the
concentration of these building blocks may reduce the capacity of the cancer
cells to proliferate. We expect that Tiazole will be administered to patients
intravenously.
Preliminary studies sponsored by the U.S. National Cancer Institute from 1996
through 1998 indicated that Tiazole may be useful in the treatment of chronic
myelogenous leukemia with blast crisis, which represents the transformation of
chronic leukemia to acute leukemia. A total of 21 patients with this disease, 16
in Phase I studies and 5 from a Phase II study, received this therapy. Two
patients had a complete response and seven other patients a partial response. A
Phase III study is planned to gather the clinical information required to
support an orphan drug application for Tiazole for the treatment of chronic
myelogenous leukemia in blast crisis. We have initiated discussions with the FDA
regarding the required population/protocol for this study. Depending on the
outcome of these discussions, we estimate that the study will commence by the
end of this year and will be completed in the second half of 2002.
We are also conducting limited Phase II studies in Russia in patients with
advanced ovarian cancer and in patients with multiple myeloma resistant to
conventional therapy. The multiple myeloma limited Phase II study is still in
the planning stage and we intend to start this clinical trial by the end of
2000.
ICN secured a use patent for Tiazole several years ago, and that patent is
scheduled to expire in February 2005. ICN's current patent strategy is directed
towards the development of new dosage forms.
ICN is currently involved in a dispute with the Federal Public of Yugoslavia
regarding its ownership rights in Tiazole. In addition, the contribution of
Tiazole to us by ICN is subject to the prior approval of the Office of Foreign
Assets Control of the U.S. Department of the Treasury. See "Business -- Legal
Proceedings of ICN" and "Risk Factors -- Our rights related to Tiazole and
Adenazole may be adversely affected by ongoing litigation involving ICN and the
contribution of these rights may be subject to approval by the Office of Foreign
Assets Control."
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ADENAZOLE (8-CL CAMP, TOCLADESINE)
Adenazole is a nucleoside analog being developed for the treatment of colon
cancer. Adenazole may potentially control cell growth and cause cancer cells to
behave more like normal cells in various cancer cell lines. We expect that
Adenazole will be administered to patients intravenously. Adenazole has
completed two Phase I trials.
Adenazole has been evaluated for potential use in the treatment of colon cancer
in two Phase I studies. Of the 19 patients with colon cancer in the two studies,
one patient showed a 70% reduction of retroperitoneal mass, believed to be
related to cancer, while another patient showed stable disease for four months.
In December 1999 we submitted various data to U.S. and Russian regulatory
authorities to obtain permission to proceed with Phase I trials in the treatment
of colon cancer in both countries. In the United States, the FDA accepted an IND
and we expect to file a revised Phase I protocol by the end of 2000. Thereafter,
we expect to begin Phase I trials for the treatment of colon cancer.
ICN has rights to five patents on Adenazole, including anti-cancer uses of
Adenazole and related cAMP compounds. Also claimed are methods of manufacturing
Adenazole. The major U.S. patents are scheduled to expire in 2015. ICN has
rights to one pending patent application for new uses.
ICN is currently involved in a dispute with the Federal Republic of Yugoslavia
regarding its ownership rights in Adenazole. In addition, the contribution of
Adenazole to us by ICN is subject to the prior approval of the Office of Foreign
Assets Control of the U.S. Department of the Treasury. See "Business -- Legal
Proceedings" and "Risk Factors -- Our rights related to Tiazole and Adenazole
may be adversely affected by ongoing litigation involving ICN and the
contribution of these rights may be subject to approval by the Office of Foreign
Assets Control."
CONTRACT SERVICES RELATIONSHIP WITH ICN
Pursuant to a contract services agreement, a Russian subsidiary of ICN has
agreed to conduct early phase proof-of-principle studies on Tiazole for use in
the treatment of ovarian cancer. See "Relationship with ICN." From time to time,
if we determine that it is in our best interest to do so, we may enter into
similar arrangements with ICN and affiliates of ICN to conduct these types of
studies on other product candidates. We believe that ICN's ability to conduct
these studies in Eastern Europe may provide us with a substantial cost advantage
over many of our domestic competitors who do not have foreign affiliates. By
conducting these low-cost studies in Eastern Europe, we will be able to
determine preliminarily the safety and efficacy of product candidates prior to
incurring the expense of full clinical trials in the United States. Any future
contract services between us and ICN will require the approval of a majority of
our independent directors.
SALES AND MARKETING
We currently do not have a marketing or sales force or any distribution
capabilities. We may decide to build a sales and marketing force in the future,
although we may establish corporate collaborations with pharmaceutical and
biotechnology companies to fill these needs. As a part of the ordinary course of
our business, we may consider forming arrangements or collaborations with
strategic partners, including pharmaceutical companies, government
organizations, academic institutions and others, to help develop and market our
drug candidates. In addition, we may enter into marketing, sales and
distribution arrangements with ICN and its affiliates. Any determination by us
to enter into an arrangement with ICN or any of its affiliates will require the
approval of a majority of our independent directors.
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MANUFACTURING
We do not have manufacturing facilities. We currently expect to contract out our
manufacturing requirements to third parties who have plants that satisfy good
manufacturing practices, or GMP, requirements. We obtain compounds for our
clinical trials from third party contract manufacturers and other third parties.
PATENTS AND PROPRIETARY TECHNOLOGY
Our success will depend in part on our ability to obtain patents for our
technology to preserve our trade secrets and to operate without infringing upon
the proprietary rights of others. ICN has contributed to us all of its patents
and patent applications that relate to nucleoside analogs in our nucleoside
library, including those patents relating to ribavirin. Patent positions in the
biotechnology field are often uncertain and may involve complex legal,
scientific and factual questions. There has been increasing litigation in the
biotechnology industry with respect to the manufacture, use and sale of new
therapeutic and diagnostic products that are the subject of conflicting patent
rights. The validity and breadth of claims in biotechnology 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 United States. Hence, the degree of protection afforded
by foreign patents may be different than the protection offered by U.S. patents.
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. There also can be no
assurance that these 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 U.S. Patent and
Trademark Office has a substantial backlog of biotechnology patent applications
and the approval or rejection of patent applications may take several years.
In January 2000, Hoffmann-La Roche filed suits against Schering-Plough in the
United States District Court in New Jersey and in France. These lawsuits allege
that an advanced form of interferon alpha developed by Schering-Plough called
peginterferon alfa-2b infringes Hoffmann-La Roche's patents on pegylated
interferons. Peginterferon alfa-2b recently was approved in the European Union
as a monotherapy for the treatment of hepatitis C patients who cannot take
ribavirin because of intolerance or counterindications. An application has also
been submitted to the FDA for approval of peginterferon alfa-2b for sale in the
United States as a monotherapy. Peginterferon alfa-2b is also undergoing
clinical trials as combination therapy with ribavirin for the treatment of
hepatitis C. If Schering-Plough loses these lawsuits, it may not be able to
market a combination therapy of peginterferon alfa-2b and ribavirin if this
combination therapy is eventually approved by the FDA.
We have an active patent program. New discoveries are rapidly disclosed to
patent counsel. Patent applications are often filed within weeks of discoveries.
Both compounds and uses are claimed as appropriate. For many discoveries several
different patent applications are filed covering related topics and perspectives
to make it more difficult for others to make similar or related patent claims.
See "Business -- Marketed Product" and "Business -- Products in Development" for
more detailed descriptions of our patent position with respect to specific
compounds.
Our commercial success also will depend in part on not infringing patents or
proprietary rights of others. We cannot be sure that we will be able to obtain a
license to any third-party technology we may require to conduct our business or
that if obtainable, this technology can be licensed at reasonable cost. In some
cases, litigation or other proceedings may be necessary to defend against or
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assert claims of infringement, to enforce patents issued to us, to protect our
trade secrets, know-how or other intellectual property rights, or to determine
the scope and validity of the proprietary rights of third parties. Any potential
litigation could result in substantial costs to us and diversion of our
resources. We cannot be sure that any of our issued or licensed patents would
ultimately be held valid or that efforts to defend any of our patents, trade
secrets, know-how or other intellectual property rights would be successful. An
adverse outcome in any litigation or proceeding could subject us to significant
liabilities, require us to cease using the subject technology or require us to
license the subject technology from the third party, which license may not be
available.
Much of the know-how of importance to our technology and many of our processes
are dependent upon the knowledge, experience and skills of key scientific and
technical personnel. This experience and skill are not patentable. To protect
our rights to and to maintain the confidentiality of trade secrets and
proprietary information, we require employees, consultants and collaborators to
execute confidentiality and invention assignment agreements upon commencement of
a relationship with us. These agreements prohibit the disclosure of confidential
information to anyone outside our company and require disclosure and assignment
to us of ideas, developments, discoveries and inventions made by employees,
advisors, consultants and collaborators. We cannot be sure, however, that these
agreements will not be breached or that our trade secrets or proprietary
information will not otherwise become known or developed independently by
others.
COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. Many of the drugs that we
are attempting to discover will be competing with existing therapies. In
addition, a number of companies are pursuing the development of pharmaceuticals
that target the same diseases and conditions that we are targeting. We face
competition from pharmaceutical and biotechnology companies both in the United
States and abroad. Our competitors may utilize discovery technologies and
techniques or partner with collaborators in order to develop products more
rapidly or successfully than we or our collaborators are able to do. Many of our
competitors, particularly large pharmaceutical companies, have substantially
greater financial, technical and human resources than we do. In addition,
academic institutions, government agencies, and other public and private
organizations conducting research may seek patent protection with respect to
potentially competitive products or technologies and may establish exclusive
collaborative or licensing relationships with our competitors.
We believe that our ability to compete is dependent, in part, upon our ability
to create, maintain and license scientifically advanced technology. We also are
dependent upon our ability and the ability of third parties we license to sell
and market our products to develop and commercialize pharmaceutical products
based on this technology. Further, we need to attract and retain qualified
personnel, obtain patent protection or otherwise develop proprietary technology
or processes and secure sufficient capital resources for the expected
substantial time period between technological conception and commercial sales of
products based upon our technology. The failure by us or any of our
collaborators in any of those areas may prevent the successful commercialization
of our potential drug candidates.
Our competitors might develop technologies and drugs that are more effective or
less costly than any which are being developed by us or which would render our
technology and potential drugs obsolete and noncompetitive. In addition, our
competitors may succeed in obtaining the approval of the FDA or other regulatory
approvals for drug candidates more rapidly than us or our strategic partners.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before their competitors
may achieve a significant competitive advantage, including FDA marketing
exclusivity rights that might delay or prevent our ability to
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market our products. Any drugs resulting from our research and development
efforts might not be able to compete successfully with competitors' existing or
future products or products under development or obtain regulatory approval in
the United States or elsewhere.
GOVERNMENT REGULATION
NEW DRUG DEVELOPMENT AND APPROVAL PROCESS
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of our products and in
ongoing research and product development activities. All of our products will
require regulatory approval by governmental agencies prior to commercialization.
In particular, our products are subject to rigorous preclinical and clinical
testing and other premarket approval requirements by the FDA and regulatory
authorities in other countries. In the United States, various statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of pharmaceutical products. The lengthy
process of seeking these approvals, and the subsequent compliance with
applicable statutes and regulations, require the expenditure of substantial
resources. We believe that we are currently in compliance with applicable
statutes and regulations. Regulatory approval, when and if obtained, may be
limited in scope which may significantly limit the indicated uses for which a
product may be marketed. Further, approved drugs, as well as their
manufacturers, are subject to ongoing review, and discovery of previously
unknown problems with these products may result in restrictions on their
manufacture, sale or use or in their withdrawal from the market. Failure to
comply with regulatory requirements may result in criminal prosecution, civil
penalties, recall or seizure of products, total or partial suspension of
production or injunction, as well as other action affecting our potential
products or us. Any failure by us to obtain and maintain, or any delay in
obtaining, regulatory approvals could materially adversely affect our business.
The process for new drug approval has many steps, including:
PRECLINICAL TESTING. Once a drug candidate is identified for development, the
drug candidate enters the preclinical testing stage. During preclinical studies,
laboratory and animal studies are conducted to show biological activity of the
drug candidate in animals, both healthy and with the targeted disease. Also, the
drug candidate is evaluated for safety. These tests typically take approximately
two years to complete. The tests must be conducted in compliance with Good
Laboratory Practice, or GLP, regulations.
INVESTIGATIONAL NEW DRUG APPLICATION. When the preclinical testing is
considered adequate by the sponsor, an IND is filed with the FDA to begin human
testing of the drug. The IND becomes effective if not rejected by the FDA within
30 days after filing. The IND must provide data on previous experiments, how,
where and by whom the new studies will be conducted, the chemical structure of
the compound, the method by which it is believed to work in the human body, any
toxic effects of the compound found in the animal studies and how the compound
is manufactured. All clinical trials must be conducted in accordance with Good
Clinical Practice, or GCP, regulations. In addition, an Institutional Review
Board, or IRB, comprised of physicians and other qualified experts at the
hospital or clinic where the proposed studies will be conducted, must review and
approve the IND. The IRB also continues to monitor the study. The IRB also must
be kept aware of the study's progress, particularly as to adverse events.
Progress reports detailing the results of the clinical trials must be submitted
at least annually to the FDA and more frequently if adverse events occur. In
addition, the FDA may, at any time during the 30-day period after filing of our
IND or at any time thereafter, impose a clinical hold on proposed or ongoing
clinical trials. If the FDA imposes a clinical hold, clinical trials cannot
commence or recommence without FDA authorization and then only under terms
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authorized by the FDA. In some instances, the IND application process can result
in substantial delay and expense.
Some limited human clinical testing may be done under a Physician's IND in
support of an IND application and prior to receiving an IND. A Physician's IND
is an IND application that allows a single individual to conduct a clinical
trial. A Physician's IND does not replace the more formal IND process, but can
provide a preliminary indication as to whether further clinical trials are
warranted, and can, on occasion, facilitate the more formal IND process.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap.
PHASE I CLINICAL TRIALS. After an IND becomes effective, Phase I human clinical
trials can begin. These tests usually involve between 20 and 80 healthy
volunteers or patients and typically take one to two years to complete. The
tests study a drug's safety profile, and may include the safe dosage range. The
Phase I clinical studies also determine how a drug is absorbed, distributed,
metabolized and excreted by the body, and the duration of its action. We may
conduct early phase proof-of-principle studies of some drug candidates in
Eastern Europe to preliminarily determine the safety and efficacy of product
candidates. In such a situation, if the drug candidate is sourced from the
United States, an IND may be necessary unless there is conformity with FDA
regulations applicable to the export of products not approved in the United
States.
PHASE II CLINICAL TRIALS. In Phase II clinical trials, controlled studies are
conducted on an expanded population of patients with the targeted disease. The
primary purpose of these tests is to evaluate the effectiveness of the drug on
the volunteer patients as well as to determine if there are any side effects.
These studies generally take approximately two years, and may be conducted
concurrently with Phase I clinical trials. In addition, Phase I/II clinical
trials may be conducted to evaluate not only the efficacy of the drug on the
patient population, but also its safety.
PHASE III CLINICAL TRIALS. This phase typically lasts two to three years and
involves an even larger patient population. During the Phase III clinical
trials, physicians monitor the patients to determine efficacy and to observe and
report any reactions that may result from long-term use of the drug.
NEW DRUG APPLICATION. After the completion of all three clinical trial phases,
if there is substantial evidence that the drug is safe and effective, an NDA is
filed with the FDA. The NDA must contain all of the information on the drug
gathered to that date, including data from the clinical trials. NDAs are often
over 100,000 pages in length.
The FDA reviews all NDAs submitted before it accepts them for filing and may
request additional information rather than accepting an NDA for filing. In this
event, the NDA must be resubmitted with the additional information and, again,
is subject to review before it is accepted for filing. Once the submission is
accepted for filing, the FDA begins an in-depth review of the NDA. Under the
Federal Food, Drug and Cosmetic Act, the FDA has 180 days in which to review the
NDA and respond to the applicant. The review process is often significantly
extended by FDA requests for additional information or clarification regarding
information already provided in the submission. The FDA may refer the
application to an appropriate advisory committee, typically a panel of
clinicians, for review, evaluation and a recommendation as to whether the
application should be approved. The FDA is not bound by the recommendation of an
advisory committee. If FDA evaluations of the NDA and the manufacturing
facilities are favorable, the FDA may issue an approval letter authorizing
commercial marketing of the drug for specified indications. The FDA could also
issue an approvable letter, which usually contains a number of conditions that
must be met in order to secure final approval of the NDA. When and if those
conditions have been met to the FDA's satisfaction, the FDA will issue an
approval letter,. On the other hand, if the FDA's evaluation of the NDA
submission or manufacturing facilities is not favorable, the FDA may refuse to
approve the NDA or issue a not approvable letter.
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Among the conditions for NDA approval is the requirement that each prospective
manufacturer's quality control and manufacturing procedures conform to GMP.
Although we expect to contract with third parties for the manufacture of any
products that are approved, these manufacturers must meet and continue to comply
with the standards set forth in the GMP regulations. Manufacturing
establishments are subject to periodic inspections by the FDA and by other
federal, state or local agencies.
MARKETING APPROVAL. If the FDA approves the NDA, the drug becomes available for
physicians to prescribe. Periodic reports must be submitted to the FDA,
including descriptions of any adverse reactions reported. The FDA may request
additional Phase IV studies to evaluate long-term effects.
PHASE IV CLINICAL TRIALS AND POST MARKETING STUDIES. In addition to studies
requested by the FDA after approval, these trials and studies are often
conducted to explore new indications. The purpose of these trials and studies
and related publications is to develop data to support additional indications
for the drug and to increase its acceptance in the medical community.
ORPHAN DRUG DESIGNATION. The FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which is generally a disease or
condition that affects fewer than 200,000 individuals in the United States.
Orphan drug designation must be requested before submitting a NDA. After the FDA
grants orphan drug designation, the generic identity of the therapeutic agent
and its potential orphan use are disclosed publicly by the FDA. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process. If a product that has orphan drug
designation is the first to receive FDA approval for the indication for which it
had been designated, the product is entitled to orphan exclusivity. This means
the FDA may not approve for seven years any other application to market the same
drug for the same indication, except in very limited circumstances.
APPROVALS OUTSIDE OF THE UNITED STATES. Steps similar to those in the United
States must be undertaken in virtually every other country comprising the market
for our products before any product can be commercialized in those countries.
The approval procedure and the time required for approval vary from country to
country and may involve additional testing. There can be no assurance that
approvals will be granted on a timely basis or at all. In addition, regulatory
approval of prices is required in most countries other than the United States.
There can be no assurance that the resulting prices would be sufficient to
generate an acceptable return to us.
FDA MODERNIZATION ACT OF 1997
The Food and Drug Administration Modernization Act of 1997, or FDAMA, was
enacted, in part, to ensure the timely availability of safe and effective drugs,
biologics and medical devices by expediting the FDA review process for new
products. FDAMA establishes a statutory program for the approval of "fast track
products." The fast track provisions essentially codified existing FDA
accelerated approval regulations for drugs and biologics. A "fast track product"
is defined as a new drug or biologic intended for the treatment of a serious or
life-threatening condition that demonstrates the potential to address unmet
medical needs. Under the fast track program, the sponsor of a new drug or
biologic may request the FDA to designate the drug or biologic as a "fast track
product" at any time during the clinical development of the product. FDAMA
specifies that the FDA must determine if the product qualifies for fast track
designation within 60 days of receipt of the sponsor's request. Approval of an
NDA for a fast track product can be based on an effect on a clinical endpoint or
on a surrogate endpoint that is reasonably likely to predict clinical benefit.
Approval of a fast track product may be subject to post-approval studies to
validate the surrogate endpoint or confirm the effect on the clinical endpoint.
If a preliminary review of the clinical data suggests efficacy, the FDA may
initiate review of sections of an application for a "fast track product" before
the application is complete. This "rolling
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review" is available if the applicant provides a schedule for submission of
remaining information and pays applicable user fees.
We intend to seek fast track designation to secure expedited review of
appropriate products. It is uncertain if fast track designation will be
obtained.
We are also subject to various laws and regulations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances used in connection with our research, including radioactive compounds
and infectious disease agents. We believe we are currently in compliance with
all these laws and regulations. The extent of governmental regulation that might
result from any legislative or administrative action cannot be accurately
predicted.
PHARMACEUTICAL PRICING AND REIMBURSEMENT
In both domestic and foreign markets, sales of our products will depend in part
upon the availability of reimbursement from third-party payors. Third-party
payors include government health administrative authorities, managed care
providers, private health insurers and other organizations. These third-party
payors are increasingly challenging the price and examining the
cost-effectiveness of medical products and services. In addition, significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products. We may need to conduct post-marketing studies in order to demonstrate
the cost-effectiveness of our products. These studies may require us to provide
a significant amount of resources. Our product candidates may not be considered
cost-effective. Adequate third-party reimbursement may not be available to
enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product development. U.S. and foreign governments continue
to propose and pass legislation designed to reduce the cost of healthcare.
Accordingly, legislation and regulations affecting the pricing of
pharmaceuticals may change before our proposed products are approved for
marketing. Adoption of new legislation could further limit reimbursement for
pharmaceuticals. If the government and third party payors fail to provide
adequate coverage and reimbursement rates for our product candidates, the market
acceptance of our products may be adversely affected. If our products do not
receive market acceptance, our business, financial condition and results of
operations will be materially adversely affected. In addition, an increasing
emphasis on managed care in the United States has and will continue to increase
the pressure on pharmaceutical pricing.
EMPLOYEES
As of , 2000, we employed persons, of whom are
involved in research and clinical development. Ph.D. or M.D. degrees are held by
of our employees. In March 2000, we hired Dr. Johnson Y.N. Lau to lead
our research and development efforts. Since Dr. Lau joined us, he has hired a
molecular biologist, an enzymologist, a pharmacologist/toxicologist, and a
regulatory affairs M.D. to lead their respective departments. Our goal is to
expand our research team from 18 scientists on March 1, 2000 to over 100
scientists within 24 months of this offering. We face competition in this regard
from other companies, research and academic institutions, government entities
and other organizations. Our employees are not covered by a collective
bargaining agreement and we consider relations with our employees to be good.
FACILITIES
We own our 178,000 square foot building in Costa Mesa, California where we
conduct all of our operations. In March 2000, we commenced work on a two-stage
upgrade of our research and
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development facilities. Stage one, which is scheduled to be completed by August
2000, involves modernizing our biology, enzymology, and drug safety and
metabolism laboratories. In addition, this stage involves constructing an animal
facility and biosafety facilities. We have also constructed a room to house our
nuclear magnetic resonance machine and our X-ray machine for our structural
biology studies. We are planning to initiate the stage two upgrading, which will
consist of renovations to the remaining part of our research facilities, by the
end of 2000. This stage will include the renovation of our biology and chemistry
laboratories, as well as chemical development/formulation and medical
departments.
After this offering, we will lease to ICN for per month for
an interim period. We believe our building are adequate to meet our immediate
needs and that suitable additional space will be available in the future on
commercially reasonable terms as needed.
LEGAL PROCEEDINGS OF ICN
SEC LITIGATION AND GRAND JURY INVESTIGATION
On August 11, 1999, the SEC filed a civil complaint in the United States
District Court for the Central District of California against ICN and our
chairman, Milan Panic, and one current and one former officer of ICN. The SEC
complaint alleges that ICN and the individually named defendants made material
misstatements and/or omissions and engaged in acts which operated as a fraud and
deceit upon other persons in violation of Section 10(b) of the Securities
Exchange Act of 1934. The civil lawsuit concerns public disclosures made by ICN
with respect to the status and disposition of ICN's 1994 NDA for ribavirin as a
monotherapy treatment for hepatitis C. This NDA was not approved by the FDA. The
SEC complaint seeks injunctive relief, unspecified civil penalties, and an order
barring Mr. Panic from acting as an officer or director of any publicly-traded
company, which would include us.
ICN has received subpoenas from a Grand Jury in the United States District Court
for the Central District of California requesting the production of documents
covering a broad range of matters over various time periods and the testimony of
various ICN employees and others. ICN has advised us that ICN, Mr. Panic, two
current senior executive officers, a former senior officer, a current employee
and a former employee of ICN are targets of the investigation. ICN has advised
us that the United States Attorney's office has advised counsel for ICN that the
areas of its investigation include disclosures made and not made to the public
and other third parties concerning ICN's 1994 NDA for ribavirin as a monotherapy
for hepatitis C; stock sales for the benefit of Mr. Panic following receipt on
November 28, 1994 of a letter from the FDA informing ICN that it had found ICN's
NDA not approvable; possible violations of the economic embargo imposed by the
United States upon the government of Yugoslavia based upon alleged sales by ICN
and Mr. Panic of stock belonging to ICN's employees; and, with respect to Mr.
Panic, personal disposition of assets of entities associated with Yugoslavia,
including possible misstatements and/or omissions in federal tax filings. ICN
has advised us that it is continuing to cooperate with the Grand Jury
investigation.
As a majority owned subsidiary of ICN, we could be adversely affected by a
judgement or settlement agreement arising from the SEC civil lawsuit or by an
indictment in, or an adverse resolution of, the Grand Jury investigation. ICN
has agreed to indemnify us against any monetary judgement or settlement arising
from these proceedings.
LITIGATION RELATING TO ICN YUGOSLAVIA
The rights to the compounds Tiazole and Adenazole were contributed by ICN to ICN
Yugoslavia in connection with ICN's acquisition of its majority ownership
interest in that company pursuant to a Foundation Agreement executed in November
1990. As part of the Foundation Agreement, ICN
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acquired a 75% ownership interest in ICN Yugoslavia and a socially-owned
Yugoslavian corporation acquired the balance.
Beginning in the Fall of 1998 and culminating in the February 6, 1999 physical
seizure of the company's premises, government bodies in Yugoslavia took over
control of ICN Yugoslavia and purported to reallocate the ownership interests in
the company. ICN's ownership interest was purportedly reduced to approximately
35%. Approximately 65% of the equity of ICN Yugoslavia was allocated to the
Republic of Serbia by Yugoslav authorities, based upon a purported conclusion
that ICN had failed to comply with its obligations under the Foundation
Agreement to contribute identified assets to ICN Yugoslavia, including the
rights to the compounds Tiazole and Adenazole.
On or about February 9, 1999, ICN commenced an action in the United States
District Court for the District of Columbia against the Republic of Serbia, the
State Health Fund of Serbia, and the Federal Republic of Yugoslavia seeking
damages in the amount of at least $500 million and declaratory relief arising
out of the unlawful taking of ICN's majority ownership interest in ICN
Yugoslavia. On or about March 8, 1999, the State Health Fund of Serbia commenced
an arbitration against ICN by filing a Request for Arbitration with the
International Chamber of Commerce International Court of Arbitration in Paris,
seeking unspecified injunctive relief and unquantified damages based upon
alleged breaches of the Foundation Agreement by ICN.
On April 27, 1999, ICN filed its answer and counterclaims against the State
Health Fund of Serbia. At the same time, ICN also filed a Request for
Arbitration with the ICC International Court of Arbitration against the Republic
of Serbia and the Federal Republic of Yugoslavia. This request seeks declaratory
relief and damages arising out of the unlawful taking of ICN's majority
ownership interest in ICN Yugoslavia and the State Health Fund of Serbia's
failure to pay for goods sold and delivered. Thereafter, the action in District
Court in Washington was stayed pending the outcome of the ICC arbitration
proceedings. The ICC arbitration proceedings are in their initial stages.
It is ICN's position in the ICC arbitrations that the rights to Tiazole and
Adenazole, as well as other intangible assets, were validly transferred to ICN
Yugoslavia and ICN is entitled to a declaration that it continues to own 75% of
the equity of ICN Yugoslavia and has the right to manage and control the company
as the majority owner. Alternatively, ICN seeks a declaration that all right,
title and interest in the intangible assets, including Tiazole and Adenazole,
have reverted to ICN or that ICN be awarded damages constituting the current
fair market value of the intangible assets.
Pursuant to the affiliation agreement, ICN has agreed that it will take all
required actions to cause ICN Yugoslavia to transfer or license Tiazole and
Adenazole to us or, in the event that the rights to these compounds are deemed
to have reverted to ICN, to effectuate the transfer or license to us directly.
However, there cannot be any assurance that ICN's dispute with the Republic of
Serbia, the Federal Republic of Yugoslavia and the State Health Fund of Serbia
will not result in the impairment of ICN's ability to fulfill its obligations to
transfer or license these assets to us. In addition, if we are able to
commercialize Tiazole or Adenazole, we may have to license the compounds from
ICN Yugoslavia which may involve the payment of fees by us to ICN Yugoslavia.
ICN's contribution to us of whatever rights it has in Tiazole and Adenazole is
also subject to the approval of the Office of Foreign Assets Control of the U.S.
Department of the Treasury. See "Risk Factors -- our rights related to Tiazole
and Adenazole may be adversely affected by ongoing litigation involving ICN and
the contribution of these rights is subject to approval by the Office of Foreign
Assets Control."
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PRIOR CONSENT DECREES INVOLVING ICN AND MR. PANIC
ICN and Mr. Panic are parties to two prior consent decrees with the SEC entered
into in February 1977 and October 1991. Pursuant to these consent decrees, in
each case without admitting or denying any violation of the securities laws, ICN
and Mr. Panic agreed not to violate securities laws in the future.
In May 1991, ICN entered into a civil settlement with the United States Justice
Department. This consent decree expired by its terms in 1994.
INVESTMENT COMPANY ACT OF 1940
The Investment Company Act of 1940 requires registration for companies that are
engaged primarily in the business of investing, reinvesting, owning, holding or
trading in securities. A company may be deemed to be an investment company if it
owns "investment securities" with a value exceeding 40% of the value of its
total assets, excluding government securities and cash items, on an
unconsolidated basis, unless an exemption or safe harbor applies. Securities
issued by companies other than majority-owned subsidiaries are generally counted
as investment securities for purposes of the Investment Company Act.
If we are deemed to be, and are required to register as, an investment company,
we will be forced to comply with the substantive requirements under the
Investment Company Act, including:
+ limitations on our ability to borrow;
+ limitations on our capital structure;
+ prohibitions on transactions with affiliates;
+ restrictions on specific investments; and
+ compliance with reporting, record keeping, voting, proxy disclosure and other
rules and regulations.
The SEC has recognized that bona fide research and development companies in the
ordinary operation of their businesses could become investment companies.
Therefore, conditions were established by the SEC as a method by which the SEC
could address its regulatory concern, regulating true investment companies,
while not imposing burdensome regulations on bona fide operating companies.
These conditions, as applicable to us, are that:
+ we use our cash to finance the research and development of our products, with
our spending on research and development exceeding our gross investment
income;
+ a substantial portion of our gross expenses consists of research and
development expenses, with our gross investment expenses being de minimis in
comparison to our overall gross expenses;
+ we invest in securities with the goal of preserving assets until they are
needed to finance our operations;
+ our historical development reflects our status as a biotechnology company;
+ our officers and directors devote substantially all of their time to our
biotechnology business; and
+ our public representations of policy are consistent with our activities as a
biotechnology company.
We intend to operate in a manner that is consistent with the conditions noted
above and believe that we will be able to do so. We note that any significant
deviation from these conditions could cause us to become an investment company,
which would, in turn, subject us to regulation under the Investment Company Act.
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Management
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is the name, age, position and a brief account of the business
experience of each of our executive officers and directors as of the completion
of this offering. Prior to completion of this offering, we intend to elect
additional independent directors to our Board.
<TABLE>
<CAPTION>
NAME AGE TITLE
<S> <C> <C>
-----------------------------------------------------------------------------------------------------
Milan Panic.................................. 70 Chairman of the Board
Richard A. Meier............................. 40 President, Chief Executive Officer and
Director
Johnson Y.N. Lau, M.D., Ph.D. ............... 40 Executive Vice President and Chief Operating
Officer
Harry A. Roosje.............................. 38 Senior Vice President, General Counsel and
Secretary
Benjamin Lap................................. 43 Senior Vice President, Investor and Public
Relations
Roger Guilleman.............................. 76 Director
Michael Smith, Ph.D.......................... 68 Director
</TABLE>
---------------
(1) Member of the audit committee
(2) Member of the compensation committee
Milan Panic, the founder of ICN and our Chairman of the Board, has been Chairman
of the Board and Chief Executive Officer of ICN since its inception in 1960 and
President until 1997, except for a leave of absence from July 14, 1992 to March
4, 1993 while he was serving as Prime Minister of Yugoslavia and a leave of
absence from October 1979 to June 1980.
Richard A. Meier, our President and Chief Executive Officer, was Executive Vice
President and Chief Financial Officer of ICN from January 2000 until the
completion of this offering and Senior Vice President -- Finance and Corporate
Treasurer of ICN from May 1998 until January 2000. Before joining ICN, Mr. Meier
was a Senior Vice President with the investment banking firm of Schroder & Co.
Inc. in New York, New York. From 1985 to 1996, Mr. Meier served in various
banking and private equity capacities at Salomon Smith Barney, Inc.,
Manufacturers Hanover Trust Corporation, Australian Capital Equity, Inc., and
Windsor Hall Partners in New York and Dallas, Texas.
Johnson Y.N. Lau, M.D., Ph.D., our Executive Vice President and Chief Operating
Officer, was Senior Vice President, Research and Development of ICN from March
2000 until the completion of this offering. Before joining ICN, he was a Senior
Director in Antiviral Research at the Schering-Plough Research Institute from
1997 to February 2000. He served as a faculty member at the University of
Florida from 1992 to 1996. From 1989 to 1991, he served as a faculty member at
the Institute of Liver Studies, King's College Hospital School of Medicine and
Dentistry, University of London.
Harry A. Roosje, our Senior Vice President, General Counsel and Secretary, was
Vice President, Associate General Counsel and Assistant Secretary of ICN from
May 1999 until the completion of this offering, and Associate General Counsel
from 1995 until May 1997. Prior to joining ICN, Mr. Roosje had a private law
practice in Newport Beach, California.
Benjamin Lap, our Senior Vice President, Investor and Public Relations, was
ICN's Senior Vice President, Investor Relations, from May 2000 until the
completion of this offering, Corporate Vice President for Investor Relations
from 1997 until May 2000, and was in Corporate Development from November 1994.
Roger Guilleman, Ph.D., M.D., was a member of ICN's board of directors from 1989
until the completion of this offering. Dr. Guilleman has been an Adjunct
Professor of Medicine at the University
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of California College of Medicine in San Diego since 1970. He was a
Distinguished Scientist at the Whittier Institute in LaJolla, California from
March 1989 to 1995 and was Resident Fellow and Chairman of the Laboratories for
Neuroendocrinology at the Salk Institute in LaJolla, California. He was awarded
the Nobel Prize in Medicine in 1977 and in the same year, was presented the
National Medal of Science by the President of the United States. He was
affiliated with the Department of Physiology at Baylor College of Medicine in
Houston, Texas from 1952 to 1970. He is a member of the National Academy of
Sciences, and a Fellow of the American Association for the Advancement of
Science. He has also served as President of the American Endocrine Society.
Michael Smith, Ph.D., was a member of ICN's board of directors from 1994 until
the completion of this offering. Dr. Smith is Director of the Biotechnology
Laboratory, an interdisciplinary unit, at the University of British Columbia. He
is a Peter Wall Distinguished Professor of Biotechnology and University
Professor at the University. He has been a Career Investigator of the Medical
Research Council of Canada since 1966 and was awarded the Nobel Price in
Chemistry in 1993 for the development of the site-directed mutagenesis.
Prior to the completion of this offering, our officers and directors were as
follows:
<TABLE>
<CAPTION>
NAME TITLES AT ICN TITLES AT RIBAPHARM
<S> <C> <C>
---------------------------------------------------------------------------------------------------
Milan Panic Chairman of the Board and Chief President and Director
Executive Officer
Bill MacDonald Executive Vice President -- Vice President, Chief Financial
Strategic Planning Officer and Treasurer and
Director
David Watt Executive Vice President, Vice President and Director
General Counsel and Corporate
Secretary
Harry A. Roosje Vice President, Associate Secretary
General Counsel and Assistant
Secretary
</TABLE>
Unless noted above, these persons will not remain as officers or directors of
Ribapharm.
BOARD COMPOSITION
We currently have directors. In accordance with the terms of our certificate
of incorporation, the terms of office of the directors are divided into three
classes:
+ Class I, whose term will expire at the annual meeting of stockholders to be
held in 2001;
+ Class II, whose term will expire at the annual meeting of stockholders to be
held in 2002; and
+ Class III, whose term will expire at the annual meeting of stockholders to be
held in 2003.
The Class I directors are , the Class II directors are , and the Class III
directors are . At each annual meeting of stockholders, the successors to
directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following their
election. Under our certificate of incorporation, the authorized number of
directors is between and directors, as may be determined by the board of
directors from time to time. The authorized number of directors may be changed
only by resolution of the board of directors or by vote of the stockholders. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one third of the directors. This classification of the
board of directors may have the effect of delaying or preventing changes in
control or our management. Pursuant to the affiliation agreement, we have agreed
with ICN that our board of directors will consist of members, of which will
be nominees of ICN, will be our executive officers and will be independent.
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BOARD COMMITTEES
AUDIT COMMITTEE
Our audit committee, consisting of , reviews our internal accounting
procedures and the services provided by our independent auditors.
COMPENSATION COMMITTEE
Our compensation committee, consisting of , reviews and recommends
to our board of directors the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and benefits
of our employees.
SCIENTIFIC AND CLINICAL ADVISORY BOARD
We are in the process of establishing a scientific and clinical advisory board,
or SAB, consisting of leading experts in the fields of virology, oncology,
chemistry, molecular biology, pharmacology and preclinical and clinical
development. These advisors will consult on matters relating to the development
of the products described elsewhere in this prospectus.
We expect that members of our SAB will review our research, development and
operating activities and will be available for consultation with management and
staff relating to their respective areas of expertise. We anticipate that our
SAB will hold regular meetings. We intend to have separate consulting
relationships with several members of the SAB which will provide for more
frequent meetings with our management and staff to discuss our ongoing research
and development projects. Some of our scientific advisors may own shares of our
Class A Common Stock and/or hold options to purchase our Class A Common Stock.
Our Scientific Advisors are expected to devote only a small portion of their
time to our business.
Our scientific advisors will all be employed by other entities. We will require
each of our scientific advisors to enter into a letter agreement with us that
contains confidentiality and non-disclosure provisions that prohibit the
disclosure of confidential information to anyone else. These letter agreements
will also provide that all inventions, discoveries or other intellectual
property that come to the attention of or are discovered by our scientific
advisors while performing services under this letter agreement will be assigned
to us.
DIRECTOR COMPENSATION
Directors who are also our employees will receive no additional compensation for
their services as directors. We will pay each of our non-employee directors a
quarterly fee of $7,500, payable at the election of each director either
one-half in cash and one-half in Class A Common Stock or in all Class A Common
Stock. Non-employee directors also are eligible to receive options to purchase
Class A Common Stock under the 2000 Stock Option Plan as compensation for their
services as directors. Each non-employee director will receive options to
purchase Class A Common Stock at the initial public offering price on the date
of this offering, and options to purchase Class A Common Stock on the date
of each annual meeting, at the then current market price. Each non-employee
director is reimbursed for reasonable expenses incurred to attend director and
committee meetings.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
and . 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 .
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid to
our executive officers for services rendered in all capacities to ICN and its
subsidiaries for the fiscal year ended December 31, 1999. The table does not
include the 1999 compensation of Dr. Johnson Y.N. Lau, our Executive Vice
President and Chief Operating Officer, who was hired by us in March 2000. Dr.
Lau was not employed by ICN or any of its subsidiaries during 1999. Dr. Lau's
2000 compensation is scheduled to be $245,000. Dr. Lau also received a $70,000
sign-on bonus. The positions reflected in the table are the positions to be held
by the executive officers with us following this offering. They were not the
positions held by the executive officers during 1999, the period covered by the
table. These executive officers held the following positions with ICN prior to
this offering:
+ Richard A. Meier -- Executive Vice President and Chief Financial Officer
+ Harry A. Roosje -- Vice President, Associate General Counsel and Assistant
Secretary
+ Benjamin Lap -- Senior Vice President, Investor Relations
References to stock options and restricted stock relate to awards of ICN options
and stock under ICN's Long Term Incentive Plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
ANNUAL COMPENSATION RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
COMPENSATION AWARDS OPTIONS COMPENSATION
NAME SALARY BONUS $(1) $ (#)(2) ($)
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------
Richard A. Meier............. $246,128 155,000 -- -- 150,000 7,714(3)
Harry A. Roosje.............. $157,632 30,000 -- -- 10,000 --
Benjamin Lap................. $166,667 -- -- -- 90,000 --
</TABLE>
---------------
(1) Unless otherwise indicated, with respect to any individual named in the
above table, the aggregate amount of perquisites and other personal
benefits, securities or property was less than either $50,000 or 10% of the
total annual salary and bonus reported for the named executive officer.
(2) Includes grants of options to purchase shares of ICN's common stock.
(3) In 1999, the $7,714 of "All Other Compensation" Mr. Meier received consisted
of the following: executive medical ($6,008) and life insurance ($1,706).
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The following table sets forth summary information regarding ICN option grants
made by ICN to each of our executive officers during 1999.
1999 ICN OPTION GRANTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES PRICE EXPIRATION PRESENT VALUE(3)
NAME GRANTED(1) IN 1999(2) (PER SHARE) DATE ----------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------
Richard A. Meier....................... 30,000 2.7% $26.88 4/9/09 $ 393,147
Richard A. Meier....................... 120,000(4) 10.7% $18.25 10/8/09 $1,067,904
Harry A. Roosje........................ 10,000 0.9% $26.88 4/9/09 $ 131,049
Benjamin Lap........................... 90,000 8.0% $24.25 3/18/09 $1,064,241
</TABLE>
---------------
(1) Unless otherwise noted, the options granted have ten year terms. The options
granted to the executive officers vest according to the following schedule:
25% on the first anniversary of the date of grant and 25% on each of the
next succeeding three anniversary dates of the grant date. Except as
otherwise noted, all options were granted with an exercise price equal to
the fair market value of the underlying shares on the date of grant.
(2) Options to purchase a total of 1,125,285 shares were granted to employees,
including executive officers, during fiscal 1999.
(3) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized by an executive will be at or near the value estimated by the
Black-Scholes model. The estimated values under that model are based on
arbitrary assumptions as to variables such as interest rates, stock price
volatility and future dividend yield.
(4) These options were granted in conjunction with Mr. Meier's promotion to
Executive Vice President and Chief Financial Officer of ICN.
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The following table sets forth summary information regarding the number and
value of ICN Pharmaceutical options held as of December 31, 1999 by our
executive officers. Options shown as exercisable in the table below are
immediately exercisable. We determined the value of unexercised in-the-money
options as of December 31, 1999 by taking the difference between the market
price of ICN common stock as of the close of business on December 31, 1999 and
the option exercise price, multiplied by the number of shares underlying the
options as of that date.
YEAR-END 1999 ICN OPTION VALUES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(2)
NAME ON EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
Richard A. Meier....... -- -- 25,000 225,000 $262,500 $1,635,000
Harry A. Roosje........ 4,000 85,214 21,150 35,987 167,634 40,608
Benjamin Lap........... 22,730 312,477 10,727 108,224 81,254 176,842
</TABLE>
---------------
(1) Difference between the fair market value of the shares of ICN common stock
at the date of exercise and the exercise price.
(2) Difference between the fair market value of the shares of ICN common stock
on December 31, 1999 and the exercise price.
EMPLOYMENT AGREEMENTS/CHANGE IN CONTROL AGREEMENTS
On , 2000, the board of directors adopted employment agreements
which contained "change in control" benefits for our key senior executive
officers. The executives include . The Employment Agreements are intended
to retain the services of these executives and provide for continuity of
management in the event of any actual or threatened change in control. Each
agreement has an initial term of three years, and automatically extends for
successive one year terms unless we or the executive elects not to extend it.
These Employment Agreements provide that each executive shall receive severance
benefits equal to three times salary, bonus and other benefits under various
circumstances. These circumstances include the executive's employment being
terminated without cause, the executive terminating employment for enumerated
reasons following a change in control of us, or the executive leaves us for any
reason or without reason during a sixty day period commencing six months after
the change in control. The reasons permitting an executive to terminate his
employment include a significant reduction in the executive's compensation,
duties, title or reporting responsibilities or a change in the executive's job
location. The executive is under no obligation to mitigate amounts payable under
the employment agreements. For purposes of the employment agreements, a "change
in control" means any of the following events:
+ the acquisition by any person, subject to exceptions, of beneficial
ownership, directly or indirectly, of 20% or more of the combined voting
power of our outstanding voting securities, but excluding an acquisition from
ICN;
+ our existing board of directors ceases for any reason to constitute at least
two-thirds of our board of directors, unless the election, or nomination for
election by our stockholders, of any new director was approved by a vote of
at least two-thirds of our existing board of directors;
+ approval by our stockholders of a merger or consolidation involving us if our
stockholders, immediately before the merger or consolidation, do not, as a
result of the merger or consolidation,
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own, directly or indirectly, more than 80% of the combined voting power of
the then outstanding voting securities of the corporation resulting from the
merger or consolidation in substantially the same proportion as their
ownership of the combined voting power of our voting securities outstanding
immediately before the merger or consolidation; or
+ approval by our stockholders of a complete liquidation or dissolution of us
or an agreement for the sale or other disposition of all or substantially all
of our assets.
Based upon present compensation, our executives would be entitled to receive the
following approximate amounts if the employment of these key senior executives
is terminated under any of the circumstances described above: Richard A. Meier,
$ ; Johnson Y.N. Lau, $ ; Harry A. Roosje, $ ; and Benjamin Lap,
$ . In addition, the vesting of options granted to the executives would be
accelerated. The value of the accelerated options would depend upon the market
price of the shares at that time.
LIMITATIONS OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
In connection with the completion of this offering, we will adopt and file an
amended and restated certificate of incorporation and bylaws. The disclosure
below assumes that the amended and restated certificate of incorporation is in
effect. As permitted by Delaware law, our certificate of incorporation provides
that no director will be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability:
+ for any breach of duty of loyalty to us or to our stockholders;
+ for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
+ for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
+ for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation further provides that we must indemnify our
directors to the fullest extent permitted by Delaware law. In addition, our
amended and restated bylaws provide that:
+ we are required to indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to limited exceptions;
+ we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by law, our
certificate of incorporation, our bylaws or other agreements;
+ we are required to advance expenses to our directors and executive officers
as incurred in connection with legal proceedings against them for which they
may be indemnified; and
+ the rights conferred in the bylaws are not exclusive.
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.
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EMPLOYEE BENEFIT PLANS
Our employees will not participate in ICN's option plans on an ongoing basis.
However, our employees that have ICN options will retain these options and will
retain benefits earned under ICN welfare and benefit plans.
2000 STOCK OPTION AND AWARD PLAN
Our Board of Directors adopted the 2000 Stock Option and Award Plan on
, 2000. The stock plan was approved by ICN as our sole stockholder
on , 2000. The stock plan provides for the grant of incentive stock
options intended to qualify under Section 422 of the Internal Revenue Code and
stock options which do not so qualify, stock appreciation rights, restricted
stock, performance units and performance shares, phantom stock awards, and share
awards. Persons are eligible to receive grants under the stock plan include our
directors, officers, employees, and consultants as well as directors, officers
and employees of ICN and its other affiliates. The stock plan is designed to
comply with the requirements for "performance-based compensation" under Section
162(m) of the Internal Revenue Code, and the conditions for exemption from the
short-swing profit recovery rules under Rule 16b-3 under the Securities Exchange
Act.
The stock plan is administered by a committee that consists of at least two
nonemployee outside board members. The compensation committee of the board
currently serves as the committee. Generally, the committee has the right to
grant options and other awards to eligible individuals and to determine the
terms and conditions of options and awards, including the vesting schedule and
exercise price of options and awards. The stock plan authorizes the issuance of
shares of Class A Common Stock pursuant to the plan.
The stock plan provides that the term of any option may not exceed ten years,
except in the case of the death of an optionee in which event the option may be
exercised for up to one year following the date of death even if it extends
beyond ten years from the date of grant. If a participant's employment, or
service as a director, with us or ICN or its affiliates is terminated following
a change in control of us, any options or stock appreciation rights become
immediately and fully vested at that time and will remain outstanding until the
earlier of the six-month anniversary of termination and the expiration of the
option term.
At the completion of this offering, we intend to grant stock options to various
employees, including our executive officers, under the 2000 Stock Option Plan.
An aggregate of shares of Class A Common stock would be issuable upon
exercise of these options, and the exercise price of these options will be the
initial public offering price. The following table sets forth the number of
shares of our Class A Common Stock underlying these options granted to our
executive officers.
<TABLE>
<CAPTION>
SHARES OF
CLASS A COMMON STOCK
NAME UNDERLYING OPTIONS GRANTED
<S> <C>
----------------------------------------------------------------------------------------
</TABLE>
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In addition, we intend to grant options to acquire shares of Class A
Common Stock under the 2000 Stock Option Plan to ICN employees who are not one
of our directors, officers, employees or consultants. The exercise price of
these options will be the initial public offering price.
2000 EMPLOYEE STOCK PURCHASE PLAN
We adopted the 2000 Employee Stock Purchase Plan in , 2000. The
stock purchase plan allows our employees to purchase additional shares of our
common stock on the Nasdaq National Market at the then current market price.
Employees who elect to participate in the program will pay for these subsequent
purchases with funds that we will withhold from their paychecks.
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Relationship with ICN
DIVIDEND AND PROMISSORY NOTE
On , 2000, we issued a $ million note to ICN as a dividend.
We intend to use a portion of the net proceeds of this offering to prepay in
full the amounts owing under this note.
ICN has contributed to us:
+ our building, including all fixtures and furniture in the building and the
real property associated with our building;
+ its rights, title and interest under the license agreement with
Schering-Plough, which entitles us to receive all of the royalties from
Schering-Plough in connection with the sale of oral forms of ribavirin,
subject to the prior approval of the holders of ICN's outstanding debt
securities;
+ all of the chemical compounds contained in our chemical compound library,
along with all associated records, journals and data;
+ all intellectual property rights, including all patents, copyrights and
trademarks, related to our business, including all intellectual property
rights held by ICN in ribavirin, Tiazole, Adenazole, Levovirin, Viramidine
and the chemical compounds in our nucleoside analog library; provided,
however, that contribution of ICN's rights in Tiazole and Adenazole are
subject to the prior approval of the Office of Foreign Assets Control;
+ all of our equipment contained in our research and development department;
and
+ all other assets used in the conduct of our business.
However, ICN retains perpetual, exclusive and royalty-free rights to all
indications for ribavirin in a given jurisdiction to the extent currently
approved in that jurisdiction, but not in other jurisdictions for which that
indication is not currently approved. This license excludes all indications and
forms of ribavirin licensed to Schering-Plough. ICN also retains a perpetual,
exclusive and royalty-free rights with respect to the use of ribavirin in
aerosol form for the treatment of bone marrow transplant patients with RSV.
INTERCOMPANY AGREEMENTS
We have entered into a number of agreements with ICN and will enter into several
other agreements with ICN for the purpose of defining our relationship with them
after this offering. These agreements were developed in the context of a
parent/subsidiary relationship and therefore are not the result of arms-length
negotiations between independent parties.
AFFILIATION AGREEMENT
GENERAL
After completion of this offering, ICN will continue to own all of our Class B
Common Stock. These shares represent % of the combined voting power and
% of the value of our outstanding shares of stock. As a result, ICN will
continue to include us as a subsidiary for various financial reporting,
accounting and other purposes. Accordingly, we have entered into an affiliation
agreement with ICN which will be binding on us as long as ICN owns at least 50%
of the combined voting power and % of the value of our outstanding shares
of common stock.
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OBLIGATIONS UNDER OUTSTANDING ICN DEBT SECURITIES
ICN has outstanding debt securities issued in Rule 144A offerings. The
indentures governing these debt securities contain provisions that limit or
prohibit ICN and its restricted subsidiaries from:
+ incurring indebtedness;
+ paying dividends or making other distributions;
+ creating liens;
+ selling our assets;
+ making investments, including some acquisitions, joint ventures and other
strategic transactions; and
+ issuing, selling or repurchasing stock or other equity interests.
We are considered a restricted subsidiary of ICN. Pursuant to the affiliation
agreement, we have agreed to be bound by these provisions.
To the extent the indentures limit or prohibit ICN and its restricted
subsidiaries from engaging in a particular transaction, we have agreed not to
engage in that transaction without the prior written consent of ICN.
Copies of the indentures are filed as exhibits to the registration statement of
which this prospectus is a part. See "Description of ICN indentures" for a
description of the indentures.
OTHER COVENANTS
Pursuant to the affiliation agreement, we have agreed as follows:
+ We will not take any action which would have the effect of limiting ICN's
ability to freely sell, pledge or otherwise dispose of its shares of our
common stock.
+ We will not limit the right of ICN, or deny ICN any benefit, as one of our
stockholders in a manner not applicable to our stockholders generally except
as provided in the affiliation agreement.
+ We will not issue additional shares of Class B Common Stock.
+ We will not issue any shares of Class A Common Stock or any rights, warrants
or options to acquire our Class A Common Stock, if after giving effect to the
issuance ICN would own less than 80.5% of the voting power or value of our
then outstanding shares of common stock. If ICN determines that, due to any
action on our part, its ownership has dropped or will drop below the 80.5%
level, ICN will be able to require us to take various actions. These actions
include reversing or terminating the action, issuing additional equity
securities to it at no cost or purchasing additional equity securities of us
in the open market or from other third parties, in which case we would have
to reimburse ICN for the costs incurred by ICN in making the purchase. After
the anniversary of the closing of this offering, these provisions would
terminate with respect to issuances of equity securities by us under our 2000
Stock Option Plan except that in the event of any issuance we would still be
obligated to issue additional equity securities to ICN at the per share fair
market value of those securities.
+ For so long as ICN is required to consolidate our results of operations and
financial position or account in its financial statements for its investment
in our company, we will provide ICN financial information regarding our
company and our subsidiaries, consult with ICN regarding the timing and
content of our earnings releases and cooperate fully with ICN in connection
with its public filings.
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RELATIONSHIP WITH ICN
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BOARD OF DIRECTORS
Pursuant to the affiliation agreement, we have agreed with ICN that our board of
directors will consist of members, of which will be nominees of ICN,
will be our executive officers and will be independent. ICN has agreed
to vote its shares of common stock so that at all times the board of directors
will include at least independent directors and of our executive
officers. Our initial board consist of directors relationship.
ICN has also agreed that any future transactions between ICN and its affiliates
and us will require the approval of a majority of our independent directors.
INDEMNIFICATION
We have agreed to indemnify ICN and its affiliates against all liabilities
arising out of:
+ any breach by us or our affiliates of any of the provisions of the
affiliation agreement; and
+ any incorrect or incomplete financial information provided by us or our
affiliates to ICN as required by the affiliation agreement.
ICN has agreed to indemnify us and our affiliates against all liabilities
arising out of:
+ any breach by ICN or its affiliates of any of the provisions of the
affiliation agreement;
+ any incorrect or incomplete financial information provided by ICN or its
affiliates to us as required by the affiliation agreement; and
+ any monetary judgment or settlement in connection with the SEC litigation and
the investigation involving the U.S. Attorney's Office.
EXPENSES
We will pay the costs and expenses incurred in connection with this offering,
including the costs and expenses of financial, legal, accounting and other
advisers.
MANAGEMENT SERVICES AGREEMENT
We and ICN have entered into a management services agreement. Under this
agreement, ICN will provide administrative and corporate support services to us
on a transitional basis, including human resource, accounting, treasury, tax,
facilities, and information services. Over time, it is our intention to provide
these services ourselves or contract with third parties to provide these
services. ICN will charge us for these services at its cost, including all
out-of-pocket, third party costs and expenses incurred by ICN in providing the
services. If ICN incurs third party expenses on behalf of us as well as an ICN
entity, ICN will be required to allocate these expenses in good faith between us
and the ICN entity. ICN will determine this allocation in the exercise of its
reasonable judgment. The agreement provides for monthly invoicing of service
charges. If we do not pay the invoiced amount within 60 days following receipt
of the invoice, we will be required to pay interest at a specified rate, unless
the invoiced amount is in dispute. ICN and we will be required to use reasonable
efforts to resolve any disputes promptly.
The management services agreement provides that the services provided by ICN
will be substantially similar in scope, quality and nature to those services
provided to us prior to the completion of this offering. ICN is also required to
provide the services to us through the same or similarly qualified personnel,
but the selection of personnel to perform the various services will be within
the sole control of ICN. In addition, ICN is not required to increase materially
the volume, scope or quality of the services provided beyond the level at which
they were performed for us in the past. The agreement provides that ICN may
cause any third party to provide any service to us that ICN is required to
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provide, but that ICN will remain responsible for any services it causes to be
provided in this manner. ICN is not required to provide any service to the
extent the performance of the service becomes impracticable due to a cause
outside the control of ICN, which could include natural disasters, governmental
actions or similar events of force majeure. Similarly, ICN is not required to
provide any service if doing so would require ICN to violate any laws, rules or
regulations. The management services agreement also provides that ICN and we may
agree to additional services to be provided by ICN. The terms and costs of these
additional services will be mutually agreed upon by ICN and us. These additional
services may include services that were not provided to us prior to the
completion of this offering.
Pursuant to the management services agreement, we have agreed to indemnify and
hold harmless ICN, each of its subsidiaries and their directors, officers,
agents and employees from any claims, damages and expenses arising out of the
services rendered to us. This indemnity would not apply to claims, damages or
expenses resulting from breach of contract, gross negligence or willful
misconduct on the part of ICN or its representatives. In addition, we have
agreed that these same persons shall be liable to us only for any claims,
damages or expenses resulting from breach of contract, gross negligence or
willful misconduct on their part.
The management services agreement will commence on the date of this offering and
will continue until the years from the completion of this offering. We may
terminate one or more of the services provided under the agreement if we
determine at any time that we no longer require these services. ICN and we may,
by mutual agreement, provide for the continuation of some services after this
termination date. In addition, either ICN or us will be able to terminate the
management services agreement with respect to one or more of the services
provided under the agreement:
+ if the other party has failed to perform any material obligation relating to
the terminated service; and
+ if the failure continues for a period of 30 days after the other party
receives notice of the failure from the terminating party.
CONFIDENTIALITY AGREEMENT
We and ICN have entered into a confidentiality agreement with respect to
confidential and proprietary information, intellectual property and other
matters and ICN will agree to keep confidential and to cause our affiliates to
keep confidential, and not to use for any unauthorized purpose, confidential
information regarding the other party. Confidential information includes:
+ unpublished technology and know-how;
+ unpublished patent applications; and
+ other confidential or proprietary technical and business information.
Confidential information does not include any information that:
+ is already known to the other party from a third party source;
+ is or becomes publicly known;
+ is received from a third party without any obligations of confidentiality;
+ is disclosed to a third party without restrictions;
+ is independently developed by employees or consultants of the party receiving
the information; or
+ is approved for release by the disclosing party.
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REGISTRATION RIGHTS AGREEMENT
We and ICN have entered into a registration rights agreement to provide ICN with
registration rights relating to the shares of our common stock which it holds.
ICN will be able to require us to register under the Securities Act all or any
portion of our shares covered by the registration rights agreement on up to
occasions. In addition, the registration rights agreement provides for
various piggyback registration rights for ICN. Whenever we propose to register
any of our securities under the Securities Act for ourselves or others, subject
to customary exceptions, we are required to provide prompt notice to ICN and
include in that registration all shares of our stock which ICN requests to be
included. The registration rights agreement sets forth customary registration
procedures, including a covenant by us to make available our employees and
personnel for road show presentations. All registration expenses incurred in
connection with the registration rights agreement will be paid by us other than
the underwriting commission. In addition, we are required to reimburse ICN for
the reasonable fees and disbursements of its outside counsel retained in
connection with any registration. The registration rights agreement also imposes
customary indemnification and contribution obligations on us for the benefit of
ICN and any underwriters with respect to liabilities resulting from untrue
statements or omissions in any registration statement used in any registration.
However, ICN must indemnify us for those liabilities resulting from information
provided by ICN. The registration rights under the registration rights agreement
will remain in effect with respect to the shares covered by the agreement until:
+ those shares have been sold pursuant to an effective registration statement
under the Securities Act;
+ those shares have been sold to the public pursuant to Rule 144 under the
Securities Act;
+ those shares have been transferred and new certificates delivered, where the
new certificates do not bear a legend restricting further transfer and where
subsequent public distribution of those shares does not require registration
under the Securities Act; or
+ those shares cease to be outstanding.
TAX SHARING AGREEMENT
We are, and after this offering will continue to be, included in ICN's
consolidated federal income tax group. Our federal income tax liability will be
included in the consolidated federal income tax liability of ICN. We and ICN
have entered into a tax sharing agreement pursuant to which the amount of taxes
to be paid or received by us with respect to federal consolidated returns of ICN
in which we are included generally are determined as though we file separate
federal income tax returns. Also, we would pay ICN an amount of state and local
income taxes based upon ICN's worldwide apportionment schedule. Under the terms
of the tax sharing agreement, ICN is not required to make any payment to us for
the use of our tax attributes that come into existence until we would otherwise
be able to utilize these attributes. Under the agreement, ICN will:
+ continue to have all the rights of a parent of a consolidated group;
+ have sole and exclusive responsibility for the preparation and filing of
consolidated federal and consolidated or combined state, local and foreign
income tax returns (or amended returns); and
+ have the power, in its sole discretion, to contest or compromise any asserted
tax adjustment or deficiency and to file, litigate or compromise any claim
for refund relating to these returns.
We will be included in ICN's consolidated group for federal income tax purposes
for so long as ICN beneficially owns at least 80% of the combined voting power
and value of our outstanding stock. Each member of a consolidated group is
jointly and severally liable for the federal income tax liability of each other
member of the consolidated group. Accordingly, although the tax sharing
agreement
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allocates tax liabilities between us and ICN during the period in which we are
included in ICN's consolidated group, we could be liable in the event that any
federal tax liability is incurred, but not paid, by any other member of ICN's
consolidated group. See "Risk Factors -- Risks Relating to Our Separation from
ICN -- We face risks associated with being a member of ICN's consolidated group
for federal income tax purposes."
TAX-FREE SPIN-OFF
ICN presently does not intend, nor does it have the ability, to effect a
tax-free spin-off of its interest in us to ICN's stockholders. However, ICN has
created a two-class structure for our common stock to preserve its ability to
effect a tax-free spin-off to the extent that ICN has the ability to do so at
some point in the future. If all of the legal requirements for a tax-free
spin-off are met at some point in the future, ICN may choose to distribute its
interest in us to ICN's stockholders on a tax-free basis. It is possible that
ICN would not be in a position to spin-off its interest in us on a tax-free
basis until approximately five years after this offering. Moreover, proposed
legislation, if enacted, would not permit ICN to spin-off its interest in us on
a tax-free basis unless ICN maintains at least an 80% interest in both the
voting power and value of our stock. Under current law, ICN would need to own at
least 80% of the voting power of our stock to effect a tax-free spin-off.
CONTRACT SERVICES AGREEMENT WITH ICN
We may from time to time enter into contract services agreements with ICN and
various foreign affiliates of ICN relating to studies of product candidates on
our behalf. See "Business -- Contract Services Relationships with ICN."
LEASE
On , 2000, we entered into a lease with ICN, under which ICN is
leasing from us, for a transitional period, approximately square feet
of office space at our offices in Costa Mesa, California at a monthly rate of
$ . The lease has a term of and will be automatically
renewable by ICN for an additional term. ICN will also have the right
to terminate the lease on days prior written notice. In addition to the
rent, ICN will be responsible for reimbursing us for its share of utilities,
security, parking, building maintenance and cleaning services. This share will
be determined based upon the percentage of square feet of space in the building
leased by ICN. ICN intends to relocate as soon as practicable after completion
of this offering to new office space.
OPTION GRANTS TO ICN EMPLOYEES
We intend to grant options under the 2000 Stock Option Plan to some ICN
directors, officers and/or employees who will not become our employees. See
"Management -- Employee Benefit Plans -- 2000 Stock Option and Award Plan."
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Description of ICN indentures
NOTES DUE AUGUST 2005
GENERAL
The following is a summary of the material provisions of the indentures
governing ICN's outstanding debt securities. Pursuant to our affiliation
agreement, we have agreed to be bound by the covenants set forth in the
indentures. For purposes of the indentures, we are a restricted subsidiary of
ICN. This summary does not purport to be complete and is subject to the detailed
provisions of, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended, the debt securities and the indentures,
including the definitions of terms contained in the indentures and the debt
securities and including those terms made part of the indentures by reference to
the Trust Indenture Act. Reference is made to the indentures for full
definitions of all defined terms.
MATURITY AND INTEREST
9 1/4% SENIOR NOTES DUE 2005.
These notes are unsecured senior obligations of ICN limited in aggregate
principal amount to $275,000,000. These notes mature on August 15, 2005.
Interest on these notes accrues at the rate of 9 1/4% per annum and is payable
semi-annually in arrears on February 15 and August 15 in each year.
8 3/4% SENIOR NOTES DUE 2008.
These notes are unsecured senior obligations of ICN limited in aggregate
principal amount to $325,000,000. The notes mature on November 15, 2008.
Interest on these notes accrues at the rate of 8 3/4% per annum and is payable
semi-annually in arrears on May 15 and November 15 in each year. Interest on the
notes is currently accruing at the rate of 9 3/4% per annum due to the failure
to timely consummate a registered exchange offer for the notes. Once the
exchange offer is consummated, interest on the notes will return to the 8 3/4%
rate.
OPTIONAL REDEMPTION
9 1/4% SENIOR NOTES DUE 2005.
These notes are redeemable at the option of ICN, in whole or in part, at any
time on or after August 15, 2001 at the redemption prices (expressed as
percentages of the principal amount of the notes) set forth below plus accrued
and unpaid interest, if any, to the date of redemption during the twelve-month
period beginning on August 15 of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
------------------------------------------------------------------------
2001................................................... 104.625
2002................................................... 103.083
2003................................................... 101.542
2004 and thereafter.................................... 100.000%
</TABLE>
8 3/4% SENIOR NOTES DUE 2008.
At any time on or prior to November 15, 2001, ICN may, at its option, redeem up
to $70 million of the aggregate principal amount of notes with the net proceeds
of one or more public equity offerings
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DESCRIPTION OF ICN INDENTURES
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of ICN stock at a redemption price equal to 108.75% of the principal amount of
the notes plus any accrued and unpaid interest to the date of redemption. These
notes are not otherwise redeemable.
RANKING
The 9 1/4% Senior Notes and the 8 3/4% Senior Notes rank pari passu with each
other. The notes are general unsecured obligations of ICN. The notes rank pari
passu in right of payment with all unsecured senior indebtedness and senior to
all subordinated indebtedness of ICN. The notes are effectively subordinated to
all secured indebtedness of ICN to the extent of the assets securing the secured
indebtedness and are also effectively subordinated to all indebtedness of ICN's
subsidiaries.
CHANGE OF CONTROL
In the event of a change of control of ICN, each holder of notes has the right,
unless ICN has given a notice of redemption, subject to the terms and conditions
of the indentures, to require ICN to offer to purchase all or any portion of the
holder's notes at a purchase price in cash equal to 101% of the aggregate
principal amount of the notes plus accrued and unpaid interest, if any, to the
date of purchase.
COVENANTS
LIMITATION ON INCURRENCE OF INDEBTEDNESS. The indentures provide that ICN will
not, and will not permit any restricted subsidiary to, create, incur, assume or
directly or indirectly guarantee or in any other manner become directly or
indirectly liable for any indebtedness, except that ICN may incur indebtedness
if, at the time of, and immediately after giving pro forma effect to, the
incurrence of Indebtedness, ICN maintains a specified consolidated cash flow
coverage ratio.
However, the indentures permit the following indebtedness:
+ senior bank debt of ICN or any of its restricted subsidiaries, in an
aggregate principal amount not to exceed at any time outstanding the greater
of (x) $50.0 million, and (y) the sum, at such time, of (I) 85% of the
consolidated book value of net accounts receivable and current notes
receivable of ICN and the restricted subsidiaries and (II) 60% of the
consolidated book value of inventory of ICN and the restricted subsidiaries;
+ indebtedness of ICN represented by the notes;
+ indebtedness of ICN or any restricted subsidiary that was outstanding on the
issue date of the notes;
+ indebtedness owed by any restricted subsidiary to ICN or to another
restricted subsidiary, or owed by ICN to any restricted subsidiary;
+ indebtedness of ICN or any restricted subsidiary incurred for the purpose of
fixing or hedging interest rate risk or currency risk with respect to any
fixed or floating rate indebtedness that is permitted by the terms of the
indentures to be outstanding or with respect to any receivable or liability
the payment of which is determined by reference to a foreign currency;
+ indebtedness represented by performance, completion, guarantee, surety and
similar bonds provided by ICN or any restricted subsidiary in the ordinary
course of business;
+ any indebtedness incurred in connection with the refinancing of any permitted
senior bank indebtedness or the notes or any indebtedness outstanding on the
issue date of the notes;
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DESCRIPTION OF ICN INDENTURES
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+ indebtedness incurred by ICN or any restricted subsidiary constituting
reimbursement obligations with respect to letters of credit issued in the
ordinary course of business;
+ indebtedness of ICN or any restricted subsidiary arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, in each case incurred or assumed in connection with the
disposition of any business, assets or a subsidiary; and
+ indebtedness of ICN or any restricted subsidiary in addition to that
described above, and any renewals, extensions, substitutions, refinancings or
replacements of this indebtedness, so long as the aggregate principal amount
of all this indebtedness incurred does not exceed $20.0 million, in the case
of the indenture governing the 9 1/4% notes, and $35.0 million in the case of
the indenture governing the 8 3/4% notes, at any one time outstanding.
Notwithstanding the foregoing exceptions to the limitation on incurrence of
indebtedness, we have agreed that we will not incur any indebtedness without the
prior written consent of ICN that may have the affect of limiting the ability of
ICN to incur any indebtedness under the indentures.
Indebtedness of any entity which is outstanding at the time an entity becomes a
restricted subsidiary or is merged with or into or consolidated with ICN or a
restricted subsidiary is deemed to have been incurred at the time the entity
becomes a restricted subsidiary or is merged with or into or consolidated with
ICN or a restricted subsidiary, and indebtedness which is assumed at the time of
the acquisition of any asset is deemed to have been incurred at the time of the
acquisition.
LIMITATION ON RESTRICTED PAYMENTS. The indentures provide that ICN will not,
and will not permit any restricted subsidiary to, directly or indirectly make
any restricted payment, unless at the time of and immediately after giving
effect to the proposed restricted payment:
+ no default or event of default shall have occurred and be continuing or would
occur as a consequence of the payment;
+ ICN could incur at least $1.00 of additional indebtedness (other than
permitted indebtedness) pursuant to the covenant described above; and
+ the aggregate amount of all restricted payments made after the issue date of
the notes does not exceed the sum of:
+ an amount equal to 50% of ICN's aggregate cumulative consolidated net
income accrued on a cumulative basis during the period beginning on the
issue date of the notes and ending on the date of the proposed restricted
payment, or, if such aggregate cumulative consolidated net income for the
period is a deficit, minus 100% of the deficit; plus
+ the aggregate amount of all net cash proceeds received since the issue
date of the notes by ICN from the issuance and sale, other than to a
restricted subsidiary, of capital stock and the principal amount of
indebtedness of ICN or any restricted subsidiary issued or incurred on or
after the issue date of the notes that has been converted into or
exchanged for capital stock, in any such case to the extent that the
proceeds are not used to redeem, repurchase, retire or otherwise acquire
capital stock or any indebtedness of ICN or any restricted subsidiary;
plus
+ the amount of the net reduction in restricted investments resulting from
(x) the payment of dividends or the repayment in cash of the principal of
loans or the cash return on any restricted investment, in each case to
the extent received by ICN or any restricted subsidiary, (y) the release
or extinguishment of any guarantee of indebtedness which guarantee
constituted a restricted investment, and (z) in the case of investments
in unrestricted subsidiaries the redesignation of unrestricted
subsidiaries as restricted subsidiaries, such aggregate amount of the net
reduction in restricted investments not to exceed the amount of
restricted investments
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DESCRIPTION OF ICN INDENTURES
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previously made by ICN or any restricted subsidiary, which amount was
included in the calculation of the amount of restricted payments.
The foregoing provisions do not prohibit, so long as no default or event of
default is continuing, the following actions:
+ the payment of any dividend within 60 days after the date of declaration
thereof, if on the declaration date the payment would have been permitted by
the indentures;
+ the redemption, repurchase, retirement or other acquisition of any capital
stock or any indebtedness of ICN or any restricted subsidiary in exchange
for, or out of the proceeds of, the substantially concurrent sale, other than
to a restricted subsidiary, of, or equity contribution with respect to,
capital stock of ICN; and
+ cash dividends on the common stock of ICN paid in the ordinary course
consistent with past practice; provided that ICN could incur at least $1.00
of additional indebtedness, other than permitted indebtedness, pursuant to
the covenant described above;
+ the redemption, repurchase or other acquisition of capital stock of ICN
issued to Hoffmann-La Roche in an amount not to exceed $40.0 million out of
net proceeds received by ICN from the issuance and sale of the notes; and
+ other payments not otherwise permitted by the foregoing clauses in an
aggregate amount not to exceed $10 million.
Under the indentures, a "restricted payment" is defined as:
+ any dividend or other distribution declared or paid on any capital stock of
ICN, other than dividends or distributions payable solely in capital stock of
ICN or dividends or distributions payable to ICN or any restricted
subsidiary;
+ any payment to purchase, redeem or otherwise acquire or retire for value any
capital stock of ICN;
+ any payment to purchase, redeem, defease or otherwise acquire or retire for
value, prior to any scheduled maturity, repayment or sinking fund payment,
any subordinated indebtedness other than a purchase, redemption, defeasance
or other acquisition or retirement for value that is paid for with the
proceeds of refinancing indebtedness that is permitted under the limitation
on indebtedness covenant described above; or
+ any investment that is not a permitted investment.
Under the indentures, a "permitted investment" is defined as:
+ any investment in ICN or any restricted subsidiary; provided, that the
primary business of the restricted subsidiary is a related business;
+ any investment in cash or cash equivalents;
+ any investment in a person the primary business of which is a related
business if, as a result of the investment:
+ the person becomes a restricted subsidiary; or
+ the person either is merged, consolidated or amalgamated with or into ICN
or one of its restricted subsidiaries and ICN or the restricted
subsidiary is the surviving person, or transfers or conveys substantially
all of its assets to, or is liquidated into, ICN or one of its restricted
subsidiaries;
+ investments in accounts and notes receivable acquired in the ordinary course
of business;
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DESCRIPTION OF ICN INDENTURES
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+ any notes, obligations or other securities received in connection with an
asset sale that complies with the limitation on asset sales covenant
described below or any other disposition not constituting an "asset sale"
under the indentures;
+ interest rate agreement obligations;
+ currency agreement obligations permitted under the limitation on indebtedness
covenant described above;
+ investments in or acquisitions of capital stock or similar interests in
persons, other than affiliates of ICN received in the bankruptcy or
reorganization of or by the person; and
+ other investments not to exceed $50 million, which are reinstated to the
extent of any net cash proceeds, dividends, repayments of loans or other
transfers of cash or assets received by ICN or any restricted subsidiary as a
return of or on the Investment.
Notwithstanding the foregoing exceptions to the limitation on restricted
payments, we have agreed that we will not make any restricted payment without
the prior written consent of ICN that may have the effect of limiting the
ability of ICN to make restricted payments under the indenture.
LIMITATION ON ASSET SALES. The indentures provide that ICN will not, and will
not permit any restricted subsidiary to, make any asset sale unless:
+ ICN or the restricted subsidiary receives consideration at the time of the
asset sale at least equal to the fair market value of the assets or other
property sold or disposed of in the asset sale; and
+ at least 75% of the consideration consists of either cash or cash
equivalents.
Within one year after any asset sale, ICN may elect to apply the net proceeds
from the asset sale to:
+ permanently reduce any senior bank debt of ICN and/or
+ make an investment in, or acquire assets and properties that will be used in,
a related business.
Pursuant to the indentures, if greater than $10 million of the net proceeds from
an asset sale are not invested by ICN as provided above, ICN must commence
separate offers to purchase the maximum principal amount of 9 1/4% and 8 3/4%
notes that may be purchased out of the excess proceeds. Any notes to be
purchased pursuant to these offers must be purchased pro rata based on the
aggregate principal amount of each series of notes outstanding, and all notes
must be purchased at an offer price in cash in an amount equal to 100% of the
principal amount, plus accrued and unpaid interest, if any, to the date of
purchase. To the extent that any excess proceeds remain after completion of
these offers, ICN may use the remaining amount for general corporate purposes
otherwise permitted by the indentures.
LIMITATION ON LIENS. The indentures provide that ICN will not, and will not
permit any restricted subsidiary to, directly or indirectly, create incur,
assume or suffer to exist any lien securing indebtedness, other than permitted
liens, unless:
+ if the lien secures indebtedness which is pari passu with the notes, then the
notes are secured on an equal and ratable basis with the obligations secured
until such time as the obligation is no longer secured by a lien; or
+ if the lien secures indebtedness which is subordinated to the notes, the lien
will be subordinated to a lien granted to the holders of the notes in the
same collateral as that securing the lien to the same extent as the
subordinated indebtedness is subordinated to the notes.
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DESCRIPTION OF ICN INDENTURES
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"Permitted liens" is defined as:
+ liens on assets or property of ICN that secure senior bank debt of ICN and
liens on assets or property of a restricted subsidiary that secure
indebtedness of a restricted subsidiary;
+ liens securing indebtedness of a person existing at the time that such person
is merged into or consolidated with ICN or a restricted subsidiary; provided,
that these liens were in existence prior to the contemplation of the merger
or consolidation and do not extend to any assets other than those of the
person;
+ liens on property acquired by ICN or a restricted subsidiary; provided,
however, that these liens were in existence prior to the contemplation of
such acquisition and do not extend to any other property;
+ liens in respect of interest rate agreement obligations and currency
agreement obligations permitted under the indenture;
+ liens in favor of ICN or any restricted subsidiary;
+ liens existing or created on the issue date of the notes; and
+ liens securing the notes.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The indentures provide that ICN will not, and will not permit any
restricted subsidiary to, directly or indirectly, create or otherwise cause to
become effective any consensual encumbrance or consensual restriction on the
ability of any restricted subsidiary to:
+ pay dividends or make any other distributions to ICN or any other restricted
subsidiary on its capital stock or with respect to any other interest or
participation in, or measured by, its profits, or pay any indebtedness owed
to ICN or any other restricted subsidiary;
+ make loans or advances to, or issue guarantees for the benefit of, ICN or any
other restricted subsidiary; or
+ transfer any of its properties or assets to ICN or any other restricted
subsidiary, subject to specified exceptions.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. Subject to limited exceptions, ICN
will not, and will not permit any restricted subsidiary to, directly or
indirectly, enter into or suffer to exist any transaction or series of related
transactions with any affiliate of ICN unless:
+ the transaction or series of transactions is on terms that are no less
favorable to ICN or the restricted subsidiary than those that could
reasonably be obtainable at that time in a comparable transaction in
arm's-length dealings with an unrelated third party; and
+ ICN delivers to the trustee under the indentures an officer's certificate, or
a fairness opinion from a nationally recognized investment banking firm in
the case of transactions in excess of $10 million, containing specified
information about the transaction.
LIMITATION ON DESIGNATION OF UNRESTRICTED SUBSIDIARIES. The indentures provide
that ICN will not designate any subsidiary, other than a newly created
subsidiary in which no investment has previously been made, as an "unrestricted
subsidiary" under the indentures unless:
+ no default shall have occurred and be continuing at the time of or after
giving effect to the designation;
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DESCRIPTION OF ICN INDENTURES
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+ immediately after giving effect to the designation, ICN would be able to
incur $1.00 of additional indebtedness, other than permitted indebtedness,
under the covenant described above; and
+ ICN would not be prohibited under the indentures from making an investment at
the time of the designation in an amount equal to the greater of (x) the book
value of the restricted subsidiary on that date and (y) the fair market value
of the restricted subsidiary on that date.
ICN does not intend to designate us as an unrestricted subsidiary.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The indentures provide that ICN cannot, in any single transaction or series of
related transactions, consolidate or merge with or into, or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets, determined on a consolidated basis for ICN and its
restricted subsidiaries, in one or more related transactions to, another entity,
and ICN will not permit any restricted subsidiary to enter into any transaction
or series of related transactions if the transaction or series of related
transactions, in the aggregate, would result in a sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the
properties and assets of ICN and the restricted subsidiaries, taken as a whole,
to another entity, unless:
+ the surviving person is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia;
+ the surviving person, if other than ICN, assumes all the obligations of ICN
under the notes and the indentures;
+ immediately after the transaction, no default or event of default shall have
occurred and be continuing; and
+ after giving pro forma effect to the transaction, the surviving person:
+ would have a consolidated net worth equal to or greater than the
consolidated net worth of ICN immediately preceding the transaction and
+ would be permitted to incur at least $1.00 of additional Indebtedness,
other than permitted indebtedness, pursuant to the covenant described
above.
Notwithstanding the foregoing, the indentures permit any restricted subsidiary
to consolidate with, merge into or transfer all or part of its properties and
assets to ICN or another restricted subsidiary.
EVENTS OF DEFAULT
The indentures provide that each of the following constitutes an event of
default:
+ a default for 30 days in the payment when due of interest on, or liquidated
damages with respect to, any note;
+ a default in the payment when due of principal on any note, whether upon
maturity, acceleration, optional redemption, required repurchase or
otherwise;
+ failure to perform or comply with any covenant, agreement or warranty in the
indenture which failure continues for 30 days after written notice thereof
has been given to ICN by the trustee under the indenture or to ICN and the
trustee by the holders of at least 25% in aggregate principal amount of the
then outstanding notes;
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DESCRIPTION OF ICN INDENTURES
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+ the occurrence of one or more defaults under any agreements, indentures or
instruments under which ICN or any restricted subsidiary then has outstanding
indebtedness in excess of $10 million in the aggregate and, if not already
matured at its final maturity in accordance with its terms, the indebtedness
shall have been accelerated;
+ one or more judgments, orders or decrees for the payment of money in excess
of $10 million, either individually or in the aggregate, shall be entered
against ICN or any restricted subsidiary or any of their respective
properties and which judgments, orders or decrees are not paid, discharged,
bonded or stayed or stayed pending appeal for a period of 60 days after their
entry; or
+ events of bankruptcy, insolvency or reorganization of the ICN or any
restricted subsidiary.
If any event of default other than an event of bankruptcy occurs and is
continuing, the trustee or the holders of at least 25% in aggregate principal
amount of the then outstanding notes may, and the trustee at the request of
these holders must, declare all the notes to be due and payable immediately by
notice in writing to ICN, and to ICN and the trustee if by the holders,
specifying the respective event of default and that such notice is a "notice of
acceleration," and the notes will become immediately due and payable.
Notwithstanding the foregoing, in the case of an event of default arising from a
bankruptcy event, the principal of, premium, if any, and any accrued interest on
all outstanding notes will become immediately due and payable without further
action or notice. Holders of the notes may not enforce the indentures or the
notes except as provided in the indentures.
DEFEASANCE
ICN may, at its option and at any time, elect to have the obligations of ICN
discharged with respect to the outstanding notes. This defeasance means that ICN
shall be deemed to have paid and discharged the entire indebtedness represented
by the outstanding notes and to have satisfied all other obligations under the
notes and the indentures except for:
+ the rights of holders of the outstanding notes to receive, solely from the
trust fund described below, payments in respect of the principal of, premium,
if any, and interest on the notes when the payments are due;
+ ICN's obligations with respect to the notes concerning issuing temporary
notes, registration of notes, mutilated, destroyed, lost or stolen notes, and
the maintenance of an office or agency for payment;
+ the rights, powers, trusts, duties and immunities of the trustee under the
indentures; and
+ the defeasance provisions of the indentures.
In addition, ICN may, at its option and at any time, elect to have the
obligations of ICN released with respect to covenants that are described in the
indentures and any omission to comply with the obligations will not constitute a
default or an event of default with respect to the notes. In the event that a
covenant defeasance occurs, specified events, not including non-payment,
bankruptcy and insolvency events, described above under "-- Events of Default"
will no longer constitute events of default with respect to the notes.
In order to exercise either defeasance or covenant defeasance:
+ ICN must irrevocably deposit with the trustee, as trust funds in trust, for
the benefit of the holders of the notes, cash in U.S. dollars, U.S.
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the report of a nationally recognized firm of independent
public accountants or a nationally recognized investment banking firm, to pay
and discharge the principal of, premium, if any, and interest on the
outstanding notes to redemption or maturity;
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DESCRIPTION OF ICN INDENTURES
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+ ICN must deliver to the trustee an opinion of tax counsel in the United
States;
+ no default or event of default shall have occurred and be continuing on the
date of the deposit;
+ the defeasance or covenant defeasance cannot result in a breach or violation
of, or constitute a default under, the indentures or any other agreement or
instrument to which ICN is a party or by which it is bound; and
+ ICN must deliver to the trustee an officers' certificate and an opinion of
counsel.
SATISFACTION AND DISCHARGE
Each indenture will be discharged and will cease to be of further effect as to
all outstanding notes when:
+ either all the notes under the indenture theretofore authenticated and
delivered have been delivered to the trustee for cancellation or all notes
not theretofore delivered to the trustee for cancellation have become due and
payable and ICN has irrevocably deposited or caused to be deposited with the
trustee an amount in U.S. dollars sufficient to pay and discharge the entire
indebtedness on the notes not theretofore delivered to the trustee for
cancellation, for the principal of, premium, if any, and interest to the date
of deposit;
+ ICN has paid or caused to be paid all other sums payable under the indenture
by ICN; and
+ ICN has delivered to the trustee an officers' certificate and an opinion of
counsel each stating that all conditions precedent under the indenture
relating to the satisfaction and discharge of the indenture have been
complied with.
Under the terms of the affiliation agreement, we have agreed to indemnify ICN
and its affiliates for any breach by us or our affiliates of any of the
provisions of the affiliation agreement. Accordingly, if we fail to comply with
the terms of the indentures as we are required to do under the affiliation
agreement, we will be liable to ICN and its affiliates for any damages they may
suffer as a result of our breach.
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Principal stockholders
Prior to this offering, we were a wholly owned subsidiary of ICN. Upon
completion of this offering, ICN will own all of the outstanding shares of Class
B Common Stock. These shares will represent approximately of the combined voting
power and % of the value of our outstanding shares of common stock.
The following table presents selected information regarding beneficial ownership
of our Class A Common Stock as of immediately after the offering for:
+ each of our directors;
+ our Chief Executive Officer and our other executive officers; and
+ all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A COMMON PERCENT OF OUTSTANDING
STOCK BENEFICIALLY SHARES OF CLASS A PERCENTAGE OF TOTAL
BENEFICIAL OWNER OWNED COMMON STOCK VOTING POWER
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 79
Description of securities
AUTHORIZED CAPITAL STOCK
Our certificate of incorporation provides for authorized capital stock of
million shares, including million shares of Class A Common Stock,
$.01 par value per share, million shares of Class B Common Stock, $.01
par value per share, and million shares of preferred stock, $.01 par
value per share. Upon completion of this offering, no preferred stock will be
outstanding and ICN will own all of the outstanding shares of Class B Common
Stock. See "Principal Stockholders."
COMMON STOCK
The relative rights of the Class A Common Stock and Class B Common Stock are
substantially identical in all respects, except for voting rights and conversion
rights.
VOTING
Holders of Class A Common Stock are entitled to one vote per share while holders
of Class B Common Stock are entitled to five votes per share on all matters
submitted to a vote of our stockholders, including the election of directors.
Except as otherwise required by law or provided in any resolution adopted by the
board of directors with respect to any series of Preferred Stock, the holders of
Class A Common Stock and Class B Common Stock will possess all voting power.
Generally, all matters to be voted on by stockholders must be approved by a
majority or, in the case of election of directors, by a plurality of the votes
entitled to be cast by all shares of Class A Common Stock and Class B Common
Stock that are present in person or represented by proxy, voting together as a
single class, subject to any voting rights granted to holders of any Preferred
Stock. Except as otherwise provided by law, and subject to any voting rights
granted holders of any Preferred Stock, amendments to our certificate of
incorporation generally must be approved by a majority of the votes entitled to
be cast by all outstanding shares of Class A Common Stock and Class B Common
Stock, voting together as a single class. However, amendments to our certificate
of incorporation that would alter or change the powers, preferences or special
rights of the Class A Common Stock or Class B Common Stock so as to adversely
affect them must also be approved by a majority of the outstanding shares of the
class that is adversely affected by that amendment, voting as a separate class.
Our certificate of incorporation will not provide for cumulative voting in the
election of directors.
CONVERSION OF CLASS B COMMON STOCK
ICN will be entitled, from time to time, to convert all or any portion of its
shares of Class B Common Stock into shares of Class A Common Stock on a
one-for-one basis. Any shares of Class B Common Stock transferred by ICN or any
of its subsidiaries to any person, other than ICN or any of its subsidiaries,
will automatically be converted into shares of Class A Common Stock on a
one-for-one basis, except in connection with a tax-free spin-off of ICN's
ownership interest in us to its stockholders. All shares of Class B Common Stock
will automatically convert into shares of Class A Common Stock on a one-for-one
basis if the number of outstanding shares of Class B Common Stock falls below
20% of the aggregate number of outstanding shares of Class A Common Stock and
Class B Common Stock. This automatic conversion feature will prevent ICN from
decreasing its economic interest in us to less than 20% while still retaining
control of approximately % of the combined voting power of our outstanding
shares of common stock, assuming no additional shares of common stock are issued
after this offering.
Following a tax-free spin-off, except as provided below, shares of Class B
Common Stock will not be convertible at the option of the holder into shares of
Class A Common Stock. Shares of Class B
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DESCRIPTION OF SECURITIES
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Common Stock will automatically convert into shares of Class A Common Stock on a
one-for-one basis on the fifth anniversary of a tax-free spin-off. However, the
automatic conversion may not occur if, prior to the fifth anniversary, we
receive an opinion from ICN's tax counsel that the elimination of the Class B
Common Stock will cause the spin-off to be taxable. In this case, the conversion
will not occur until we receive an opinion from ICN's tax counsel that a
stockholder vote or the conversion will not cause the spin-off to become a
taxable event and the conversion is approved by the holders of Class A Common
Stock and Class B Common Stock voting together as a single class with each share
of Class A Common Stock and Class B Common Stock having one vote.
DIVIDENDS
Subject to any preferential rights of any outstanding series of Preferred Stock
created by our board of directors from time to time, the holders of shares of
Class A Common Stock and Class B Common Stock will be entitled to cash dividends
as may be declared from time to time by the board of directors from funds
available therefor. Dividends are required to be declared pro-rata on both
classes. In addition, in connection with any stock dividend that may be declared
by our board of directors from time to time, holders of Class A Common Stock
will be entitled to receive these dividends only in shares of Class A Common
Stock while holders of Class B Common Stock will be entitled to receive these
dividends either in shares of Class A Common Stock or in shares of Class B
Common Stock as may be determined by our board of directors. Neither the shares
of Class A Common Stock nor the shares of Class B Common Stock may be
reclassified, subdivided or combined unless the reclassification, subdivision or
combination occurs simultaneously and in the same proportion for each class.
LIQUIDATION
Subject to any preferential rights of any outstanding series of Preferred Stock
created from time to time by our board of directors, upon our liquidation,
dissolution or winding up, the holders of shares of Class A Common Stock and
Class B Common Stock will be entitled to receive pro rata all our assets
available for distribution to these holders.
PREFERRED STOCK
Pursuant to our certificate of incorporation, our board of directors will have
the authority, without further action by our stockholders, to issue up to
shares of preferred stock, in one or more series. Our board shall
determine the rights, preferences, privileges and restrictions of the preferred
stock, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of any series. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock, and the likelihood that holders of preferred stock will receive dividend
payments and payments upon liquidation may have the effect of delaying,
deferring or preventing a change in control of us, which could depress the
market price of our common stock. We have no present plan to issue any shares of
preferred stock.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION
AND BYLAWS
A number of provisions in Delaware Law and our certificate of incorporation and
by-laws may make it more difficult to acquire control of us. These provisions
could deprive our stockholders of opportunities to realize a premium on the
shares of common stock owned by them. In addition, these
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DESCRIPTION OF SECURITIES
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provisions may adversely affect the prevailing market price of the common stock.
These provisions are intended to:
+ enhance the likelihood of continuity and stability in the composition of the
board and in the policies formulated by the board;
+ discourage specified types of transactions which may involve an actual or
threatened change in control of us;
+ discourage tactics that may be used in proxy fights; and
+ encourage persons seeking to acquire control of us to consult first with the
board of directors to negotiate the terms of any proposed business
combination or offer.
STAGGERED BOARD
Our certificate of incorporation and by-laws will provide that the number of our
directors shall be fixed from time to time by a resolution of a majority of our
board of directors. Our certificate of incorporation and by-laws also provide
that the board of directors will be divided into three classes. The members of
each class of directors will serve for staggered three-year terms. In accordance
with the Delaware General Corporation Law, directors serving on classified
boards of directors may only be removed from office for cause. The
classification of the board has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of the members of
the board. Subject to the rights of the holders of any outstanding series of
preferred stock, vacancies on the board of directors may be filled only by a
majority of the remaining directors, or by the sole remaining director, or by
the stockholders if the vacancy was caused by removal of the director by the
stockholders. This provision could prevent a stockholder from obtaining majority
representation on the board by enlarging the board of directors and filling the
new directorships with its own nominees.
ADVANCE NOTICE PROCEDURES FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our by-laws will provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice generally must be
delivered to or mailed and received at our principal executive offices not less
than 45 or more than 75 days prior to the first anniversary of the date on which
we first mailed our proxy materials for the preceding year's annual meeting of
stockholders. However, if the date of the annual meeting is advanced more than
30 days prior to or delayed by more than 30 days after the anniversary of the
preceding year's annual meeting, to be timely, notice by the stockholder may be
delivered not later than the close of business on the later of the 90th day
prior to the annual meeting or the 10th day following the day on which public
announcement of the date of the meeting is first made. The by-laws will also
specify requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Our by-laws provide that stockholders may take action by written consent.
PREFERRED STOCK
The ability of our board to establish the rights and issue substantial amounts
of preferred stock without the need for stockholder approval, while providing
desirable flexibility in connection with possible acquisitions, financing, and
other corporate transactions, may among other things, discourage, delay, defer,
or prevent a change in control of us.
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DESCRIPTION OF SECURITIES
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AUTHORIZED BUT UNISSUED SHARES OF COMMON STOCK
The authorized but unissued shares of common stock are available for future
issuance without stockholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions, and employee benefit plans. The
existence of authorized but unissued shares of common stock could render more
difficult or discourage an attempt to obtain control of us by means of a proxy
contest, tender offer, merger or otherwise.
DELAWARE SECTION 203
Our certificate of incorporation provides that we have opted out of the
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Because we have opted out in the manner permitted under Delaware law, the
restrictions of this provision will not apply to us.
CORPORATE OPPORTUNITIES
Our certificate of incorporation provides that we and ICN and our and their
respective subsidiaries may engage in the same or similar business activities
and lines of business and have an interest in the same areas of corporate
opportunities and that we and ICN will continue to have contractual and business
relations with each other. Our certificate of incorporation provides that,
except as ICN may otherwise agree in writing, ICN will have the right to:
+ engage in the same or similar business activities or lines of business as us;
+ do business with any of our potential or actual customers; and
+ employ or otherwise engage, or solicit for this purpose, any of our officers,
directors or employees.
Neither ICN nor any officer, employee or director of ICN will be liable to us or
our stockholders for breach of any fiduciary or other duty by reason of these
activities. If ICN acquires knowledge of a potential transaction or matter that
may be a corporate opportunity for both ICN and us and ICN will have no duty to
communicate that opportunity to us. ICN will not be liable to us or our
stockholders because ICN pursues or acquires that corporate opportunity for
itself, directs that corporate opportunity to another person or entity or does
not present that corporate opportunity to us.
After completion of this offering, Milan Panic will be the chairman of our board
of directors but will not be an executive officer of us. He will also be
chairman of the board and chief executive officer of ICN. Other than Mr. Panic,
no person will be a director, officer or employee of us and a director, officer
or employee of ICN. However, in the future there may be one or more other
persons serving in one of these positions with both us and ICN. Therefore, we
have adopted provisions to protect us in the event of a conflict or a potential
conflict of interest. If one of our directors, officers or employees who is also
a director, officer or employee of ICN acquires knowledge of a potential
transaction or matter that may be a corporate opportunity for both us and ICN,
our certificate of incorporation will require that our director, officer or
employee act in good faith in accordance with the following policy:
+ a corporate opportunity offered to any person who is one of our directors but
not one of our officers or employees and who is also an officer or employee
of ICN will belong to ICN, unless the opportunity is expressly offered to
that person solely in his or her capacity as our director, in which case the
opportunity will belong to us;
--------------------------------------------------------------------------------
79
<PAGE> 83
DESCRIPTION OF SECURITIES
--------------------------------------------------------------------------------
+ a corporate opportunity offered to any person who is one of our officers or
employees and who is also a director but not an officer or employee of ICN
will belong to us, unless the opportunity is expressly offered to that person
solely in his or her capacity as a director of ICN, in which case the
opportunity will belong to ICN; and
+ a corporate opportunity offered to any other person who is either one of our
officers or employees and either an officer or employee of ICN or a director
of both us and ICN will belong to ICN, unless this opportunity is expressly
offered to the person solely in his or her capacity as one of our officers,
directors or employees, in which case the opportunity will belong to us.
If a corporate opportunity is offered to us or ICN other than through a person
who is an officer, director or employee of both us and ICN, either we or ICN can
pursue that opportunity. Under our certificate of incorporation, any corporate
opportunity that belongs to ICN or to us pursuant to the policy described above
will not be pursued by the other or directed by the other to another person or
entity unless and until ICN or we, as the case may be, determine not to pursue
the opportunity. If the party to whom the corporate opportunity belongs does
not, however, within a reasonable period of time, begin to pursue, or thereafter
continue to pursue, this opportunity diligently and in good faith, the other
party may pursue the opportunity or direct it to another person or entity. Our
directors, officers or employees acting in accordance with the policy described
above:
+ will be deemed fully to have satisfied their fiduciary or other duties to us
and our stockholders with respect to that corporate opportunity;
+ will not be liable to us or our stockholders for any breach of fiduciary duty
by reason of the fact that ICN pursues or acquires that opportunity for
itself or directs that corporate opportunity to another person or does not
communicate information regarding the opportunity to us;
+ will be deemed to have acted in good faith and in a manner they reasonably
believe to be in our best interests; and
+ will be deemed not to have breached any duty of loyalty or other duty those
persons may have to us or our stockholders and not to have derived an
improper benefit from these actions.
The corporate opportunity provisions in our certificate of incorporation expire
on the date that ICN ceases to beneficially own common stock representing at
least 20% of the combined voting power of our outstanding shares of common
stock. Our certificate of incorporation provides that any person purchasing or
otherwise acquiring any interest in any shares of our capital stock shall be
deemed to have notice of and to have consented to these provisions.
ICN has agreed contractually with us in the affiliation agreement to comply with
these rules as well. These provisions are not contained in ICN's certificate of
incorporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is .
--------------------------------------------------------------------------------
80
<PAGE> 84
--------------------------------------------------------------------------------
Shares eligible for future sale
Prior to this offering, there has been no public market for our Class A Common
Stock. Future sales of substantial amounts of our Class A Common Stock in the
public market, or the perception that these sales could occur, could adversely
affect prevailing market prices.
Upon completion of this offering, we will have outstanding an aggregate of
shares of Class A Common Stock, assuming no exercise of the
underwriters' over-allotment option, and shares of Class B Common
Stock. Of these shares, all of the shares of Class A Common Stock sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless these shares are purchased by our affiliates.
The shares of Class B Common Stock held by ICN are restricted securities.
Restricted securities may be sold in the public market only if registered or if
the sale qualified for an exemption from registration.
ICN and all of our officers and directors have agreed not to transfer or dispose
of, directly or indirectly, any shares of our common stock or any securities
convertible into shares or exercisable or exchangeable for shares of our common
stock, for a period of at least 180 days after the date of this prospectus.
Transfers or dispositions can be made sooner only with the prior written consent
of UBS Warburg LLC.
Following this offering, we intend to file a registration statement on Form S-8
under the Securities Act covering the shares of Class A Common Stock reserved
for issuance under our 2000 Stock Option Plan. Accordingly, shares registered
under that registration statement will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market after the
filing, except those shares subject to lock-up agreements.
In general, under Rule 144 as currently in effect, after the expiration of the
lock-up agreements, a person who has beneficially owned restricted securities
for at least one year, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
+ 1% of the number of shares of our common stock then outstanding, which will
equal approximately shares immediately after this offering; and
+ the average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner of
sale, notice and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell these
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 144, the holding period
of any prior owner is aggregated, except if the transferee was an affiliate of
ours.
--------------------------------------------------------------------------------
81
<PAGE> 85
--------------------------------------------------------------------------------
Underwriting
We and the underwriters of this offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC and CIBC World Markets
Corp. are the representatives of the underwriters.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
--------------------------------------------------------------------------
UBS Warburg LLC.............................................
CIBC World Markets Corp. ...................................
Total.............................................
============
</TABLE>
If the underwriters sell more shares of Class A Common Stock than the total
number set forth in the table above, the underwriters have a 30-day option to by
from us up to an additional shares at the initial public offering price
less the underwriting discounts and commissions to cover these sales. If any
shares of Class A Common Stock 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 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 $ .
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 the 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 % of the shares of Class A Common Stock to be offered.
We, our directors and officers and ICN 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 shares of Class A Common Stock or securities convertible
into or exchangeable for shares of Class A 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 UBS Warburg LLC. This
lockup provision does not limit our ability to grant options to purchase Class A
Common Stock under stock option plans or to issue Class A Common Stock under our
employee stock purchase plan.
The underwriters have reserved for sale, at the initial public offering price,
up to shares of Class A Common Stock to some of our directors,
officers, employees and friends and to some of the
--------------------------------------------------------------------------------
82
<PAGE> 86
UNDERWRITING
--------------------------------------------------------------------------------
officers and employees of ICN. The number of shares available for sale to the
general public in this offering will be reduced 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
in this offering.
Prior to this offering, there has been no public market for our Class A Common
Stock. The initial public offering price will be negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price include:
+ the information set forth in this prospectus and otherwise available to the
representatives;
+ the history and the prospects for the industry in which we compete;
+ the ability of our management;
+ our prospects for future earnings, the present state of our development and
our current financial position;
+ 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 this offering, the underwriters may purchase and sell shares
of Class A 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 Class A Common Stock while this
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 Class A Common Stock. As a result, the price of the
Class A 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 and ICN 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.
UBS Warburg LLC and some of its affiliates have provided investment banking and
other services to ICN in the past. They received customary compensation.
--------------------------------------------------------------------------------
83
<PAGE> 87
--------------------------------------------------------------------------------
Legal matters
Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York, will pass upon the validity of the Class A
Common Stock offered under this prospectus. Fried, Frank, Harris, Shriver &
Jacobson has in the past provided, and may continue to provide, legal services
to ICN and its affiliates. Dewey Ballantine LLP, New York, New York, will pass
upon legal matters related to this offering for the underwriters.
Experts
The financial statements as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 included in this Registration
Statement 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.
--------------------------------------------------------------------------------
84
<PAGE> 88
--------------------------------------------------------------------------------
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered under this
prospectus. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule to the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and to the exhibits and schedule to
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and in each instance, we refer you to the copy of the contract or
other document filed as an exhibit to the registration statement. Each of these
statements is qualified in all respects by this reference. You may inspect a
copy of the registration statement without charge at the SEC's principal office
in Washington, D.C., and copies of all or any part of the registration statement
may be obtained from the Public Reference Section of the SEC, located at 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of fees prescribed by
the SEC. The SEC maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC. The address of the Web site is http://www.sec.gov.
The SEC's toll free investor information service can be reached at
1-800-SEC-0330.
Upon completion of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, and we will file
reports, proxy statements and other information with the SEC.
Our telephone number is (714) 545-0100.
--------------------------------------------------------------------------------
85
<PAGE> 89
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
--------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------------------------------------------------------------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets at December 31, 1998 and 1999 and at March
31, 2000 (unaudited)...................................... F-3
Statements of Income for the years ended December 31, 1997,
1998 and 1999 and for the three months ended March 31,
1999 and 2000 (unaudited)................................. F-4
Statements of Equity for the years ended December 31, 1997,
1998 and 1999 and for the three months ended March 31,
2000 (unaudited).......................................... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and for the three months ended March
31, 1999 and 2000 (unaudited)............................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
--------------------------------------------------------------------------------
F- 1
<PAGE> 90
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ICN Pharmaceuticals, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
income, of equity and of cash flows present fairly, in all material respects,
the financial position of Ribapharm (the "Division"), a division of ICN
Pharmaceuticals, Inc., at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31,1999 in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Division'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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Newport Beach, California
June 12, 2000
--------------------------------------------------------------------------------
F- 2
<PAGE> 91
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
--------------------------------------------------------------------------------
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999 AND MARCH 31, 2000 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999 2000
------------------------------------------------------------------------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Royalties receivable.................................... $ 8,343 $34,462 $34,272
------- ------- -------
Total current assets...................................... 8,343 34,462 34,272
Property, plant and equipment, net........................ 21,218 20,715 20,610
------- ------- -------
Total assets.............................................. $29,561 $55,177 $54,882
======= ======= =======
LIABILITIES AND EQUITY
Current liabilities:
Trade payables.......................................... $ 409 $ 362 $ 11
Accrued liabilities..................................... 217 750 924
Current portion of mortgage payable..................... 828 -- --
------- ------- -------
Total current liabilities................................. 1,454 1,112 935
Mortgage payable, less current portion.................... 6,800 -- --
Deferred license and royalty income....................... 4,323 -- --
Deferred income taxes payable............................. 1,014 2,665 2,689
Commitments and contingencies
Equity:
Advances due to (from) ICN.............................. 27,085 (247) (20,620)
Other equity............................................ (11,115) 51,647 71,878
------- ------- -------
Total equity.............................................. 15,970 51,400 51,258
------- ------- -------
Total liabilities and equity.............................. $29,561 $55,177 $54,882
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F- 3
<PAGE> 92
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
--------------------------------------------------------------------------------
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
------------------------------------------------------------------- ----------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Royalties....................... $ 3,223 $36,830 $109,592 $16,208
$34,272
-------- ------- -------- ------- -------
Costs and expenses:
Research and development........ 7,011 9,530 5,523 635 1,141
General and administrative...... 9,676 7,392 5,608 1,443 1,519
-------- ------- -------- ------- -------
Total expenses.................... 16,687 16,922 11,131 2,078 2,660
-------- ------- -------- ------- -------
Income (loss) from operations..... (13,464) 19,908 98,461 14,130 31,612
Interest expense.................. 683 609 396 91 --
-------- ------- -------- ------- -------
Income (loss) before income
taxes........................... (14,147) 19,299 98,065 14,039 31,612
Provision (benefit) for income
taxes........................... (5,093) 6,948 35,303 5,054 11,381
-------- ------- -------- ------- -------
Net income (loss)................. $ (9,054) $12,351 $ 62,762 $ 8,985 $20,231
======== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F- 4
<PAGE> 93
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
--------------------------------------------------------------------------------
STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADVANCES
DUE TO
(FROM) OTHER
ICN EQUITY TOTAL
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1996............................. $ 12,366 $(14,412) $ (2,046)
Net loss................................................ -- (9,054) (9,054)
Advances due to ICN, net................................ 11,217 -- 11,217
--------------------------------
Balances at December 31, 1997............................. 23,583 (23,466) 117
Net income.............................................. -- 12,351 12,351
Advances due to ICN, net................................ 3,502 -- 3,502
--------------------------------
Balances at December 31, 1998............................. 27,085 (11,115) 15,970
Net income.............................................. -- 62,762 62,762
Advances due from ICN, net.............................. (27,332) -- (27,332)
--------------------------------
Balances at December 31, 1999............................. (247) 51,647 51,400
Net income.............................................. -- 20,231 20,231
Advances due from ICN, net.............................. (20,373) -- (20,373)
--------------------------------
Balances at March 31, 2000................................ $(20,620) $ 71,878 $ 51,258
================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F- 5
<PAGE> 94
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
----------------------------------------------------------------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $(9,054) $ 12,351 $ 62,762 $ 8,985 $ 20,231
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation.......................... 859 560 556 134 133
Deferred income....................... (930) (13,619) (4,323) (4,323) --
Deferred income taxes................. 429 4,998 1,651 1,580 24
Compensation expense related to
extension of stock options......... -- 1,625 -- -- --
Changes in assets and liabilities:
Royalties receivable.................. (708) (6,875) (26,119) (3,838) 190
Trade payables and accrued
liabilities........................ (674) 664 486 (543) (177)
Advances due to (from) ICN, net....... 11,217 1,877 (27,332) (1,868) (20,373)
------- -------- -------- ------- --------
Net cash provided by operating
activities............................ 1,139 1,581 7,681 127 28
------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................... (346) (103) (53) (11) (28)
------- -------- -------- ------- --------
Net cash used in investing activities... (346) (103) (53) (11) (28)
------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on mortgage payable............ (793) (1,478) (7,628) (116) --
------- -------- -------- ------- --------
Net cash provided by financing
activities............................ (793) (1,478) (7,628) (116) --
------- -------- -------- ------- --------
Net change in cash and cash
equivalents........................... -- -- -- -- --
------- -------- -------- ------- --------
Cash and cash equivalents at beginning
of period............................. -- -- -- -- --
------- -------- -------- ------- --------
Cash and cash equivalents at end of
period................................ $ -- $ -- $ -- $ -- $ --
======= ======== ======== ======= ========
Cash paid for interest.................. $ 683 $ 609 $ 396 $ 91 $ --
======= ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
--------------------------------------------------------------------------------
F- 6
<PAGE> 95
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Ribapharm (the "Division") is a division of ICN Pharmaceuticals, Inc. ("ICN")
and seeks to discover, develop and commercialize innovative products for the
treatment of significant unmet medical needs, principally in the antiviral and
anticancer areas. The Division's primary product, ribavirin, is an antiviral
drug that was licensed to Schering-Plough Ltd. ("Schering-Plough") for the
treatment of chronic hepatitis C ("HCV") in combination with Schering-Plough's
interferon alfa-2b. All of the Division's revenue is currently derived from this
licensing agreement. The accompanying financial statements are derived from the
historical books and records of ICN and present the assets and liabilities,
results of operations and cash flows applicable to the Division. The financial
statements of the Division have been prepared for inclusion in a registration
statement relating to the public offering of a portion of the common stock of
Ribapharm Inc. ("Ribapharm"), a wholly-owned subsidiary of ICN which was
incorporated in April 2000. Prior to the planned initial public offering,
substantially all of the assets and liabilities of the Division will be
transferred to Ribapharm at historical cost.
The balance sheets have been prepared using the historical basis of accounting
and include all of the assets and liabilities specifically identifiable to the
Division. The statements of income include all revenue and costs attributable to
the Division, including a corporate allocation of costs of shared services
(including legal, finance, corporate development, information systems and
corporate office expenses). These costs are allocated to the Division on a basis
that is considered by management to reflect most fairly or reasonably the
utilization of services provided to or the benefit obtained by the Division,
such as the square footage, headcount, or actual utilization. Management
believes the methods used to allocate these amounts are reasonable. However, the
financial information included herein does not necessarily reflect what the
financial position or results of operation would have been had it operated as a
stand-alone public entity during the periods covered, and may not be indicative
of future results of operations or financial position. For the years ended
December 31, 1997, 1998 and 1999, such allocated costs amounted to $9,542,000,
$5,146,000, and $4,852,000, and are included in operating expenses. For the
three months ended March 31, 1999 and 2000, such allocated costs amounted to
$975,000 and $932,000. The details of the allocation for the years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 1999
and 2000 were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Legal expenses.............................. $7,155 $2,460 $2,844 $390 $388
Facility and central service costs.......... 2,167 2,376 1,963 568 499
Information systems......................... 220 310 45 17 4
Corporate development....................... -- -- -- -- 41
------ ------ ------ ---- ----
$9,542 $5,146 $4,852 $975 $932
====== ====== ====== ==== ====
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost.
The Division primarily uses the straight-line method for depreciating property,
plant and equipment over their
--------------------------------------------------------------------------------
F- 7
<PAGE> 96
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
estimated useful lives. The building and its related improvements are
depreciated over a period of 40 years, and equipment from 3 - 10 years.
The Division follows the policy of capitalizing expenditures that materially
increase the lives of the related assets and charges maintenance and repairs to
expense. Upon sale or retirement, the costs and related accumulated depreciation
or amortization are eliminated from the respective accounts and the resulting
gain or loss is included in income.
REVENUE RECOGNITION: The Division earns royalties as a result of the sale of
product rights and technologies to third parties. Royalty revenue is recorded at
the time the products subject to the royalty are sold by the third party.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
INCOME TAXES: The Division is not a separate taxable entity for federal, state
or local income tax purposes. The Division's operations are included in the
consolidated ICN tax returns. Income tax provisions and benefits have been
calculated on a separate return basis for federal income tax purposes and based
upon ICN's worldwide apportionment California State rate of 1%. Prior to the
consummation of the Offering, the Division intends to enter into a tax sharing
agreement as described in Note 4.
Deferred income taxes are calculated using the estimated future tax effects or
difference between financial statement carrying amounts and the tax bases of
assets and liabilities.
CONCENTRATION OF CREDIT RISK: Financial instruments that subject the Division
to concentrations of credit risk consist principally of accounts receivable. The
Division performs an ongoing credit evaluation of its customers' financial
condition and generally does not require collateral to secure accounts
receivable. The Division's exposure to credit risk associated with nonpayment is
affected principally by conditions or occurrences within its sole customer. The
Division historically has not experienced losses relating to accounts
receivables from its customer. At December 31, 1999 and 1998 and March 31, 2000,
one customer accounted for 100% of accounts receivable. All revenues for the
three years in the period ended December 31, 1999 and for the three months ended
March 31, 2000 were derived from one customer.
STOCK-BASED COMPENSATION: The Division participates in ICN's stock-based
compensation plans. In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", the Division has elected to account for stock-based compensation
plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations. The
Division discloses the summary of pro forma effects to reported net income
(loss) for fiscal 1997, 1998 and 1999, as if the Division had elected to
recognize compensation cost based on the fair value of the options granted by
ICN to employees of the Division as prescribed by SFAS No. 123.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
COMPREHENSIVE INCOME: The Division has adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for the reporting
and display of comprehensive
--------------------------------------------------------------------------------
F- 8
<PAGE> 97
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
income and its components. For all periods presented, there were no differences
between comprehensive and net income.
EARNINGS PER SHARE: Historical earnings per share data has not been presented
because the Division did not operate as a separate legal entity of ICN with its
own capital structure.
UNAUDITED INTERIM FINANCIAL STATEMENTS: The accompanying financial information
as of March 31, 2000 and for the three-month periods ended March 31, 1999 and
2000 is unaudited. The unaudited interim financial information has been prepared
on the same basis as the accompanying annual financial statements. In the
opinion of management, such interim financial information reflects adjustments
consisting of normal and recurring adjustments necessary for a fair presentation
of such financial information. The unaudited results of operations for the
interim periods ended March 31, 1999 and 2000 are not necessarily indicative of
the results of operations to be expected for any other interim period or for the
full year.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
becomes effective for the Division for the first quarter of 2001. The Division
does not currently engage in any program of hedging or hold derivative
instruments and consequently the Division does not expect the adoption of SFAS
No. 133 to have a material effect on the Division's financial position, cash
flows or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Division is required to be in conformity with the
provisions of SAB 101 no later than second quarter 2000 and does not expect a
material change in its financial condition or results of operations as a result
of SAB 101.
3. AGREEMENT WITH SCHERING-PLOUGH:
On July 28, 1995, ICN entered into an Exclusive License and Supply Agreement
(the "License Agreement") with Schering-Plough. Under the License Agreement,
Schering-Plough licensed all oral forms of ribavirin for the treatment of HCV in
combination with Schering-Plough's interferon alfa-2b. The License Agreement
provided ICN an initial non-refundable payment and future royalty payments from
sales of ribavirin by Schering-Plough, including certain minimum royalty rates.
As part of the initial License Agreement, ICN retained the right to co-market
ribavirin capsules in the European Union under its trademark Virazole. In 1998,
ICN and the Division received a one-time payment of $16,500,000 from
Schering-Plough of which the Division received $13,467,000 for settlement of
past royalties due on samples and free product distributed by Schering-Plough
($8,467,000) and forgiveness of a $5,000,000 obligation to them. In addition,
the Division gave up the right to co-market in the European Union in exchange
for an increase in worldwide royalty rates.
In conjunction with the License Agreement, Schering-Plough entered into a stock
purchase agreement under which Schering-Plough purchased $42,000,000 of ICN's
common stock upon the achievement of certain regulatory milestones.
As part of ICN's contribution, ICN intends to assign to Ribapharm its rights
under the License Agreement.
--------------------------------------------------------------------------------
F- 9
<PAGE> 98
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS:
These financial statements have been prepared for inclusion in a registration
statement relating to the planned initial public offering of a portion of the
common stock of Ribapharm. ICN will continue to beneficially own more than 80%
of the outstanding shares of common stock after the offering.
Effective upon the closing of this offering, Ribapharm and ICN will be subject
to an affiliation agreement, which requires Ribapharm to comply with the terms
of ICN's indentures, places restrictions on Ribapharm's ability to issue capital
stock to ensure that Ribapharm remains part of ICN's consolidated group for tax
purposes, and details ICN's commitment to elect independent directors to
Ribapharm's board of directors; a management services agreement, which details
ICN's agreement to provide Ribapharm with interim administrative and corporate
services; a confidentiality agreement, which provides that Ribapharm and ICN
will not disclose to third parties confidential and proprietary information
concerning each other; a registration rights agreement, which grants ICN rights
to require Ribapharm to register shares of Ribapharm common stock owned by ICN;
a tax sharing agreement, which will govern Ribapharm's commitment to remain part
of ICN's consolidated tax group; a contract services agreement, which details
ICN's agreement to conduct Phase I/II clinical trials on Tiazole for the
treatment of ovarian cancer; and a lease, under which the Division has agreed
for an interim period to lease office space in the Division's building to ICN.
5. INCOME TAXES:
The income tax (benefit) provision for each of the years ended December 31,
1997, 1998 and 1999, and for each of the three months ended March 31, 1999 and
2000 (unaudited), consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
---------------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C>
Current................................. $(5,522) $1,950 $33,652 $3,474 $11,357
Deferred................................ 429 4,998 1,651 1,580 24
------- ------ ------- ------ -------
$(5,093) $6,948 $35,303 $5,054 $11,381
======= ====== ======= ====== =======
</TABLE>
The Division is not a separate taxable entity for federal, state or local income
tax purposes. The Division's operations are included in the consolidated ICN tax
returns. Income tax provisions and benefits have been calculated on a separate
return basis for federal income tax purposes and based upon ICN's worldwide
apportionment California State rate of 1%. Prior to the consummation of the
Offering, the Division intends to enter into a tax sharing agreement with ICN.
--------------------------------------------------------------------------------
F- 10
<PAGE> 99
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
The primary components of the Division's net deferred taxes were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999 2000
------------------------------------------------------------------------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment..................................... $(2,570) $(2,665) $ (2,689)
Schering-Plough deferred income and obligation............. 1,556 -- --
------- ------- -----------
Net deferred tax liability................................. $(1,014) $(2,665) $ (2,689)
======= ======= ===========
</TABLE>
The Division's effective tax rate for each of years ended 1997, 1998 and 1999
and for each of the three months ended March 31, 1999 and 2000 was 36%. This
rate is equal to the federal statutory rate and ICN's worldwide apportionment
California State rate of 1%.
6. DETAIL OF CERTAIN ACCOUNTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999 2000
------------------------------------------------------------------------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, NET:
Land.................................................... $10,859 $10,859 $10,859
Building and building improvements...................... 10,121 10,121 10,121
Equipment............................................... 3,346 3,399 3,427
------- ------- -------
$24,326 24,379 24,407
Accumulated depreciation.................................. (3,108) (3,664) (3,797)
------- ------- -------
$21,218 $20,715 $20,610
======= ======= =======
Accrued Liabilities Payroll and related items............. $ 96 $ 93 $ 109
Other................................................... 121 657 815
------- ------- -------
$ 217 $ 750 $ 924
======= ======= =======
</TABLE>
7. MORTGAGE PAYABLE (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------------------
<S> <C>
MORTGAGE PAYABLE:
U.S. mortgage with variable interest at rates ranging from
6.7% to 7.1%; interest and principal payable monthly through
2022........................................................ $7,628
Less current portion........................................ 828
------
Mortgage payable, less current portion...................... $6,800
======
</TABLE>
In September 1999, the Division repaid the remaining balances of the mortgage in
the amount of $7,129,000. There were no borrowings outstanding at the end of
1999.
--------------------------------------------------------------------------------
F- 11
<PAGE> 100
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
8. COMMON STOCK PLANS:
During 1998, the Board of Directors and the stockholders of ICN approved ICN's
Amended and Restated 1998 Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan, as amended, provides for the granting of options to purchase a
maximum of 7,854,000 shares (including 3,000,000 shares authorized in 1998) of
ICN's common stock to key employees, officers, directors, consultants and
advisors of ICN. Options granted under the Stock Option Plan must have an option
price not less than 85% of the fair market value of ICN's common stock at the
date of the grant, and a term not exceeding 10 years. Options vest ratably over
a four-year period from the date of the grant. Certain ICN employees who will
become employees of Ribapharm were granted options under the Stock Option Plan.
The Division has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for options granted under
the Stock Option Plan. Had compensation cost for ICN's Stock Option Plan been
determined based on the fair value at the grant date for awards in 1997, 1998
and 1999 consistent with the provisions of SFAS No. 123, the Division's
unaudited pro forma net income (loss) would have been ($9,193,000), $11,992,000
and $62,400,000, for the years ended December 31, 1997, 1998 and 1999,
respectively
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average life (years)............................... 5.0 5.0 4.4
Volatility.................................................. 46% 56% 54%
Expected dividend per share................................. $0.24 $ 0.36 $ 0.36
Risk-free interest rate..................................... 6.33% 5.15% 5.4%
Weighted-average fair value of options granted.............. $6.52 $23.57 $13.11
</TABLE>
--------------------------------------------------------------------------------
F- 12
<PAGE> 101
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
The following table sets forth information relating to ICN stock option plans
for Division employees during the years ended December 31, 1997, 1998 and 1999
(in thousands, except per share data):
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-----------------------------
<S> <C> <C>
Shares under option, December 31, 1996 246 $12.61
Granted................................................... 3 13.66
Exercised................................................. (17) 11.06
Canceled.................................................. -- --
--- ------
Shares under option, December 31, 1997...................... 232 12.73
Granted................................................... 93 45.25
Exercised................................................. (51) 15.69
Canceled.................................................. -- --
--- ------
Shares under option, December 31, 1998...................... 274 23.22
Granted................................................... 26 26.88
Exercised................................................. (69) 11.06
Canceled.................................................. (9) 45.24
--- ------
Shares under option, December 31, 1999...................... 222 $26.54
=== ======
Exercisable at December 31, 1997............................ 120 $10.44
=== ======
Exercisable at December 31, 1998............................ 96 $ 7.97
=== ======
Exercisable at December 31, 1999............................ 155 $21.65
=== ======
</TABLE>
The schedule below reflects the number of outstanding and exercisable options
for employees of the Division as of December 31, 1999 segregated by price range
(in thousands, except per share data):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE AVERAGE
OF EXERCISE NUMBER OF EXERCISE REMAINING
RANGE OF EXERCISE PRICESSHARES PRICE SHARES PRICE LIFE (YEARS)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2.91 to $13.67 62 $ 9.16 61 $9.11 4.0
13.92 to 26.88 76 19.98 50 16.46 6.7
27.61 to 46.25 84 45.25 44 45.25 8.3
--- ---
222 155
=== ===
</TABLE>
During 1998, ICN extended by one year the term of options to purchase an
aggregate of 103,475 shares of common stock which are held by a director of ICN
who was acting as the Senior Vice President of Research and Development. The
Division recorded non-cash compensation expense of $1,625,000 related to these
options.
--------------------------------------------------------------------------------
F- 13
<PAGE> 102
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES:
CONTINGENCIES: On August 11, 1999, the United States Securities and Exchange
Commission filed a complaint in the United States District Court against ICN,
the Chairman (Milan Panic) and one current and one former officer of ICN and the
Division (the "SEC Complaint"). The SEC Complaint alleges that ICN and the
individual named defendants made untrue statements of material fact or omitted
to state material facts necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading and
engaged in acts, practices, and courses of business which operated as a fraud
and deceit upon other persons in violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The action concerns
the status and disposition of the Division's 1994 new drug application for
Virazole(R) as a monotherapy treatment for hepatitis C (the "NDA"). The SEC
Complaint seeks injunctive relief, unspecified civil penalties, and an order
barring Mr. Panic from acting as an officer or director of any publicly-traded
company.
ICN has received subpoenas from a Grand Jury in the United States District Court
for the Central District of California requesting the production of documents
covering a broad range of matters over various time periods. ICN understands
that ICN, Mr. Panic, two current senior executive officers, a former senior
officer, a current employee, and a former employee of ICN are targets of the
investigation. ICN also understands that a senior executive officer, a director,
a former officer, a current employee and a former employee of ICN are subjects
of the investigation. The United States Attorney's office has advised counsel
for ICN that the areas of its investigation include disclosures made and not
made concerning the NDA to the public and other third parties; stock sales for
the benefit of Mr. Panic following receipt on November 28, 1994 of a letter from
the FDA informing ICN that the NDA had been found not approvable; possible
violations of the economic embargo imposed by the United States upon the Federal
Republic of Yugoslavia, based upon alleged sales by ICN and Mr. Panic of stock
belonging to ICN employees; and, with respect to Mr. Panic, personal disposition
of assets of entities associated with Yugoslavia, including possible
misstatements and/or omissions in federal tax filings. ICN has, and continues
to, cooperate in the Grand Jury investigation. A number of current and former
employees of ICN have been interviewed by the government in connection with the
investigation. The United States Attorney's office has issued subpoenas
requiring various current and former officers and employees of ICN to testify
before the Grand Jury. Certain current and former officers and employees of ICN
testified before the Grand Jury beginning in July 1998.
As a division controlled by ICN, any adverse judgment or settlement of the
pending Securities and Exchange Commission and government actions against ICN
can impose restrictions on the conduct of the Division's business. Furthermore,
the pending Commission action seeks to bar ICN's chairman from acting as an
officer or director of any publicly traded company, which would include
Ribapharm.
BENEFITS PLANS: ICN has a defined contribution plan that provides all U.S.
employees the opportunity to defer a portion of their compensation for pay out
at a subsequent date. ICN can voluntarily make matching contributions on behalf
of participating and eligible employees. Certain of the employees of ICN who
will become employees of Ribapharm participate in this plan. The Division's
expense related to such defined contribution plan was not material in 1999, 1998
and 1997.
PRODUCT LIABILITY INSURANCE: The Division is currently self-insured with
respect to product liability claims and could be exposed to possible claims for
personal injury resulting from allegedly defective products. While to date no
material adverse claim for personal injury resulting from allegedly defective
--------------------------------------------------------------------------------
F- 14
<PAGE> 103
RIBAPHARM
(A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
products has been successfully maintained against the Division, a substantial
claim, if successful, could have a negative impact on the Division's results of
operations and cash flows.
LONG-TERM INCENTIVE PLAN: ICN has a long-term incentive plan, which provides
for the issuance of shares of ICN's common stock to senior executives, certain
of whom are employees of the Division. Shares issued under the long-term
incentive plan are restricted and vest over a four-year period. Although certain
current employees of the Division may be eligible for grants under the plan, no
such grants have been made.
OTHER: Milan Panic, ICN's Chairman of the Board and Chief Executive Officer, is
employed under a contract expiring December 31, 2002 that provides for, among
other things, certain health and retirement benefits. The contract is
automatically extended at the end of each term for successive one-year periods
unless either ICN or Mr. Panic terminates the contract upon six months prior
written notice. Mr. Panic, at his option, may provide consulting services upon
his retirement and will be entitled, when serving as a consultant, to
participate in ICN medical and dental plans. The consulting fee shall not at any
time exceed the annual compensation, as adjusted, paid to Mr. Panic. Upon Mr.
Panic's retirement, the consulting fee shall not be subject to further
cost-of-living adjustments. To date, Mr. Panic has devoted substantially all of
his efforts to ICN.
ICN has employment agreements with eight key executives which contain "change in
control" benefits, two of whom are employees of the Division. Upon a "change in
control" of ICN as defined in the contract, the employee shall receive severance
benefits equal to three times salary and other benefits.
--------------------------------------------------------------------------------
F- 15
<PAGE> 104
--------------------------------------------------------------------------------
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the Class A Common Stock
registered hereby, all of which expenses, except for the SEC registration fee,
the National Association of Securities Dealers, Inc. filing fee, and the Nasdaq
National Market listing fee, are estimated.
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------------------------------
Securities and Exchange Commission registration fee......... $
NASD filing fee.............................................
Nasdaq National Market listing application fee..............
Printing and engraving fees and expenses....................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue Sky fees and expenses..................................
Transfer Agent and Registrar fees and expenses..............
Miscellaneous expenses......................................
----------
Total.............................................
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In connection with the consummation of this offering, we will adopt and file an
amended and restated certificate of incorporation and amended and restated
bylaws. As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
+ for any breach of duty of loyalty to us or to our stockholders;
+ for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
+ for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law or for
any transaction from which the director derived an improper personal benefit.
Our amended and restated certificate of incorporation further provides that we
must indemnify our directors to the fullest extent permitted by Delaware law. In
addition, our amended and restated bylaws provide that:
+ we are required to indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to limited exceptions;
+ we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by law, our
amended and restated certificate of incorporation, our amended and restated
bylaws or agreements;
+ we are required to advance expenses to our directors and executive officers
as incurred in connection with legal proceedings against them for which they
may be indemnified; and
--------------------------------------------------------------------------------
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<PAGE> 105
PART II
--------------------------------------------------------------------------------
+ the rights conferred in the amended and restated bylaws are not exclusive.
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the three years preceding the filing of this registration statement,
Ribapharm has not sold any of its securities without registration under the
Securities Act of 1933, except for the issuance of shares of Class B
Common Stock to ICN on for $ per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The following exhibits are filed with this registration statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement, by and among Ribapharm Inc.
and the underwriters named therein.**
3.1 Form of Amended and Restated Certificate of Incorporation of
Ribapharm Inc.**
3.2 Amended and Restated By-laws of Ribapharm Inc.**
4.1 Form of Class A Common Stock Certificate.**
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.**
10.1 Ribapharm Inc. 2000 Employee Stock Option and Award Plan and
form of Stock Option Agreement.**
10.2 Ribapharm Inc. 2000 Employee Stock Purchase Plan.**
10.3 Promissory Note, dated as of , issued by
Ribapharm Inc. to ICN Pharmaceuticals, Inc.**
10.4 Affiliation Agreement, dated as of , 2000,
between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.5 Management Services Agreement, dated as of ,
2000, between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.6 Confidentiality Agreement, dated as of , 2000,
between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.7 Registration Rights Agreement, dated as of ,
2000, between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.8 Tax Sharing Agreement, dated as of April , 2000,
between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.9 Contract Services Agreement, dated as of April ,
2000, between ICN Pharmaceuticals, Inc. and Ribapharm Inc**
10.10 Lease Agreement, dated as of April , 2000,
between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
</TABLE>
--------------------------------------------------------------------------------
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<PAGE> 106
PART II
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------
<S> <C>
10.11 Form of Indemnification Agreement between Ribapharm Inc. and
its directors and executive officers.**
10.12 Indenture, dated as of August 14, 1997, by and among ICN
Pharmaceuticals and United States Trust Company of New York,
relating to $275,000,000 9 1/4% Senior Notes due 2005,
previously filed as Exhibit 10.3 to ICN's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference.
10.13 Indenture, dated as of August 20, 1998, by and among ICN
Pharmaceuticals and United States Trust Company of New York,
relating to $200,000,000 8 3/4% Senior Notes due 2008,
previously filed as Exhibit 4.2 to ICN's Registration
Statement No. 333-63721 on Form S-4, which is incorporated
herein by reference.
10.14 Exclusive License and Supply Agreement between ICN
Pharmaceuticals, Inc. and Schering-Plough Ltd. dated July
28, 1995 previously filed as Exhibit 10 to ICN
Pharmaceuticals, Inc.'s Amendment 3 to the Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, which
is incorporated herein by reference.
10.15 Amendment to Exclusive License and Supply Agreement between
ICN Pharmaceuticals, Inc. and Schering-Plough Ltd.,
previously filed as Exhibit to ICN Pharmaceuticals, Inc.'s
, which is incorporated herein by reference.
11.1 Computation of Earnings per Common Share.**
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in the opinion filed as Exhibit 5.1).**
23.2 Consent of PricewaterhouseCoopers LLP.*
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule*
99.1 Consent of director-designee.**
99.2 Consent of director-designee.**
</TABLE>
-------------------------
* Filed herewith.
** To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
All the schedules are omitted because they are not required, are not applicable
or the information is included in the selected consolidated financial data or
notes contained in this Registration Statement.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes 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.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
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 the registrant of expenses
incurred or paid by the director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by any
--------------------------------------------------------------------------------
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PART II
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director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether this indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of this issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering thereof.
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<PAGE> 108
PART II
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Costa Mesa, State of
California, on the 15th day of June, 2000.
RIBAPHARM INC.
By: /s/ BILL A. MACDONALD
--------------------------------------
Name: Bill A. MacDonald
Title: Vice President, Chief
Financial Officer and
Treasurer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints David
C. Watt and Harry A. Roosje and each of them acting individually, as his or her
attorney-in-fact, each with full power of substitution, for him or her in any
and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Registration Statement, or any related registration statement that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MILAN PANIC President and Director June 15, 2000
-------------------------------------------------------- (Principal Executive Officer)
Milan Panic
/s/ BILL A. MACDONALD Vice President, Chief June 15, 2000
-------------------------------------------------------- Financial Officer and
Bill A. MacDonald Treasurer
(Principal Financial Officer
and
Principal Accounting Officer)
/s/ DAVID C. WATT Director June 15, 2000
--------------------------------------------------------
David C. Watt
</TABLE>
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<PAGE> 109
PART II
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EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION PAGE
-------------------------------------------------------------------------
<S> <C> <C>
1.1 Form of Underwriting Agreement, by and among Ribapharm Inc.
and the underwriters named therein.**
3.1 Form of Amended and Restated Certificate of Incorporation of
Ribapharma Technologies, Inc.**
3.2 Form of Amended and Restated By-laws of Ribapharm Inc.**
4.1 Form of Class A Common Stock Certificate.**
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.**
10.1 Ribapharm Inc. 2000 Employee Stock Option and Award Plan and
form of Stock Option Agreement.**
10.2 Ribapharm Inc. 2000 Employee Stock Purchase Plan.**
10.3 Promissory Note, dated as of , issued by
Ribapharm Inc. to ICN Pharmaceuticals, Inc.**
10.4 Affiliation Agreement, dated as of , 2000,
between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.5 Management Services Agreement, dated as of ,
2000, between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.6 Confidentiality Agreement, dated as of , 2000,
between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.7 Registration Rights Agreement, dated as of ,
2000, between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.8 Tax Sharing Agreement, dated as of April , 2000, between
ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.9 Contract Services Agreement, dated as of April , 2000,
between ICN Pharmaceuticals, Inc. and Ribapharm Inc.**
10.10 Lease Agreement, dated as of April , 2000, between ICN
Pharmaceuticals, Inc. and Ribapharm Inc.**
10.11 Form of Indemnification Agreement between Ribapharm Inc. and
its directors and executive officers.**
10.12 Indenture, dated as of August 14, 1997, by and among ICN
Pharmaceuticals and United States Trust Company of New York,
relating to $275,000,000 9 1/4% Senior Notes due 2005,
previously filed as Exhibit 10.3 to ICN's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference.
10.13 Indenture, dated as of August 20, 1998, by and among ICN
Pharmaceuticals and United States Trust Company of New York,
relating to $200,000,000 8 3/4% Senior Notes due 2008,
previously filed as Exhibit 4.2 to ICN's Registration
Statement No. 333-63721 on Form S-4, which is incorporated
herein by reference.
</TABLE>
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<PAGE> 110
PART II
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<TABLE>
<CAPTION>
NO. DESCRIPTION PAGE
-------------------------------------------------------------------------
<S> <C> <C>
10.14 Exclusive License and Supply Agreement between ICN
Pharmaceuticals, Inc. and Schering-Plough Ltd. dated July
28, 1995 previously filed as Exhibit 10 to ICN
Pharmaceuticals, Inc.'s Amendment 3 to the Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, which
is incorporated herein by reference.
10.15 Amendment to Exclusive License and Supply Agreement between
ICN Pharmaceuticals, Inc. and Schering-Plough Ltd.,
previously filed as Exhibit to ICN Pharmaceuticals, Inc.'s
, which is incorporated herein by reference.
11.1 Computation of Earnings per Common Share.**
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in the opinion filed as Exhibit 5.1).**
23.2 Consent of PricewaterhouseCoopers LLP.*
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule*
99.1 Consent of director-designee.**
99.2 Consent of director-designee.**
</TABLE>
-------------------------
* Filed herewith.
** To be filed by amendment.
*** Incorporated by reference.
(b) FINANCIAL STATEMENT SCHEDULES
All the schedules are omitted because they are not required, are not applicable
or the information is included in the selected consolidated financial data or
notes contained in this Registration Statement.
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