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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the year ended December 31, 1999
COMMISSION FILE NUMBER 0-13789
NASTECH PHARMACEUTICAL COMPANY INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2658569
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 DAVIDS DRIVE, HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 273-0101
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common Stock, $.006 par value Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 29, 2000 based upon the closing price on that date, on
the Nasdaq National Market, was approximately $25,386,000.
As of February 29, 2000, there were 6,190,485 shares of the registrant's $.006
par value common stock outstanding.
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PART I
ITEM 1 - BUSINESS
BACKGROUND
Nastech Pharmaceutical Company Inc. researches, develops and
manufactures nasally-administered prescription pharmaceuticals. We investigate
the commercial weaknesses of pharmaceutical products that are already approved
by regulatory authorities and administered in alternative dosage forms, such as
injectables, oral tablets and capsules. We determine the advantages a nasal
delivery system would have for the same drug in the market place. For example,
while the oral route of drug delivery is the most popular and least expensive
method of delivery, an oral drug's effectiveness can be reduced by
gastrointestinal and liver metabolism. Generally, a nasal delivery system would
provide faster absorption into the blood stream than an oral product thereby
resulting in faster onset of action. Other advantages of this painless therapy
include possible lower drug doses, fewer side effects, greater safety and
efficacy, convenience to the patient, better patient compliance of prescribed
drug therapy, and a possible reduction in overall health care costs for the
patient.
We have a commercial interest in two drugs that are marketed by our
licensees: Stadol NS(TM) (Butorphanol Tartrate) by Bristol-Myers Squibb Company
("BMS") and Nascobal(R) (Cyanocobalamin, USP) by Schwarz Pharma Inc. Stadol NS
is the only intranasal opioid analgesic marketed for the treatment of moderate
to severe pain and the acute pain of migraine. It provides painless therapy and
convenient, patient self-administration as compared to the competitive
injectable product. Similarly, our nasal vitamin B-12 product, Nascobal(R),
provides patient benefits over the injectable therapy for chronic B-12
deficiency anemia. In addition to these drugs approved in the U.S., we have six
drugs in various stages of drug development, including one drug that is being
developed by another pharmaceutical company.
INDUSTRY OVERVIEW
We participate in the drug delivery industry estimated at $12
billion in revenues. Conventional methods of drug delivery include oral
administration and injections. Newer delivery methods include improved versions
of the above and other novel systems such as nasal, transdermal and pulmonary
systems, among others. These newer methods of drug delivery often provide
greater safety and efficacy, fewer side effects, improved patient compliance and
lower healthcare costs to the patient.
We believe that the advantages of nasal drug delivery provide
significant market opportunities, particularly against oral and injectable
therapy. Nasal delivery may provide the opportunity to administer lower dosages
to achieve the desired therapeutic effect. In addition, some patients,
particularly children and the elderly and those who suffer from nausea and
vomiting, may find oral tablets or capsules difficult to swallow. Also, the
required use of measuring devices may be difficult for these patients to
self-administer liquids or syrups.
Injectable products, although avoiding gastrointestinal or liver
metabolism found in oral therapy, are oftentimes painful and expensive. These
products often result in patient non-compliance because of patient discomfort
and the required assistance of healthcare professionals or caretakers.
Like injections, the transdermal dosage form avoids gastrointestinal
or liver metabolism but are slow-absorbing in the blood stream and may result in
skin irritation.
Pulmonary drug delivery is widely accepted for the administration of
drugs to treat respiratory conditions such as bronchial asthma. Although this
route is being considered for the systemic delivery of pharmaceuticals, no such
products have been approved in the U.S. at this time. If approved, these
products may require the use of expensive delivery devices and extensive patient
and physician education.
We believe that changes in healthcare have created a greater need
for alternative drug delivery methods, including nasal delivery. Managed care
policies and increased competition, particularly from generic competitors, have
caused large pharmaceutical companies to seek collaborative agreements with drug
delivery specialists. These collaborations seek to improve and differentiate
existing products, expand drug indications and provide proprietary
protection against competition.
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BUSINESS STRATEGY
Our current business strategy is to expand the applications of nasal
drug delivery in the prescription and over-the-counter markets.
Focus Initial Efforts on Approved Drugs. We focus primarily on drugs
that have proven efficacy and safety, are approved for marketing and which we
believe could benefit from a nasal form of delivery. We believe that by focusing
our research and development activities on drugs with demonstrated safety and
efficacy, and with an unaddressed market need, we may reduce the technical and
marketing risk of our projects by decreasing the time period required to bring a
new product to market and expanding the market for certain drugs.
Internally Fund Development Through Later Stages. Historically, we
have used our cash and cash equivalents to fund our research and development and
for other working capital purposes. We believe that internally funding
development until later stages will allow us to retain product rights and enable
us (i) to negotiate more favorable collaborative agreements and (ii) to retain
manufacturing rights on a global basis. Although historically focused on
establishing early stage alliances, we believe we are now able to leverage our
product development experience and broad product pipeline to pursue internally
funded development and commercialization projects, as appropriate. Therefore, we
intend to commit significant financial resources to research and development
with the goal of achieving greater economic benefit from product sales.
Leverage Strategic Alliances. Where appropriate, we seek to
establish domestic and international relationships with major pharmaceutical
companies for the marketing and distribution of certain of our products or
technology. This approach allows us to devote our resources to the further
development of our technology while leveraging the established sales and
marketing capabilities of our collaborative partners. We currently have
collaborative agreements with BMS, Schwarz Pharma Inc. ("Schwarz"), Meda AB
("Meda"), Cambridge Laboratories ("Cambridge"), and Questcor, Inc. ("Questcor"),
and will continue to pursue additional partners where appropriate.
Protect and Expand Intellectual Property. We have and will continue
to seek patent protection for our formulations and other technology in the
United States and key international markets. We have filed U.S. patent
applications, as well as corresponding patent applications outside the United
States, relating to our technology. As specific formulations are developed and
clinically tested, we intend to file for additional patent protection.
PRODUCTS
The following chart summarizes our current products and product
pipeline:
<TABLE>
<CAPTION>
TRADITIONAL
THERAPEUTIC DELIVERY
DRUG CATEGORY METHOD STATUS (1) PARTNER
- ----------------------- --------------------------- ---------------------- ---------------------- ------------------------
MARKETED:
<S> <C> <C> <C> <C>
Stadol(R) NS(TM) Opioid Analgesic Injection Global (2) BMS
Nascobal(R) Vitamin/Anti-Anemia Injection U.S. only (2) Schwarz, Meda (4),
Cambridge (4)
Metoclopramide HCl Anti-Nausea/Anti-Emetic Injection/Oral Italy(3) Questcor
ACTIVE DEVELOPMENT
STATUS:
Scopolamine HBr Anti-Motion Sickness Patch/Injection NDA Filed (5)
Morphine Sulfate Pain Management Injection/Oral Phase II
Apomorphine HCl Sexual Dysfunction N/A Phase II
Undisclosed Opioid Analgesic Injection/Oral Phase I
Buprenorphine HCl Opioid Analgesic Injection Phase I
Metoclopramide HCl Anti-Nausea/Anti-Emetic Injection/Oral Phase III (2) Questcor
</TABLE>
(1) See "Risk Factors" for a description of the different stages of
development.
(2) All marketing or development activities performed by collaborative
partners and/or licensee.
(3) Approved for marketing in Italy.
(4) Marketing partners for Nascobal(R) excluding U.S.
(5) In February 2000 the FDA refused acceptance of the NDA.
Stadol(R) NS(TM) is a trademark of the Bristol-Myers Squibb Company ("BMS").
Stadol NS is an opioid analgesic sublicensed to BMS for marketing as a
prescription pain-reliever. Nascobal(R) is a trademark of Nastech. Trade names
and trademarks
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of other companies appearing herein are the property of their respective
holders. Metoclopramide development activities are performed by Questcor.
Approved and Marketable Products
STADOL(R) NS(TM) (BUTORPHANOL TARTRATE NASAL SPRAY) -- Opioid
analgesic for acute pain. Stadol NS is the only transnasal opioid analgesic
therapy marketed for the treatment of moderate to severe pain and the acute pain
of migraine. Prior to Stadol NS, the only acceptable and effective means of
delivery for Butorphanol Tartrate was the injectable form. Transnasal
Butorphanol Tartrate offers significant advantages over injectable formulations
of the drug, including patient self-administration, increased patient
compliance, cost containment, and the additional indication of usage. Because of
these advantages, transnasal Butorphanol Tartrate has enjoyed significant growth
in market size since 1992, as compared to the injectable formulation. Stadol NS
is currently marketed by BMS under an agreement that generates quarterly
royalties to us. The royalty agreement terminates at time of patent expiry in
August 2001. Stadol NS has been classified by the Food and Drug Administration
("FDA") as a Schedule IV substance under the Controlled Substances Act which has
negatively affected sales by BMS and our royalties.
NASCOBAL(R) (CYANOCOBALAMIN, USP) GEL FOR INTRANASAL ADMINISTRATION
- -- For Vitamin B-12 deficiency anemia. Nascobal(R) may replace inconvenient,
painful and often expensive monthly injections by a health care professional for
the maintenance treatment of chronic Vitamin B-12 deficiency anemia. Nascobal(R)
is a more convenient, painless, self-administered weekly therapy, which we
believe will result in improved patient compliance. We independently developed
Nascobal(R) through FDA marketing clearance, and presently manufacture this
product for Schwarz Pharma. In July 1997, we entered into an exclusive licensing
agreement for Nascobal(R) in the U.S. with Schwarz Pharma, and the product was
commercially launched in October, 1997. In 1997 and 1998, we expanded our
licensing arrangements into territories outside the U.S. through agreements with
Meda AB and Cambridge Laboratories.
Products Under Development
SCOPOLAMINE HYDROBROMIDE -- Anti-motion sickness. Scopolamine
Hydrobromide is a naturally occurring tertiary amine antimuscarinic agent with a
long history of oral and parenteral use for central anticholinergic activity,
including prophylaxis of motion sickness. Scopolamine is currently available as
a transdermal patch for the prevention of nausea and vomiting associated with
motion sickness in adults and is marketed under the tradename Transderm Scop(R)
by Novartis. As a patch dosage form, Transderm Scop(R) must be applied to the
skin at least 4 hours before the anti-emetic effect is required and is
programmed to deliver drug over a three day period. We believe that a nasal
dosage form of scopolamine will be a more convenient and safer alternative with
a faster onset of action allowing for both prevention and treatment of motion
sickness. In February 2000 the FDA refused acceptance of our New Drug
Application ("NDA") and may require us to conduct additional safety studies.
MORPHINE SULFATE -- Opioid analgesic. Morphine Sulfate is an opioid
agonist currently marketed in multiple dosage forms including injectable, oral
and rectal. However, the only method currently approved for breakthrough pain is
a transmucosal oral product, which is limited to opioid-tolerant cancer
patients. We believe a nasal dosage form of morphine sulfate will allow for
patient-friendly self-administration and will provide a rapid systemic
absorption of the drug for quick pain relief in a broad patient population.
APOMORPHINE HYDROCHLORIDE -- Sexual dysfunction. Apomorphine
Hydrochloride, an emetic, is a centrally acting dopamine agonist. In 1999 a
pharmaceutical company filed an NDA indicating that a sub-lingual form of
apomorphine was effective in the treatment of erectile dysfunction. We believe
that a nasal dosage form of apomorphine will allow for patient-friendly
self-administration and provide a rapid systemic absorption of the drug with
reduced side- effects for the treatment of erectile dysfunction.
BUPRENORPHINE HYDROCHLORIDE -- Opioid analgesic. Buprenorphine HCl
is a partial opioid agonist analgesic. In its injectable dosage form, it is
commonly known as Buprenex(R), which is marketed by Reckitt and Colman
Pharmaceutical, Inc. The only method currently approved by the FDA for
administering Buprenorphine HCl is by injection. We believe that a nasal dosage
form of this product will allow for patient-friendly self-administration and
will provide a rapid systemic absorption of the drug for quick pain relief.
METOCLOPRAMIDE HYDROCHLORIDE -- Anti-nausea/anti-emetic.
Metoclopramide HCl is an anti-nausea/anti- emetic agent indicated for the
treatment of nausea and vomiting due to emetogenic cancer chemotherapy. In its
oral and injectable dosage forms, it is commonly known as Reglan(R) which is
marketed by A. H. Robins Company Inc. We believe that a self-administered nasal
dosage form will provide a patient friendly alternative to injections, which are
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inconvenient and painful, and to oral doses, which are often difficult to
swallow when nauseous. Questcor has conducted Phase III clinical trials under an
agreement that provides for certain minimum royalties to us beginning in 1998,
in addition to royalties based on net sales. Metoclopramide HCl is currently
marketed in Italy.
Other Products and Research Activities
In addition to the products contained in our product development
pipeline, we are frequently presented with opportunities to evaluate the
feasibility of a given compound for nasal delivery and to develop new product
concepts. In this regard our ongoing research activities focus on the
utilization, optimization or modification of our core nasal drug delivery
technologies for use with specific drugs or therapies.
We also intend to leverage our core technologies by collaborating
with other pharmaceutical and bio-tech companies which have late stage product
concepts or developed pharmaceuticals that may benefit from nasal delivery. Such
collaborative development projects will be initiated only to the extent that we
believe that (i) the project is feasible, (ii) the potential product resulting
from the development program would have significant market potential, and (iii)
favorable economic arrangements can be obtained. We will seek milestone payments
for the development cycle, payment of certain expenses incurred by us,
manufacturing rights, if applicable, and a royalty.
STRATEGIC ALLIANCES
Our current collaborative arrangements generally provide for a
development project to be followed by commercialization pursuant to a licensing
contract. Our current strategic alliances are as follows:
BRISTOL-MYERS SQUIBB COMPANY -- In January 1986, we sublicensed to
BMS our development and commercial exploitation rights with respect to our
licensed patent rights for the nasal delivery of Butorphanol Tartrate,
(Stadol(R) NS(TM)) in exchange for which BMS agreed to pay us a royalty based on
the net sales of this product (the "BMS Agreement"). In December 1991, the FDA
granted marketing clearance to BMS for this product and quarterly royalty
payments to us by BMS are continuing. We pay a percentage of these royalties to
the University of Kentucky Research Foundation ("UKRF") under a separate license
agreement with UKRF. The BMS Agreement, which may be terminated by BMS at any
time upon 60 days written notice to us, is concurrent with our licensed patent
rights to nasal Butorphanol Tartrate. The nasal Butorphanol Tartrate patent
expires in the year 2001 in the United States, subject to any right of extension
or renewal.
SCHWARZ PHARMA -- In July 1997, we exclusively licensed to Schwarz
Pharma the right to market our Nascobal(R) (Cyanocobalamin, USP) Gel for
Intranasal Administration in the U.S. We retained worldwide manufacturing rights
and the agreement provided for a fixed manufacturing transfer price to Schwarz
Pharma. According to the agreement we are to receive royalty payments from
Schwarz Pharma based upon the net sales of Nascobal(R). The royalty rate is, in
part, dependent upon sales volume, with a minimum royalty of $2 million in 1998.
The term of the agreement is for the later of 15 years or the expiration of the
applicable patent which expires in 2005.
In December 1997, we exclusively licensed to Schwarz Pharma the
right to market our intranasal scopolamine hydrobromide gel in the U.S. Under
the terms of the agreement, we were to receive royalty and manufacturing
payments from Schwarz Pharma. In addition, Schwarz Pharma made research
milestone payments to us of $3,750,000 through December 1999 of which $750,000
and $3,000,000 was recognized in fiscal 1999 and 1998, respectively.
In December 1999, we reacquired the marketing rights to intranasal
scopolamine hydrobromide from Schwarz Pharma. We made a payment of $250,000 to
Schwarz Pharma which has been reflected as an expense in research and
development for the year ended December 31, 1999. We agreed to pay Schwarz
Pharma one-half of any future consideration received by us in respect to
intranasal scopolamine until Schwarz Pharma receives payments totaling
$3,500,000 plus an additional amount for interest that will accrue at a rate of
8.5% per annum. As any payment to Schwarz Pharma is contingent on whether we
will receive proceeds from the future sale or license of intranasal scopolamine,
no liability has been recorded for this agreement as of December 31, 1999.
MEDA AB -- In September 1997, we entered into an Agreement with
Meda AB of Goteborg, Sweden ("Meda"), giving Meda the exclusive right to market
Nascobal(R) in Sweden, Denmark, Norway and Finland. The agreement provides that
we will receive revenue from the sale of Nascobal(R) to Meda and a license fee
upon the occurrence of certain regulatory approvals and commercial events in the
Nordic countries.
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CAMBRIDGE LABORATORIES - In July 1998, we entered into an Agreement
with Cambridge Laboratories ("Cambridge"), giving Cambridge the exclusive right
to market Nascobal(R) in several European countries, Australia and New Zealand.
The agreement provides that we will receive revenue from the sale of Nascobal(R)
to Cambridge.
QUESTCOR, INC. -- In March 1990 Questcor purchased the Company's
Metoclopramide HCl patent and other related proprietary information (the
"Metoclopramide Agreement"). The Metoclopramide Agreement provides for certain
royalties and other fees to us if and when nasal Metoclopramide HCl is approved
for marketing and commercialized. Questcor has a sublicense for nasal
Metoclopramide HCl with Crinos Industria Farmacobiologica SpA in Italy and
Prodis Pharma in Spain. In 1998, Metoclopramide HCl was approved for marketing
in Italy.
PATENTS AND PROPRIETARY RIGHTS
Our policy is to obtain patent protection in both the United States
and selected foreign jurisdictions. We have thirteen U.S. patents and nine
pending U.S. patent applications. The primary technology protected by our patent
and proprietary rights relates to the nasal administration of various
compositions and compounds. Generally, both the compositions and compounds and
the method of nasal administration of such compositions and compounds are
protected. Our patents expire throughout various years up to year 2017.
The establishment of a strong proprietary position is an important
element of our strategy, as the pharmaceuticals to which we have proprietary
rights for nasal delivery have been commercially available for many years
in traditional oral, injectable, or transdermal forms.
In June 1983, we entered into an agreement with the University of
Kentucky Research Foundation and Dr. Anwar Hussain ("UKRF Agreement"). We
obtained an exclusive worldwide (except for the Middle East region) license for
the development and commercial exploitation of certain patents, patent
applications and related know-how pertaining to the nasal delivery of certain
opioid antagonists and analgesics. The UKRF Agreement will terminate in year
2001. The UKRF Agreement requires us to pay UKRF 50% of our royalties received
from Bristol-Myers Squibb on product sales of Stadol NS.
To protect our proprietary information, we require all employees,
consultants, advisors and others to enter into confidentiality agreements which
prohibit the disclosure of confidential information to third parties and require
disclosure and assignment to us of any developments, inventions or discoveries.
We cannot assure you that these agreements will effectively prevent the
unauthorized use or disclosure of our confidential information.
GOVERNMENT REGULATIONS
Our research and development activities are, and its future business
will be, subject to significant regulation by numerous governmental authorities
in the United States and other countries. Pharmaceutical products intended for
therapeutic use in humans are governed by FDA regulations in the United States
and by comparable regulations in foreign countries. The process of completing
clinical testing and obtaining FDA approval for a new drug product
requires the expenditure of substantial resources over a number of years.
Following initial formulation, the steps required before any new
pharmaceutical product may be marketed in the United States include (i)
preclinical laboratory and animal tests, (ii) the submission to the FDA of an
IND application, (iii) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug, (iv) the submission of an NDA to the FDA,
and (v) FDA approval of the NDA prior to any commercial sale or shipment of the
drug.
Typically, preclinical studies are conducted in the laboratory and
in animal model systems to gain preliminary information on the drug's
bioavailability or efficacy and to identify any significant safety problems. The
results of these studies are submitted to the FDA as part of the IND
application. Testing in humans may commence 30 days after filing of the IND
unless the FDA issues a "clinical hold". A three phase clinical program is
usually required for FDA approval of a pharmaceutical product.
Phase I clinical trials are conducted to determine the safety and
optimal dosage of the product in normal volunteers who do not have the disease
or condition that the proposed drug is designed to treat. Phase I studies are
conducted at approved institutions at which the absorption and excretion
(pharmacokinetics) of the drug as well as any side effects are closely
monitored.
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If the Phase I testing data is positive and there are no adverse
reactions, a Phase II clinical trial is conducted to gain preliminary evidence
as to the safety and efficacy of the product in a selected patient population. A
Phase III clinical trial is conducted on a more complex patient population
including patients with multiple disease states and taking one or more
medications to provide sufficient data for the statistical proof of safety and
efficacy. Phase II and III studies are usually multi-center trials in order to
achieve greater statistical validity. A clinical trial may combine the elements
of more than one phase.
Upon completion of clinical testing which demonstrates that the
product is safe and effective for a specific indication, an NDA may be filed
with the FDA. This application includes details of the testing processes,
preclinical studies, clinical trials, as well as chemical, analytical,
manufacturing, packaging and labeling information. FDA approval of the
application is required before the applicant may market the new drug product.
Recent user-fee legislation establishes specific time frames for
completion of FDA regulatory reviews. While this program provides some measure
of assurance that the FDA's review is conducted in a timely fashion, there is no
guarantee that the time periods will be met in all cases or that the review will
provide positive results. Even after initial FDA approval has been obtained, the
NDA must be supplemented with any new data subsequently obtained with respect to
the drug's safety and efficacy. Further studies may be required to provide
additional data on safety or to gain approval for the use of a product as a
treatment in clinical indications other than those for which the product was
initially tested. The FDA may also require post-marketing testing and
surveillance programs or Phase IV post-approval trials to monitor the drug's
effects. Side effects resulting from the use of pharmaceutical products may
prevent or limit the further marketing of products.
In addition to regulations enforced by the FDA, we are subject to
regulations under the Occupational Safety and Health Act, various state and
federal environmental protection laws, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other similar federal, state and
local regulations governing permissible laboratory activities, waste disposal
and other matters.
For marketing outside of the United States, we will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs. The requirements relating to the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country.
EMPLOYEES
At February 29, 2000, we had 53 full-time employees, of whom 40 were
engaged in research and development, including our Chief Executive Officer and
Executive Vice President of Research and Development, both of whom hold Ph.D.
degrees in pharmaceutical sciences. The balance of our employees are engaged in
administration, production and support functions.
None of our employees are covered by a collective bargaining
agreement or are represented by a labor union. We consider our relationship with
our employees to be satisfactory.
RISK FACTORS
Investing in our common stock involves several risks, some of which
are beyond our control. You should carefully consider the following highlights
of some of the risks we face. Certain "forward-looking" statements are made
according to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve known and unknown risks
and uncertainties, which may cause our actual results in future periods to
differ materially from forecasted results.
WE HAVE A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES
We have incurred losses in each of the last three years, and we
cannot be certain that we will ever achieve and sustain profitability. The
process of developing our products requires significant research and
development, including basic research, pre-clinical and clinical development, as
well as regulatory approval by the Food and Drug Administration ("FDA"). We
expect these activities, together with our sales, marketing, general and
administrative expenses, to result in operating losses for the foreseeable
future. Our ability to achieve profitability is dependent, in part, on our
ability to successfully complete development of our projects, obtain regulatory
approvals, and manufacture and market our products directly or through licensing
partners.
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OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND
UNCERTAINTIES
A number of factors influence our operating results including, among
others:
- the timing and achievement of licensing transactions,
including milestones and other performance factors associated
with these contracts
- the time and costs involved in patent research and development
of our proprietary position
- continued scientific progress and level of expenditures in our
research and development programs
- the cost of manufacturing scale-up and production batches,
including vendor provider activities and costs
- the time and costs involved in obtaining regulatory approvals
- changes in general economic conditions and drug delivery
technologies
- introduction of new products and product enhancements by us or
our competitors
Due to these factors and others, our revenues and operating results,
particularly those reported on a quarterly basis, are difficult to forecast.
Therefore, we believe that quarterly comparisons of our operating results will
not be meaningful, and you should not rely on them as an indication of our
future performance. Also, the market price of our common stock could be
adversely affected by analysts should actual results differ from their
projections or expectations.
THERE MAY BE IMPAIRMENT OF OUR PROPRIETARY POSITION AND TECHNOLOGY BASE
We specialize in the nasal delivery of pharmaceutical products and
rely on the issuance of patents, both in the U.S. and internationally, for
protection against nasal product competition. Although we believe that we
exercise the necessary due diligence in our patent filings, our proprietary
position is not established until actual patent issuance, which may take up to
two or three years after initial filing, by the appropriate regulatory
authorities. In addition, alternative drug delivery technologies may provide
more effective therapeutic benefit to patients thereby creating potential
obsolescence of our products, technology and/or proprietary position.
Moreover, patent positions of pharmaceutical companies are generally
uncertain and involve complex legal and factual issues. Therefore, although we
believe our patents are valid, we cannot predict with any precision the scope or
enforceability of our claims or that our issued patents would withstand review
and be held valid by a court of competent jurisdiction. Furthermore, there can
be no assurance that any issued patents will not be infringed or otherwise
circumvented by others or that we will be able to fund the cost of litigation
against such parties.
THE COMMERCIAL OPPORTUNITY FOR NASALLY-ADMINISTERED PRODUCTS MAY BE LIMITED
We rely on our understanding of the physical and chemical properties
of a drug and the effect of these properties on the development of a formulation
applied intranasally. Although we continue to explore the feasibility of
delivering certain drugs that are large molecules nasally, our expertise
historically has been focused in small molecules. The universe of nasal products
that qualify as small molecules and are available for commercialization may be
limited. Accordingly, we may be subject to intense competition in these
potential products. Although we need to accelerate our research of larger
molecules, we cannot assure you that we will be successful in these areas.
WE MAY REQUIRE ADDITIONAL FINANCING IN YEAR 2000, OTHERWISE WE MAY NOT BE ABLE
TO COMPLETE OUR PROJECTS
Subject to the success of our development programs and potential
licensing transactions, we may require an additional infusion of capital to
complete our research and development activities currently contemplated and to
commercialize our proposed products. Our future capital needs depend on many
factors, including:
- the scope, duration and expenditures associated with our
current research and development programs
- continued scientific progress in these programs
- the outcome of potential licensing transactions, if any
- competing technological developments
- our proprietary patent position, if any, in our products
- the regulatory approval process for our products
- other factors which may not be within our control
Subject to projected cash flow, we may seek additional financing
when market conditions allow but we cannot assure you that capital will be
available at that time. Without additional funding, we may be required to delay,
reduce
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or eliminate one or more research or development programs and reduce overall
overhead expenses. Such action may have an adverse effect on the market price of
our common stock.
OUR PRODUCTS ARE SUBJECT TO REGULATORY APPROVALS WHICH COULD SUBSTANTIALLY DELAY
OR PREVENT US FROM MARKETING OUR PRODUCTS
We embark on specific research or development projects that address
unmet medical needs and incur significant project costs in anticipation of
filing an NDA. These projects are subject to significant regulation by numerous
governmental authorities in the United States and other countries. The process
of completing clinical testing and obtaining FDA approval for a new drug product
requires the expenditure of substantial resources over a number of years (see
"Government Regulations"). If we do not receive the necessary regulatory
approvals along the way, we will not be able to progress clinically in our
projects and may be forced to abandon projects after incurring substantial
costs. Furthermore, we will not be able to generate revenues and become
profitable. Finally, we may encounter significant delays or excessive costs in
our efforts, even if we are eventually successful in achieving regulatory
approval.
WE HAVE NO EXPERIENCE IN MARKETING OR SELLING OUR PRODUCTS
Even if we are able to develop our products and obtain necessary
regulatory approvals, we have no experience in marketing or commercializing any
of our proposed products. We are dependent on our ability to find collaborative
marketing partners for commercial sale of our products. Even if we find a
potential marketing partner, we may not be able to negotiate a licensing
contract on favorable terms to justify our investment or achieve adequate
revenues. In addition, a licensing transaction with a marketing partner does not
assure a product's success, which is dependent upon market acceptance by
patients, physicians or third party payors.
Our products may prove to be unsuccessful as a result of lack of
acceptance by government health administration authorities, private health care
insurers and other health care payers, such as health maintenance organizations
and self-insured employee plans, that determine reimbursement to the consumer.
We cannot assure you that such reimbursement will be available at all or at
levels sufficient to allow our marketing partners to achieve profitable price
levels for our products. If we fail to achieve adequate reimbursement levels,
patients may not purchase our products and sales of these products would be
adversely affected.
WE EXPECT THAT WE WILL FACE INTENSE COMPETITION THAT MAY LIMIT OUR ABILITY TO
ACHIEVE PROFITABILITY
Our competitors are numerous and include, among others, major
pharmaceutical companies, biotechnology firms, universities and other research
institutions. We cannot assure you that our competitors will not succeed in
developing technologies and products that are more effective than the nasal
technology being developed by us or which would cause our technology or products
to become obsolete or noncompetitive.
Many of our competitors have substantially greater financial and
technical resources and production and marketing capabilities than we have. They
also may have greater experience in conducting preclinical testing and clinical
trials of pharmaceutical products and obtaining FDA and other regulatory
approvals. Therefore, our competitors may succeed in obtaining FDA approval for
products faster than we could. Even if we commence commercial sales of our
products, we will also be competing against their manufacturing efficiency and
marketing capabilities, areas in which we have limited or no experience.
We believe that direct competition with our patented nasal delivery
products may be difficult because of our patent position. However, we must also
compete with other promising technologies such as controlled release, target
organ or site release, pumps, polymers, microemulsion, monoclonal antibodies,
inhalation, ocular, liposomal, implants, transdermal passive and transdermal
electrotransport. Other products using these or other delivery alternatives may
be developed that may be as or more effective than our products and proposed
products. There can be no assurance that we will be able to compete effectively
with other commercially available products or drug delivery technologies.
WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES
We depend upon the knowledge, experience and skills of our
management and research and development personnel. In addition, we rely on
consultants to assist us in our business. The loss of any key employee or
consultant could have a material adverse effect on our business.
- 8 -
<PAGE> 10
Recruiting and retaining qualified technical and managerial
personnel is vital to our success. We cannot assure you that we will be
successful in attracting or retaining key personnel who generally are in high
demand in the pharmaceutical industry. In addition, the location of our
facilities may limit the pool of technical talent available to us.
WE MAY NOT BE ABLE TO MANUFACTURE OUR PRODUCTS OR PERFORM OUR CLINICAL
STUDIES
All of our products for clinical and commercial use must be produced
in compliance with Federal and State regulations. Our facilities are also
subject to inspection by these authorities. In addition, certain key suppliers
are also subject to regulatory compliance. We cannot assure you that our
suppliers will comply with these regulations or perform their obligations in a
timely fashion. The failure by any supplier could cause a delay in clinical
trials or the supply of product to market. Any significant delay could also
jeopardize our performance contracts with collaborative partners and result in
material penalties to us.
WE ARE SUBJECT TO FACTORS OF CHANGES IN OUR INDUSTRY THAT ARE BEYOND OUR
CONTROL
The health care industry is changing rapidly as the public,
government, medical professionals and the pharmaceutical industry examine ways
to broaden medical coverage while controlling the increase in health care costs.
Potential changes could put pressure on the prices of prescription
pharmaceutical products and adversely affect our business or prospects. We
cannot predict when, if any, proposed health care reforms will be implemented,
and such changes are beyond our control.
ITEM 2 - PROPERTY
We lease approximately 28,000 square feet for our research and
development activities and 10,000 square feet for our manufacturing and
corporate and administrative offices. The R&D site is in proximity to the
corporate offices in Hauppauge, New York. The leases provide for minimum annual
rent of approximately $210,000 which escalates to $410,000 in 2008 with our
having an option to renew the R&D site lease for an additional five-year term at
increased annual rental rates. The corporate office lease expires June 30, 2005
and the R&D site lease expires October 31, 2009. We are also responsible for all
utilities, maintenance, security and property tax increases.
ITEM 3 - LEGAL PROCEEDINGS
We know of no material litigation or proceeding, pending or
threatened, to which we are or may become a party.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of security holders
through the solicitation of proxies or otherwise, during the last quarter of the
fiscal period covered by this report.
- 9 -
<PAGE> 11
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the NASDAQ National Market
(prior to January 27, 1997 it traded on the NASDAQ Small Cap Market) under the
symbol NSTK. The following table sets forth the range of high and low closing
bid prices for the Company's common stock as reported by the NASDAQ Stock Market
for the last two years. These quotations represent inter-dealer prices, without
adjustment for retail mark-ups, mark-downs or commissions and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
SALE PRICE
------------------------------------
YEARS LOW HIGH
- ------------------------------------- -------------- ---------------
1999 QUARTER ENDED:
<S> <C> <C>
December 31, 1999 $ 1.56 $ 3.63
September 30, 1999 2.75 4.44
June 30, 1999 2.56 3.63
March 31, 1999 3.00 6.25
1998 QUARTER ENDED:
- --------------------
December 31, 1998 $ 3.00 $ 5.50
September 30, 1998 3.75 8.25
June 30, 1998 7.63 12.50
March 31, 1998 10.38 15.38
- ---------------------------------------------------------------------------------
</TABLE>
The Company believes that its common stock is held of record by
approximately 5,000 persons, including several brokerage firms holding shares in
street name for beneficial owners.
DIVIDEND POLICY
Since its inception, the Company has neither paid nor declared any
cash or other dividends on its shares of common stock. The Company has no
current plans to pay dividends on its common stock and intends to retain
earnings, if any, for working capital purposes. Any future determination as to
the payment of dividends on the common stock will depend upon the results of
operations, capital requirements, the financial condition of the Company and
other factors that the Board of Directors deems relevant.
- 10 -
<PAGE> 12
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the financial statements and notes thereto. The statement of operations
data for the years ended December 31, 1999, 1998 and 1997, for the six months
ended December 31, 1996 and each of the years in the two-year period ended June
30, 1996 and the balance sheet data as of December 31, 1999, 1998, 1997 and 1996
and June 30, 1996 and 1995 are derived from the audited financial statements of
the Company. The selected financial data for the year ended December 31, 1996
and the six months ended December 31, 1995 has been derived from unaudited
financial statements of the Company which, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of such information for such period. The Company changed its
year end from June 30 to December 31 commencing with the six month period ended
December 31, 1996.
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 YEAR ENDED JUNE 30
-------------------------------------------------------------- -------------------------------
STATEMENT OF OPERATIONS
DATA: 1999 1998 19971 1996 1996 1995
-------------- -------------- ------------ --------------- -------------- --------------
(UNAUDITED)
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Product sales ................. $ 325 $ 516 $ 482 $ --- $ --- $ ---
License fee, royalty and
research income............. 4,222 7,632 3,647 3,987 3,629 2,684
Interest income................ 1,084 1,442 1,393 344 238 254
Total revenues.............. 5,631 9,590 5,522 4,331 3,867 2,938
-------------- -------------- ------------ --------------- -------------- --------------
Cost and expenses:
Cost of product sales ......... 268 589 454 --- --- ---
Research and development....... 9,649 6,014 4,600 1,494 1,164 882
Royalties...................... 1,436 1,251 1,586 1,649 1,677 1,251
Sales and marketing............ 1,051 875 1,723 169 128 50
General and administrative..... 1,577 1,737 1,705 1,073 780 834
Total costs and expenses.... 13,981 10,466 10,068 4,385 3,749 3,017
-------------- -------------- ------------ --------------- -------------- --------------
Income (loss) before provision
for income taxes............... (8,350) (876) (4,546) (54) 118 (79)
Provision for income taxes........ --- --- --- --- --- ---
-------------- -------------- ------------ --------------- -------------- --------------
Net income (loss) ................ $ (8,350) $ (876) $ (4,546) $ (54) $ 118 $ (79)
============== ============== ============ =============== ============== ==============
Net income (loss) per common
share-basic.................... $ (1.32) $ (.14) $ (.76) $ (.01) $ .04 $ (.03)
Net income (loss) per common
share-diluted.................. $ (1.32) $ (.14) $ (.76) $ (.01) $ .03 $ (.03)
Average shares outstanding-
basic......................... 6,335,112 6,296,019 5,978,121 3,706,529 3,221,447 3,119,718
Average shares outstanding-
diluted....................... 6,335,112 6,296,019 5,978,121 3,706,529 4,297,536 3,119,718
<CAPTION>
DECEMBER 31 JUNE 30
-------------------------------------------------------------- -------------------------------
BALANCE SHEET DATA: 1999 19982 19972 19962 19962 1995
-------------- -------------- ------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Working capital .................. $ 12,912 $ 24,454 $ 24,206 $ 11,342 $ 7,469 $ 4,444
Total assets...................... 20,199 27,518 27,371 12,894 9,367 6,035
Total stockholders' equity 16,625 25,502 24,929 11,813 7,569 4,288
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
-------------------------------
STATEMENT OF OPERATIONS
DATA: 1996 1995
--------------- --------------
(UNAUDITED)
Revenues:
<S> <C> <C>
Product sales .................. $ --- $ ---
License fee, royalty and
research income.............. 1,880 1,522
Interest income................. 231 125
Total revenues............... 2,111 1,647
--------------- --------------
Cost and expenses:
Cost of product sales .......... --- ---
Research and development........ 1,035 705
Royalties....................... 710 738
Sales and marketing............. 76 35
General and administrative...... 643 349
Total costs and expenses..... 2,464 1,827
--------------- --------------
Income (loss) before provision
for income taxes................ (353) (180)
Provision for income taxes......... --- ---
--------------- --------------
Net income (loss) ................. $ (353) $ (180)
=============== ==============
Net income (loss) per common
share-basic..................... $ (.08) $ (.06)
Net income (loss) per common
share-diluted................... $ (.08) $ (.06)
Average shares outstanding-
basic.......................... 4,191,600 3,221,447
Average shares outstanding-
diluted........................ 4,191,600 3,221,447
<CAPTION>
DECEMBER 31
-------------------------------
BALANCE SHEET DATA: 1996 1995
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Working capital ................... $ 11,342 $ 4,045
Total assets....................... 12,894 5,616
Total stockholders' equity 11,813 4,108
</TABLE>
- --------
(1)During fiscal 1997, the Company began making shipments of Nascobal(R) to
Schwarz Pharma (see note 8 to the Company's financial statements).
(2)During fiscal 1997, the Company completed a public offering of 1,380,000
shares of common stock. For the periods end ed December 31, 1998 and 1996 and
June 30, 1996, the Company received net proceeds of $1.4 million, $4.6 million
and $3.2 million, respectively, from the exercise of the warrants.
- 11 -
<PAGE> 13
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION RESULTS
OF OPERATIONS
OVERVIEW
Except for historical information contained herein, the statements
in this Item are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward- looking statements involve known and unknown risks and uncertainties
that reflect the Company's intentions, expectations or beliefs concerning future
events. (See Item 1, "Risk Factors".)
The Company is engaged in the research, development, manufacturing
and commercialization of nasally administered forms of prescription
pharmaceuticals that are currently delivered in oral, injectable or other dosage
forms. The nasal delivery of certain pharmaceuticals may enable more rapid
systemic absorption, lower required dosages, quicker onset of desired effect,
and painless, convenient patient self-administration, resulting in improved
patient compliance and pharmacoeconomics. The Company focuses its research
primarily on drugs with demonstrated safety and efficacy, which, through current
delivery forms, have certain bioavailability, therapeutic or patient compliance
limitations that may be improved with a preferred delivery system.
The Company receives licensing revenues on two commercial products -
Stadol(R)NS(TM) and Nascobal(R). Stadol NS, an opioid analgesic which is
classified as a Schedule IV substance, is used for the treatment of moderate to
severe pain and the acute pain of migraine. The product is currently marketed by
Bristol-Myers Squibb Co. (BMS) under an agreement that generates quarterly
royalties to the Company. Royalties from BMS are scheduled to terminate at time
of patent expiry in August 2001. In July 1997, the Company entered into an
exclusive licensing agreement for Nascobal(R) in the U.S. with Schwarz Pharma
and commercially launched the product in October 1997. Under the agreement, the
Company received minimum royalties of $2 million in 1998 and retains global
manufacturing rights. The minimum royalty expired in December 1998. Sales
re-orders of Nascobal(R) in 1999 and 1998 were below expectations as a result of
a marketing issue which required a change in the packaging configuration of the
product. The Company shipped the new package configuration to Schwarz Pharma
beginning in the second quarter of 1999. Schwarz Pharma has reported an increase
in units sold to distributors during the second half of 1999.
In December 1999, we reacquired the marketing rights to intranasal
scopolamine hydrobromide from Schwarz Pharma. We made a payment of $250,000 to
Schwarz Pharma which has been reflected as an expense in research and
development for the year ended December 31, 1999. We agreed to pay Schwarz
Pharma one-half of any future consideration received by Nastech in respect to
intranasal scopolamine until Schwarz Pharma receives payments totaling
$3,500,000 plus an additional amount for interest that will accrue at a rate of
8.5% per annum. As any payment to Schwarz Pharma is contingent on whether we
will receive proceeds from the future sale or license of intranasal scopolamine,
no liability has been recorded for this agreement as of December 31, 1999. The
Company is currently seeking a marketing partner for this product.
The Company intends to commit significant financial resources in the
future to internally fund certain research and development projects with the
goal of achieving greater economic benefit from product sales. In addition, the
Company's future profitability is primarily affected by, among others, the
success of product sales by its licensees, its investment and achievement of
milestones in research and development programs, regulatory uncertainties with
respect to its filings with the FDA, and the success of its financing
activities. As a result of the uncertainties associated with these factors and
the increased investment in research and development, the Company anticipates
operating losses in the foreseeable future.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31,
1998
Revenues decreased by $4.0 million, or 41%, to $5.6 million
primarily as a result of a decline in product sales and royalty income of
Nascobal(R) and milestone payments on intranasal scopolamine. Total revenues
from Schwarz Pharma on Nascobal(R) were $740,000 compared to $2.5 million in
1998. The revenue for the year ended December 31, 1998 included $2 million as a
minimum royalty from Schwarz Pharma on Nascobal(R). Sales re-orders of
Nascobal(R) were below expectation as a result of the marketing issue noted
above. Accordingly, royalty income on sales of Nascobal(R) decreased $1.6
million, or 79%, to $415,000. Total milestone payments on scopolamine decreased
$2.2 million or 75% to $750,000. Royalty income received from BMS on sales of
Stadol NS increased $374,000, or 15%, to $2.9 million.
- 12 -
<PAGE> 14
Total costs and expenses increased by $3.5 million or 34%, to $14
million in 1999. The details of the increase follow:
Research and development expense increased by $3.6 million, or 60%,
to $9.6 million primarily as a result of the Company's clinical programs for
intranasal scopolamine, morphine and apomorphine. Included in the increase is
the $250,000 initial buyback amount paid to Schwarz Pharma. In September 1998,
the Company also entered into an operating lease for a larger R&D facility and
intends to pursue additional internally funded projects in the future.
Royalties expense increased by $185,000, or 15%, to $1.4 million as
a result of the increase in sales of Stadol NS by BMS and the related royalty
payable to the University of Kentucky Research Foundation (UKRF) under a
separate agreement between the Company and UKRF. Royalties expense increases or
decreases approximately in proportion to royalty income associated with Stadol
NS.
Sales and marketing costs increased by $176,000 or 20% from 1998 and
arises from an increase in market research and consulting fees.
As a percentage of total revenues, sales and marketing and general
and administrative expenses increased to 47% in 1999 as compared to 27% in 1998
as a result of the decline in revenues.
Year Ended December 31, 1998 Compared to Year Ended December 31,
1997
Revenues increased by $4.1 million, or 73.7%, to $9.6 million
primarily as a result of manufactured product sales and royalty income from the
sales of Nascobal(R) of $2 million and the achievement of milestones of $3
million on the intranasal motion sickness product, scopolamine, under its
collaborative licensing agreements with Schwarz Pharma. Royalty income received
from BMS on sales of Stadol NS decreased $675,000 or 21%, to $2.6 million.
Total costs and expenses increased by $398,000 to $10.5 million in
1998. The details of the increase follow:
Research and development expense increased by $1.4 million, or 31%
to $6.0 million primarily as a result of the Company's clinical program for
intranasal scopolamine. The Company has entered into an operating lease for a
larger R&D facility and intends to pursue internally funded projects.
In connection with the manufacture of Nascobal(R), the Company
entered into a filling and packaging agreement with a third party. In 1998, the
Company has incurred certain costs associated with its plan to expand its
manufacturing capabilities and reduce its reliance on third parties. The total
cost of product sales, including certain costs associated with this plan of
operations, was $589,000 in 1998.
Royalties expense decreased by $335,000 or 21% to $1.3 million as a
result of the decline in sales of Stadol NS by BMS and the related royalty
payable to the University of Kentucky Research Foundation (UKRF) under a
separate agreement between the Company and UKRF. Royalties expense increases or
decreases approximately in proportion to royalty income associated with Stadol
NS.
Sales and marketing expenses decreased by $848,000, or 49%, to
$875,000. The Company eliminated its marketing costs associated with the
product, Nascobal(R), as a result of the licensing agreement entered into with
Schwarz Pharma in 1997.
As a percentage of total revenues, general and administrative
expenses decreased to 18% in 1998 as compared to 31% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's liquidity included cash and cash
equivalents and short-term investments of $14.6 million compared to $23.5
million at December 31, 1998. Accounts, royalties and fee receivables at
December 31, 1999 consist principally of receivables pursuant to the BMS and
Schwarz Pharma agreements.
In July 1999, the shareholders of the Company approved a 1:100
reverse split of its common stock followed immediately by a 100:1 forward split.
The Company effectuated these transactions on August 17, 1999. The purpose of
these transactions is to enable a redemption of odd-lot shares and reduce
certain related administrative costs incurred annually by the Company. As of
December 31, 1999 the Company has redeemed 110,736 of such shares at a cost of
- 13 -
<PAGE> 15
$395,000. In addition, on October 29, 1999, the Company's Board of Directors
authorized the Company to effect open market purchases of up to 500,000 shares
of its common stock. As of December 31, 1999 the Company made purchases
of 77,000 of its shares of common stock at a cost of $151,000.
At December 31, 1999, the Company had working capital of $12.9
million. Management anticipates that it may require an additional infusion of
capital in year 2000 in order to provide adequate funds for the Company's
anticipated needs, including working capital. As of December 31, 1999 the
Company has invested approximately $3.0 million in equipment and leasehold
improvements in connection with its new R&D facility.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activity." This statement establishes
comprehensive accounting and reporting standards for derivative instruments and
hedging activities. In June 1999, the FASB issued SFAS No. 137, deferring the
required implementation of SFAS No. 133. This SFAS will be adopted by the
Company in the first quarter of fiscal 2001. Implementation of this statement is
not expected to affect the Company's financial position or results of
operations.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
- 14 -
<PAGE> 16
ITEM 8 - INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT...............................................................................16
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance Sheets at December 31, 1999 and 1998...................................................17
Statements of Operations for the years ended December 31, 1999, 1998 and 1997. ................18
Statements of Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997.......19
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997..................20
Notes to Financial Statements..................................................................21
</TABLE>
- 15 -
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Nastech Pharmaceutical Company Inc.
We have audited the accompanying balance sheets of Nastech Pharmaceutical
Company Inc. (the Company) as of December 31, 1999 and 1998 and related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nastech Pharmaceutical Company
Inc. as of December 31, 1999 and 1998 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 generally accepted accounting principles.
/s/ KPMG LLP
Melville, New York
February 28, 2000
- 16 -
<PAGE> 18
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NASTECH PHARMACEUTICAL COMPANY INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------- ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ................................... $ 10,652 $ 23,515
Short-term investments ...................................... 3,986 ---
Accounts receivable ......................................... 25 20
Royalties and fees receivable ............................... 1,011 2,265
Inventories ................................................. 279 390
Prepaid expenses and sundry assets .......................... 533 280
-------- --------
Total current assets ............................... 16,486 26,470
-------- --------
Property and equipment .......................................... 4,666 1,635
Less: Accumulated depreciation and amortization ............. 986 602
Property and equipment, net ........................ 3,680 1,033
-------- --------
Other assets .................................................... 33 15
-------- --------
Total assets ....................................... $ 20,199 $ 27,518
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 2,059 $ 625
Royalties payable ........................................... 664 597
Accrued expenses and sundry liabilities ..................... 851 794
-------- --------
Total current liabilities .......................... 3,574 2,016
-------- --------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized: 100,000 shares;
issued and outstanding: none .......................... --- ---
Common stock, $0.006 par value; authorized: 25,000,000
shares; issued: 6,267,485 and 6,376,915 shares at
December 31, 1999 and 1998, respectively ............... 38 38
Additional paid-in capital .................................. 37,050 37,426
Accumulated deficit ......................................... (20,312) (11,962)
-------- --------
16,776 25,502
Less: Treasury stock, at cost, 77,000 shares ............... 151 ---
-------- --------
Total stockholders' equity ......................... 16,625 25,502
-------- --------
Total liabilities and stockholders' equity ......... $ 20,199 $ 27,518
======== ========
</TABLE>
See accompanying notes to financial statements.
- 17 -
<PAGE> 19
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
DEC. 31, DEC. 31, DEC. 31,
1999 1998 1997
-------- -------- ---------
Revenues:
<S> <C> <C> <C>
Product sales .......................... $ 325 $ 516 $ 482
License fee, royalty and research income 4,222 7,632 3,647
Interest income ........................ 1,084 1,442 1,393
-------- -------- --------
Total revenues .................... 5,631 9,590 5,522
-------- -------- --------
Costs and expenses:
Cost of product sales .................. 268 589 454
Research and development ............... 9,649 6,014 4,600
Royalties .............................. 1,436 1,251 1,586
Sales and marketing .................... 1,051 875 1,723
General and administrative ............. 1,577 1,737 1,705
-------- -------- --------
Total costs and expenses .......... 13,981 10,466 10,068
-------- -------- --------
Net loss ................................... $ (8,350) $ (876) $ (4,546)
======== ======== ========
Net loss per common share-basic and diluted $ (1.32) $ (.14) $ (.76)
======== ======== ========
Average shares outstanding-basic and diluted 6,335 6,296 5,978
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
- 18 -
<PAGE> 20
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ......................... 4,706,158 $ 28 $ 18,325 $ (6,540)
Additional shares issued in connection
with public offering net of issuance
costs .......................................... 1,380,000 9 17,460 ---
Shares issued in connection with exercise
of stock options ............................... 14,999 --- 18 ---
Compensation related to stock options .............. --- --- 175 ---
Fractional shares redeemed in connection
with reverse stock split ....................... (137) --- --- ---
Net loss year ended December 31, 1997 .............. --- --- --- $ (4,546)
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 ......................... 6,101,020 $ 37 $ 35,978 $ (11,086)
Shares issued in connection with exercise
underwriter's warrants ......................... 270,000 1 1,402 ---
Shares issued in connection with exercise
of stock options ............................... 6,000 --- 46 ---
Fractional shares redeemed in connection
with reverse stock split ....................... (105) --- --- ---
Net loss year ended December 31, 1998 .............. --- --- --- (876)
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 ......................... 6,376,915 $ 38 $ 37,426 $ (11,962 )
Redemption of shares in connection with
reverse/forward stock .......................... (110,736) --- (395) ---
Shares issued in connection with exercise
of stock options ............................... 5,000 --- 19 ---
Acquisition of treasury stock ...................... --- --- --- ---
Fractional shares redeemed in connection
with reverse stock split ....................... (3,694) --- --- ---
Net loss year ended December 31, 1999 .............. --- --- --- (8,350)
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 ......................... 6,267,485 $ 38 $ 37,050 $ (20,312)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
----------- -------------
<S> <C>
BALANCE, DECEMBER 31, 1996 ......................... --- $ 11,813
Additional shares issued in connection
with public offering net of issuance
costs .......................................... --- 17,469
Shares issued in connection with exercise
of stock options ............................... --- 18
Compensation related to stock options .............. --- 175
Fractional shares redeemed in connection
with reverse stock split ....................... --- ---
Net loss year ended December 31, 1997 .............. --- $ (4,546)
---------- ----------
BALANCE, DECEMBER 31, 1997 ......................... --- $ 24,929
Shares issued in connection with exercise
underwriter's warrants ......................... --- 1,403
Shares issued in connection with exercise
of stock options ............................... --- 46
Fractional shares redeemed in connection
with reverse stock split ....................... --- ---
Net loss year ended December 31, 1998 .............. --- (876)
---------- ----------
BALANCE, DECEMBER 31, 1998 ......................... --- $ 25,502
Redemption of shares in connection with
reverse/forward stock .......................... --- (395)
Shares issued in connection with exercise
of stock options ............................... --- 19
Acquisition of treasury stock ...................... (151) (151)
Fractional shares redeemed in connection
with reverse stock split ....................... --- ---
Net loss year ended December 31, 1999 .............. --- (8,350)
---------- ----------
BALANCE, DECEMBER 31, 1999 ......................... $ (151) $ 16,625
========== ==========
</TABLE>
See accompanying notes to financial statements.
- 19 -
<PAGE> 21
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------
DEC. 31, DEC. 31, DEC. 31,
1999 1998 1997
-------- -------- --------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss .............................. $ (8,350) $ (876) $ (4,546)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Compensation related to stock
options ......................... --- --- 175
Depreciation and amortization .... 384 300 262
Changes in assets and liabilities:
Accounts and other receivables ... 1,249 (1,348) (139)
Inventories ...................... 111 (20) (370)
Prepaid expenses and sundry assets (271) (233) 33
Accounts payable ................. 1,434 (872) 910
Royalties payable ................ 67 406 (45)
Accrued expenses and sundry
liabilities .................. 57 40 497
-------- -------- --------
Net cash used in operating activities ..... (5,319) (2,603) (3,223)
-------- -------- --------
INVESTING ACTIVITIES:
Property and equipment ................ (3,031) (625) (585)
Short-term investments-acquisitions ... (3,986) --- (968)
Short-term investments-redemptions .... --- --- 7,992
-------- -------- --------
Net cash provided by (used in) investing
activities ............................ (7,017) (625) 6,439
-------- -------- --------
FINANCING ACTIVITIES:
Redemption of common shares ........... (395) --- ---
Acquisition of treasury stock ......... (151) --- ---
Exercise of stock options ............. 19 46 18
Exercise of warrants .................. --- 1,403 ---
Proceeds from sale of common stock .... --- --- 17,566
-------- -------- --------
Net cash provided by (used in) financing
activities ............................ (527) 1,449 17,584
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ........................... (12,863) (1,779) 20,800
Cash and cash equivalents--beginning ...... 23,515 25,294 4,494
-------- -------- --------
Cash and cash equivalents--ending ......... $ 10,652 $ 23,515 $ 25,294
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
- 20 -
<PAGE> 22
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS
For the Three Years Ended December 31, 1999
NOTE 1 -- BUSINESS AND BASIS OF PRESENTATION
Business
The Company operates in a single segment which is engaged in the
research, development, manufacturing and commercialization of nasally
administered forms of prescription pharmaceuticals.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
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 and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and temporary investments
of highly-rated investment grade commercial paper with maturities of three
months or less when purchased. At December 31, 1999 and 1998, cash equivalents
totaled $10.6 million and $23.2 million, respectively.
Investments
Short-term investments consist of highly-rated investment grade
commercial paper having original maturities greater that three months and up to
one year. There were no material unrealized holding gains or losses at December
31, 1999.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
basis) or market and consist principally of raw materials.
Patents
The cost of acquired patents is capitalized and amortized over the
remaining legal life of the patents at acquisition or their useful life,
whichever is shorter. Legal costs and fees related to patent applications
developed by the Company are charged to expense as incurred.
Property and Equipment
Property and equipment are carried at cost and depreciated using
accelerated methods over estimated useful lives ranging from 5 to 7 years.
Leasehold improvements are carried at cost and amortized using the straight-line
method over the lesser of the estimated useful life or the remaining lease term.
When assets are sold or retired, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is recognized in
the period. Expenditures for maintenance and repairs are charged to expense as
incurred.
License Fee, Royalty and Research Income
The Company has entered into various collaborative arrangements with
other pharmaceutical companies and recognizes income from royalties based upon
the sale of licensed products as reported by licensees. Income from license fees
and research income are recognized as earned pursuant to the terms of the
related agreements. A substantial portion of the Company's revenues is derived
from licensing agreements with Bristol-Myers Squibb ("BMS") and Schwarz Pharma,
Inc. ("Schwarz").
- 21 -
<PAGE> 23
Net Loss per Common Share
Basic and diluted net loss per common share is computed by dividing
the net loss by the weighted average number of common shares outstanding during
the period. The diluted loss per common share presented excludes the common
stock equivalents (stock options and warrants), since such inclusion in the
computation would be antidilutive.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Long-Lived Assets
The Company reviews its long-lived assets (property and equipment)
for impairment whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the expected cash
flows, undiscounted and without interest, is less than the carrying amount of
the asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value. There was no significant impact on
the Company's results of operations or financial position as a result of the
adoption of SFAS No. 121.
Stock-Based Compensation
The Company accounts for stock-based compensation using the
intrinsic value method in accordance with APB No. 25, "Accounting for Stock
Issued to Employees." Effective July 1, 1996, the Company adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", which
requires the disclosure of pro forma net income and earnings per share as if the
Company adopted the fair value-based method in measuring compensation expense as
of the beginning of fiscal 1996 (see Note 9).
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 130 requires that all items
recognized under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. Other comprehensive income may
include foreign currency translation adjustments, minimum pension liability
adjustments and unrealized gains and losses on marketable securities classified
as available-for-sale. The Company's operations did not give rise to items
includible in comprehensive income which were not already included in net
income. Accordingly, the Company's comprehensive income is the same as its net
income for all periods presented.
.
Fair Value Financial Instruments
The Company considers the fair value of all financial instruments to
not be materially different from their carrying value at year-end as all
financial instruments are highly rated investment grade commercial paper having
short term maturities.
- 22 -
<PAGE> 24
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------------- -----------------
(In thousands)
<S> <C> <C>
Furniture and fixtures...................................... $ 335 $ 131
Machinery and equipment..................................... 2,027 962
Computer equipment.......................................... 316 211
Leasehold improvements...................................... 1,988 331
---------------- -----------------
4,666 1,635
Less accumulated depreciation
and amortization........................................... 986 602
---------------- -----------------
Net property and equipment.................................. $ 3,680 $ 1,033
================ =================
</TABLE>
NOTE 4 -- STOCKHOLDERS' EQUITY
The Company completed a public offering of 1,380,000 shares of
common stock at $14.00 per share in February, 1997. The proceeds to the Company
of $17,469,000 was net of direct expenses of the offering totaling $1,851,000.
In connection with this public offering, the Company issued to the
representatives of the underwriters warrants to purchase in the aggregate up to
69,000 shares of Common Stock (the "Representatives' Warrants") at an exercise
price per share equal to 120% of the public offering price per share. The
Representatives' Warrants are exercisable for a period of four years commencing
January 24, 1998. The holders of the Representatives' Warrants will have no
voting, dividend or other stockholder rights until the Representatives' Warrants
are exercised. The Company has granted the representatives certain registration
rights related to the Representatives' Warrants.
In connection with a public offering of common stock and warrants in
1994, underwriter's warrants were exercised during 1998 resulting in proceeds to
the Company of $1,403,000.
In July 1999, the shareholders of the Company approved a 1:100
reverse split of its common stock followed immediately by a 100:1 forward split.
The Company effectuated these transactions on August 17, 1999. The purpose of
these transactions is to enable a redemption of odd-lot shares and reduce
certain related administrative costs incurred annually by the Company. As of
December 31, 1999, the Company has redeemed 110,736 of such shares at a cost of
$395,000 and subsequently retired. The Company also acquired 77,000 shares of
its common stock in 1999 at an aggregate cost of $151,000. These shares are
being held as treasury stock.
The Company is authorized to issue up to 100,000 shares of preferred
stock, the designations, powers, preferences and rights of which may be
determined, from time to time, by the Company's Board of Directors.
NOTE 5 -- STOCK OPTION PLAN
Under the Company's amended Stock Option Plan (the "Plan") options
to purchase a maximum of 1,500,000 shares of common stock (subject to adjustment
in the event of stock splits, stock dividends, recapitalization and other
capital adjustments) may be granted to employees, officers and directors of the
Company and other persons who provide services to the Company. The options to be
granted under the Plan are designated as incentive stock options or
non-incentive stock options by the Board of Directors which also has discretion
as to the person to be granted options, the number of shares subject to the
options and the terms of the option agreements. Only employees, including
officers and part-time employees of the Company may be granted incentive stock
options. The options are intended to receive incentive stock option tax
treatment pursuant to Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
The Plan provides that options granted thereunder shall be
exercisable during a period of no more than ten years (five years in the case of
10% shareholders) from the date of grant, depending upon the specific stock
option agreement, and that, with respect to incentive stock options, the option
exercise price shall be at least equal to 100% of the fair market value of the
common stock at the time of grant (110% in the case of 10% shareholders).
Pursuant to the provisions of the Plan, the aggregate fair market value
(determined on the date of grant) of the common stock with respect to which
incentive stock options are exercisable for the first time by an employee during
any calendar year shall not exceed $100,000. The Plan is administered by the
Company's Board of Directors.
- 23 -
<PAGE> 25
In August 1998, the Company's Board of Directors approved a stock
option exchange program in which it offered all holders the right to exchange
their options for the same number of new options with a lower exercise price but
with a modified term of vesting. All outstanding options (786,350) with an
exercise price greater than $5.63 per share were eligible for this program and
were exchanged during 1998. No charge was recorded to earnings as the new
exercise price was in excess of the market value on the date of the exchange.
Data relating to these plans are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
---------------------------- ---------------------------- ----------------------------
Weighted
Average Weighted Weighted
Exercise Average Average
Shares Price Shares Exercise Price Shares Exercise Price
------------ -------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period..... 985,750 $ 5.49 878,150 $ 10.47 459,299 $ 9.97
Granted................................ 429,050 3.29 903,650 5.91 461,902 10.94
Exercised.............................. (5,000) 3.72 (6,000) 7.73 (14,999) 1.21
Expired................................ (25,000) 3.72 --- --- --- ---
Canceled............................... --- --- (786,350) 11.18 (10,000) 22.75
Terminated............................. (214,288) 3.92 (3,700) 9.96 (18,052) 9.83
----------- ------------- -------- ------ ------- ------------
Outstanding at end of period........... 1,170,512 $ 4.84 985,750 $ 5.49 878,150 $ 10.47
=========== ============= ======== ====== ======= ============
</TABLE>
The following table summaries the information on stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------- ---------------------------------
Weighted- Weighted-
average Weighted- average
Range of Number remaining average Number exercisable
exercise prices outstanding contractual life exercise price exercisable price
--------------- ----------- ---------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.94 - $3.75 242,650 4.51 $ 2.84 100,800 $ 3.20
$4.13 - $5.13 291,900 2.50 $ 4.77 226,000 $ 4.78
$5.63 635,962 3.67 $ 5.63 554,693 $ 5.63
--------- --------
1,170,512 881,493
========= ========
</TABLE>
NOTE 6 -- INCOME TAXES
The Company's net deferred tax assets as of December 31, 1999 and
1998, are estimated as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 7,798,000 $ 3,546,000
Federal and State tax credits .. 1,106,000 637,000
Depreciation ................... 263,000 56,000
Other .......................... 131,000 59,000
------------ ------------
Total deferred tax assets . $ 9,298,000 $ 4,298,000
Valuation allowance ............ (9,298,000) (4,298,000)
------------ ------------
Net deferred taxes ............. $ --- $ ---
============ ============
</TABLE>
A valuation allowance for 1999 and 1998 has been applied to offset
the respective deferred tax assets in recognition of the uncertainty that such
tax benefits will be realized.
At December 31, 1999, the Company has available net operating loss
carryforwards for Federal and State income tax reporting purposes of
approximately $19,100,000, and has available Federal and State tax credits of
approximately
-24-
<PAGE> 26
$1,106,000, which are available to offset future taxable income, if any. These
carryforwards expire beginning in 2000 through 2019. The Company's ability to
use such net operating loss and Federal and State tax credit carryforwards is
limited by change of control provisions under Section 382 of the Internal
Revenue Code.
NOTE 7 -- COMMITMENTS
(a) Employment Agreements and Accrued Compensation
Certain officers of the Company have employment agreements that
provide base compensation and annual incentive compensation. The Company's Chief
Executive Officer has an employment agreement expiring December 31, 2000, from
which he receives base compensation of $230,000 per year, and annual incentive
compensation of up to 50% of base salary based on the achievement of certain
business objectives of the Company.
The Company's agreement with its former President terminated January
1, 1999. As part of the termination agreement the former President received a
severance payment of $107,500 which was accrued as of December 31, 1998 and a
monthly retainer of $10,000 for the initial six month term of a consulting
arrangement. Participation in the Company's stock option plan expired December
31, 1999.
As of December 31, 1999 and 1998, accrued expenses and sundry
liabilities include accrued compensation and benefits of $331,000 and $439,000,
respectively.
(b) Leases:
The Company leases space for its research and development activities
under a lease expiring October 31, 2009 and leases office and manufacturing
space under a lease expiring on June 30, 2005. The lease for the research and
development facility has a 5 year renewal option. The following is a schedule of
future minimum lease payments:
<TABLE>
<CAPTION>
<S> <C>
2000...................................................... $ 290,000
2001...................................................... 313,000
2002...................................................... 333,000
2003...................................................... 361,000
2004...................................................... 391,000
Thereafter................................................ 1,851,000
-----------
Total............................................. $ 3,538,000
===========
</TABLE>
Rental expense for the aforementioned space aggregated approximately
$418,000, $173,000, and $95,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
NOTE 8 -- CONTRACTUAL AGREEMENTS
In January 1986, the Company sublicensed to BMS its development and
commercial exploitation rights with respect to its licensed patent rights for
the nasal delivery of Butorphanol Tartrate, in exchange for which BMS agreed to
pay the Company a royalty based on the net sales of such product (the "BMS
Agreement"). The Company must pay a percentage of these royalties to University
of Kentucky Research Foundation ("UKRF") under the Company's separate license
agreement with UKRF. The BMS Agreement, which may be terminated by BMS at any
time upon 60 days written notice to the Company, is concurrent with the
Company's licensed patent rights to nasal Butorphanol Tartrate. The nasal
Butorphanol Tartrate patent expires in the year 2001 in the United States,
subject to any right of extension or renewal. In December 1991, the FDA granted
marketing clearance to BMS for this product, which is marketed by BMS as Stadol
NS and quarterly royalty payments to the Company by BMS are continuing. During
1997, Stadol NS was classified by the FDA as a Schedule IV substance under the
Controlled Substances Act which has negatively affected sales by BMS and
royalties to the Company.
In July 1997, the Company exclusively licensed to Schwarz Pharma the
right to market the Company's Nascobal(R) (Cyanocobalamin, USP) Gel in the U.S.
The Company retained worldwide manufacturing rights and the
-25-
<PAGE> 27
agreement provided for a fixed manufacturing transfer price to Schwarz Pharma.
Pursuant to the agreement the Company will receive royalty payments from Schwarz
Pharma based upon the net sales of Nascobal(R). The royalty rate is, in part,
dependent upon sales volume, with a minimum royalty of $2 million in 1998. The
term of the agreement is for the later of 15 years or the expiration of the
applicable patent which expires in 2005.
In December 1997, the Company exclusively licensed to Schwarz Pharma
the right to market the Company's intranasal scopolamine gel in the U.S. Under
the terms of the agreement, the Company was to receive royalty and manufacturing
payments from Schwarz Pharma. In addition, Schwarz Pharma made research
milestone payments to the Company of $3,750,000 through December 1999 of which
$750,000 and $3,000,000 was recognized in the years ended December 31, 1999 and
1998, respectively,
In December 1999, the Company reacquired the marketing rights to
intranasal scopolamine from Schwarz Pharma. The Company made a payment of
$250,000 to Schwarz Pharma, which has been reflected as an expense in research
and development for the year ended December 31, 1999, and agreed to pay one-half
of any future consideration received until Schwarz Pharma receives payments
totaling $3,500,000 plus an additional amount for interest that will accrue at a
rate of 8.5% per annum. As any payment to Schwarz Pharma is contingent on
whether the Company will receive proceeds from the future sale or license of
intranasal scopolamine, no liability has been recorded for this agreement as of
December 31, 1999.
In September 1997, the Company entered into an agreement with Meda
AB of Goteborg, Sweden ("Meda"), giving Meda the exclusive right to market
Nascobal(R) in Sweden, Denmark, Norway and Finland. Pursuant to the agreement,
the Company will receive revenue from the sale of Nascobal(R) to Meda and a
license fee upon the occurrence of certain regulatory approvals and commercial
events in the Nordic countries.
In July 1998, the Company entered into an agreement with Cambridge
Laboratories ("Cambridge"), giving Cambridge the exclusive right to market
Nascobal(R) in several European countries, Australia and New Zealand. Pursuant
to the agreement, the Company will receive revenue from the sale of Nascobal(R)
to Cambridge.
NOTE 9 -- STOCK-BASED COMPENSATION
The per share weighted average fair value of stock options granted
during the years ended December 31, 1999, 1998 and 1997, was $1.50, $3.82, and
$6.81, respectively, on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Expected dividend yield - 0-% - 0-% - 0-%
Risk free interest rate 6.0% 4.75% 5.8%
Expected stock volatility 53% 63% 65%
Expected option life 5 years 5 years 5 years
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock
options and, accordingly, no compensation cost (except in 1997 with the amount
of $175,000 for options granted below market value), has been recognized in the
financial statements for its stock options which have an exercise price equal to
the fair value of the stock on the date of the grant. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been reported as
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net loss:
As reported.............. $ (8,350) $ (876) $ (4,546)
Pro forma................ $ (9,011) $ (2,322) $ (6,515)
Net loss per share:
As reported.............. $ (1.32) $ (.14) $ (.76)
Pro forma................ $ (1.42) $ (.37) $ (1.09)
</TABLE>
-26-
<PAGE> 28
Pro forma net income reflects only options granted subsequent to
July 1, 1995, the date the Company adopted SFAS No. 123. Accordingly, the pro
forma amounts above do not reflect the full impact of calculating pro forma
income since cost of options issued prior to June 1, 1995, which would be
amortized over the five year vesting period of the options, was not considered.
NOTE 10 -- RELATED PARTY TRANSACTIONS
In 1999, the Company agreed to provide split-dollar life insurance
for its former Chairman of the Board of Directors in consideration for services
rendered and in lieu of cash remuneration. Over a 10-year period the Company
will pay $397,000 in premiums. At the end of 15 years, the premiums are to be
repaid to the Company; such repayment being secured by the Company's collateral
interest in the insurance policy. For the year ended December 31, 1999, the
Company recognized $24,000 of expense related to this policy.
A member of the Board of Directors provided legal services to the
Company in 1999. Fees earned by this director were $142,000.
NOTE 11 -- SUBSEQUENT EVENT - SHAREHOLDER RIGHTS PLAN
In February 2000, the Company adopted a Shareholder Rights Plan,
which is designed to protect shareholders from coercive or unfair takeover
tactics. Under the plan, a dividend of one preferred stock purchase right is
being declared for each common share held of record as of the close of business
on March 17, 2000.
-27-
<PAGE> 29
PART III
ITEM 8 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers, directors and senior employees of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dr. Vincent D. Romeo 43 President and Chief Executive Officer
Executive Vice President of Research
Dr. Charan R. Behl 48 and Development
Andrew P. Zinzi 53 Chief Financial Officer
Devin N. Wenig 33 Director
Joel Girsky 60 Director, Treasurer
Bruce R. Thaw 47 Director
Grant W. Denison, Jr 50 Director
Dr. Ian R. Ferrier 56 Director
Alvin Katz 70 Director
John V. Pollock 61 Director
Carol Wenig 55 Secretary
</TABLE>
All directors hold office until the next annual meeting of
shareholders or until their successors are elected and qualify. Executive
officers hold office until their successors are chosen and qualify, subject to
earlier removal by the Board of Directors.
Set forth below is a biographical description of each director,
executive officer and senior employee of the Company based on information
supplied by each of them.
Dr. Vincent D. Romeo. Dr. Romeo has been employed by the Company
since 1985 as Director of Research and was appointed President and Chief
Executive Officer of the Company in August 1991. Dr. Romeo is a registered
pharmacist in the State of New York and received a Ph.D. degree from St. John's
University College of Pharmacy and Allied Health Professions in Pharmaceutical
Sciences in 1984, with a specialty in pharmacology. He continues at St. John's
as an Adjunct Professor of Pharmacology, Graduate Division, College of Pharmacy
and Allied Health Professions. He has authored and co-authored several published
articles in the field of drug delivery. Dr. Romeo has also presented his work at
various meetings and conferences sponsored by the American Association of
Pharmaceutical Scientists ("AAPS") and the American College of Clinical
Pharmacology. Dr. Romeo is an active member of the AAPS, the American College of
Clinical Pharmacology, the Rho Chi Pharmaceutical Society, and the New York
Academy of Sciences. He is currently co-chairing the Nasal Drug Delivery Focus
Group of the AAPS.
Dr. Charan R. Behl. Dr. Behl has been employed by the Company since
January 1995 as Executive Vice President of Research and Development. Dr. Behl
previously held senior research positions in the Pharmaceutical Research and
Development Department of Hoffmann La-Roche, Inc, for approximately 14 years.
During his tenure at Roche and as a research faculty member at the University of
Michigan, he has done extensive research and product development on various drug
delivery systems. Dr. Behl has worked on the optimization of drug delivery via
different routes including nasal, enteral, transdermal (local and systemic),
rectal, vaginal and trans-nail. Dr. Behl has authored or coauthored over 100
articles and major meeting abstracts including many book chapters. Working
closely with his colleagues at the FDA, academia, National Institute of Health
and other companies, Dr. Behl has been instrumental in organizing international
workshops, conferences and meetings to address crucial issues pertaining to drug
delivery. Currently he is co-chairing the Nasal Drug Delivery Focus Group of the
AAPS. Dr. Behl is an active member of the American Pharmaceutical Association,
AAPS and Controlled Release Society, and is a Fellow of the AAPS.
Andrew P. Zinzi. Mr. Zinzi has been employed by the Company since
November 1996 as the Company's Chief Financial Officer. From February 1992 to
November 1996, Mr. Zinzi was employed by IVAX Corporation ("IVAX"), a
pharmaceutical company, most recently as Vice President-Finance and Treasurer.
From March 1985 to February 1992, Mr. Zinzi held various management positions in
finance and operations with Goldline Laboratories and Bioline Laboratories,
distributors of generic pharmaceutical products, which were subsequently
acquired by IVAX in December 1991. Mr. Zinzi is a CPA, member of the AICPA and
earned a Master of Business Administration degree from New York
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<PAGE> 30
University.
Joel Girsky. Mr. Girsky has been a Director of the Company since
October 1983, and the Company's Secretary and Treasurer since April 1986. From
1961 to the present, Mr. Girsky has been President and Chairman of the Board of
Jaco Electronics, Inc., Hauppauge, New York, a publicly held company engaged in
the distribution of electronic components. Mr. Girsky received a degree in
Marketing from Brooklyn College in 1957.
Bruce R. Thaw. Mr. Thaw has been a Director of the Company from
June 1991 to January 1997 and was reappointed to the Board in January 1998. From
1984 to the present, Mr. Thaw has been a principal in a law firm, which serves
as general counsel to the Company. Mr. Thaw was admitted to the bar of the State
of New York in 1978 and the California State Bar in 1983. Mr. Thaw is also a
director of Information Resource Engineering, Inc. a publicly traded company
engaged in the computer network security industry and Amtech Systems, Inc. a
publicly traded company engaged in the semi-conductor industry.
Devin N. Wenig. Mr. Wenig has been Chairman of the Board of
Directors of the Company from June 1991 to March 1999 and currently serves as a
director. Mr. Wenig was appointed Managing Director of Reuters Information (1999
revenue of $2.5 billion) in February 2000. In this role Mr. Wenig has the
responsibility for both the regional and central marketing functions, product
development, e-commerce, the data groups, and commercial policy for Reuters
globally. Mr. Wenig also retains the position of Executive Vice President of
Marketing - Reuters America responsible for marketing and business development
functions in North and South America. Mr. Wenig serves as a Director of a number
of Reuters subsidiaries and portfolio companies, including Aether Systems, Inc.,
Multex.com, Intralinks, Inc., Loan Pricing Corporation, and FreeEdgar.com.
Before joining the Reuters organization, Mr. Wenig worked with the firm of
Cravath, Swaine and Moore as a Mergers and Acquisitions attorney. There he
managed several of their largest global transactions, including leveraged
buyouts, hostile transactions and cross-border mergers. Mr. Wenig has also
served as Chairman of the Board of Directors for a mid-sized biotechnology
company for the past eight years. Mr. Wenig received a B.A. degree from Union
College and a J.D. degree from the Columbia University School of Law.
Grant W. Denison, Jr. Mr. Denison co-founded BioMarin Pharmaceutical
Inc. in 1997. As Chairman and CEO, he has guided the development of the Company
since its inception. Under his leadership, BioMarin has raised approximately
$69.0 million in private financings and $67.3 million in a July 1999 IPO dual
listing of the Company on Nasdaq National Market and Swiss New Market exchanges.
He also formed a joint venture with Genzyme General to develop and commercialize
BioMarin's lead enzyme replacement product, which has completed pivotal clinical
trials. Mr. Denison has 25 years experience in senior management in major
pharmaceutical companies. During his ten years at Monsanto/Searle, he served as
a member of the executive committees of both companies. As President of
Worldwide Consumer Products and Senior Vice President for Business Development
at Searle, he was responsible for the general management of Searle's consumer
products business and all pharmaceutical, diagnostics and consumer licensing and
business development. He also served as Corporate Vice President, Strategic
Planning for Searle's parent company, Monsanto, during a period of major
restructuring and portfolio realignment. In addition, he was President of
Searle's U.S. Pharmaceutical Operations during a period of significant sales and
earnings growth in the late 1980's. Prior to joining Searle, Mr. Denison was
Vice President of International Operations for Squibb Medical Systems and also
held a number of management positions during his 13 years at Pfizer, Inc.,
including Vice President of Pharmaceutical Planning and Business Development
from 1980 to 1985. During the course of his career at Pfizer, he formed numerous
licensing agreements, acquisitions and strategic alliances. Mr. Denison holds an
MBA from Harvard Business School, and he graduated from Colgate University magna
cum laude with a bachelor's degree with High Honors in Mathematical Economics.
Dr. Ian R. Ferrier. Dr. Ferrier, who was appointed to the Company's
Board of Directors in January 1995, is the founder, President and Chief
Executive Officer of Bogart Delafield Ferrier Inc., and has served in such
capacity since its inception in 1982. Trained in medicine and pharmacology, Dr.
Ferrier has managed and directed pharmaceutical programs and guided the growth
of several multinational companies. He has served on the Board of Directors of a
number of health care and biotechnical firms, as well as serving as consultant
to many of the world's major pharmaceutical companies. From 1982 to 1987, Dr.
Ferrier served as President of McCann Healthcare Inc. From 1982 to 1983, Dr.
Ferrier served as Chairman of The Covington Group of Companies, in 1982 as
Executive Vice President of TechAmerica Group and from 1979 to 1982, as Vice
President of Kalipharma Inc. From 1975 to 1979, Dr. Ferrier served as Chief
Executive Officer of the Monadnock Medical Center. Dr. Ferrier received a BSc in
Pharmacology from the University of Edinburgh, Edinburgh Scotland; served his
residency training in nephrology/clinical pharmacology at Southmead General
Hospital, University of Bristol Associated Hospitals, Bristol, England; and his
post-graduate internship at the Western General Hospital of the University of
Edinburgh Associated Hospitals, Edinburgh, Scotland.
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<PAGE> 31
Alvin Katz. Mr. Katz was appointed to the Board of Directors of the
Company in September 1993. Since 1981, he has served as an adjunct professor of
business management at Florida Atlantic University. In 1991, Mr. Katz was
appointed Chief Executive Officer of Odessa Engineering Corp., a company engaged
in the manufacturing of pollution monitoring equipment. He held this position
until that company was sold in September 1992. Mr. Katz also serves on the Board
of Directors of Amtech Systems Inc. which is engaged in the manufacture of
capital equipment in the computer chip manufacturing business; BCT
International, Inc., a franchisor of thermo graphic printing plants; Micron
Instruments Inc., a manufacturer of infrared temperature measuring instruments;
Ozo Diversified Inc., a manufacturer of depaneling equipment for the computer
chip manufacturing industry; and Blimpie International, Inc., which is engaged
in fast food franchising. Mr. Katz holds a B.S. in Business Administration
degree from New York University and has done graduate work at C.U.N.Y. -- Baruch
School.
John V. Pollock. Mr. Pollock was appointed to the Company's Board
of Directors in September 1993. From 1991 to the present, Mr. Pollock has served
as a director of Frank E. Basil, Inc., a worldwide provider of facilities
maintenance, engineering and operations management services. Mr. Pollock also
serves as a consultant to the partners of Basil Properties and has served as the
President of Nastech-Basil International, Inc. From 1975 to 1991, Mr. Pollock
was a senior banking executive in the Washington, D.C. area, serving as
President and Chief Executive Officer of Dominion Bank of Washington and the
John Hanson Savings Bank.
COMMITTEES OF THE BOARD
The Company's Board of Directors has established a Compensation
Committee which is comprised of Joel Girsky and John V. Pollock. The purpose of
this Committee is to review and approve the compensation of the Company's
officers and to administer and interpret the Company's stock option plan. The
Audit Committee of the Company's Board of Directors is comprised of Alvin Katz,
Joel Girsky and John V. Pollock. The purpose of this Committee is to review with
the Company's independent auditors the financial controls and practices of the
Company and the plans for and results of the audit engagement.
The Company's Certificate of Incorporation contains provisions
indemnifying its officers, directors, employees and agents against certain
liabilities.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
ITEM 10 - EXECUTIVE COMPENSATION
Information with respect to executive compensation is set forth in
the Proxy Statement for the Annual Meeting of Shareholders of the Company under
the caption "Executive Compensation and Other Information", and is incorporated
herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is set forth in the Proxy Statement for the Annual Meeting
of Shareholders of the Company under the caption "Security Ownership of Certain
Beneficial Owners and Management", and is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions is set forth in the Proxy Statement for the Annual Meeting of
Shareholders of the Company under the caption "Certain Relationships and Related
Transactions", and is incorporated herein by reference.
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<PAGE> 32
PART IV
ITEM 13 - EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of Registrant, as amended and filed with
the Secretary of State of Delaware on November 8, 1993. (Filed as
Exhibit 3A to the Company's Registration Statement on Form SB-2,
as amended (Commission File No. 33-70180), filed on October 12,
1993, and incorporated herein by reference.)
3.2 Amended By-Laws of Registrant. (Filed as Exhibit 3B to the
Company's Registration Statement on Form SB-2, as amended
(Commission File No. 33-70180), filed on October 12, 1993, and
incorporated herein by reference.)
3.3 Certificate of Amendment of Certificate of Incorporation of
Registrant, as filed with the Secretary of State of Delaware on
December 30, 1996. (Filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-2 (Commission File No.
333-16507), filed on November 20, 1996, and incorporated herein by
reference.)
4.1 Form of Representatives' Warrant (Filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-2 (Commission File No.
333-16507), filed on November 20, 1996, and incorporated herein by
reference.)
10.1 Licensing Agreement with UKRF. (Filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-18, as amended
(Commission File No. 2-88605-NY), filed on December 23, 1983, and
incorporated herein by reference.)
10.2 Lease for facilities at 45 Davids Drive, Hauppauge, NY. (Filed as
Exhibit 10B to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1995 (Commission File No. 0-13789), and
incorporated herein by reference.)
10.3 Sublicense Agreement with Bristol-Myers Squibb Co. (Filed as
Exhibit 10E to the Company's Registration Statement on Form S-1,
as amended (Commission File No. 33-5717), filed on May 15, 1986,
and incorporated herein as reference.)
10.4 Agreements between Registrant, and RiboGene, Inc. (as successor in
interest to Rugby Laboratories, Inc., and Darby Pharmaceuticals,
Inc.) (Filed as Exhibit 10D to the Company's Registration
Statement on Form S-1, as amended (Commission File No. 33-5717),
filed on May 15, 1986, and incorporated herein by reference.)
10.5 1995 Agreement between the Registrant and RiboGene, Inc. (Filed as
Exhibit 10F to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1995 (Commission File No. 0-13789), and
incorporated herein by reference.)
10.6 Stock Option Agreements. (Filed as Exhibit 10M to the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1995
(Commission File No. 0-13789), and incorporated herein by
reference.)
10.7 License Agreement with The DuPont Merck Pharmaceutical Company.
(Filed as Exhibit 10N to the Company's Registration Statement on
Form SB-2, as amended (Commission File No. 33-70180), filed on
October 12, 1993, and incorporated herein by reference.)
10.8 Nasal Drug Evaluation and Option Agreement. (Filed as Exhibit 10K
to the Company's Annual Report on Form 10-KSB for the year ended
June 30, 1996 (Commission File No. 0-13789), and incorporated
herein by reference.)
10.9 Agreement with Ciba Self-Medication, Inc. (Filed as Exhibit 10J to
the Company's Annual Report on Form 10-KSB for the year ended June
30, 1996 (Commission File No. 0-13789), and incorporated herein by
reference.)
10.10 Employment Agreement with Andrew P. Zinzi. (Filed as Exhibit 10.11
to the Company's Registration Statement on Form S-2 (Commission
File No. 333-16507), filed on November 20, 1996, and incorporated
herein by reference.)
10.11 Employment Agreement with Dr. Vincent D. Romeo. (Filed as Exhibit
10.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (Commission File No. 000-13789), and
incorporated herein by reference.)
10.12 Employment Agreement with Robert H. Rosen. (Filed as Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (Commission File No. 000-13789), and
incorporated herein by reference.)
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<PAGE> 33
10.13 Evaluation and Option Agreement with the Consumer Health Care
Division of Pfizer Inc. (Filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-2 (Commission File No.
333-16507), filed on November 20, 1996, and incorporated herein by
reference.)
10.14 Development and License Agreement with DynaGen, Inc. (Filed as
Exhibit 10.13 to the Company's Registration Statement on Form S-2
as amended (Commission File No. 333-16507), filed on November 20,
1996, and incorporated herein by reference.)
10.15 License and Supply Agreement with Schwarz Pharma, Inc. (Filed as
Exhibit 10J to the Company's Financial Report on Form 10Q for the
Quarter Ended June 30, 1997 (Commission File No.000-13789), filed
on August 14, 1997, and incorporated herein by reference.)
10.16 License and Supply Agreement with Schwarz Pharma, Inc. (Filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (Commission File No. 000-13789), and
incorporated herein by reference.)
10.17 License and Supply Agreement with Meda AB. (Filed as Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (Commission File No. 000-13789), and
incorporated herein by reference.)
10.18 License and Supply Agreement with Tzamal Pharma Ltd. (Filed as
Exhibit 10.18 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (Commission File No. 000-13789),
and incorporated herein by reference.)
10.19 International Distribution Agreement with Cambridge Selfcare
Diagnostics Limited. (Filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 (Commission File No. 000-13789), and incorporated herein by
reference.)
10.20 Employment Agreement with Dr. Charan Behl. (Filed as Exhibit 10.20
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission File No. 000-13789), and
incorporated herein by reference.)
10.21 Employment Agreement with Andrew P. Zinzi.
10.22 Termination and Release Agreement with Schwarz Pharma, Inc.
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<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Hauppauge, State of New York, on March 29, 2000.
NASTECH PHARMACEUTICAL COMPANY INC.
By: /s/ Vincent D. Romeo, Ph.D
-----------------------------------
Vincent D. Romeo, Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Vincent D. Romeo, Ph.D President and Chief Executive Officer
- ----------------------------------- (Principal Executive Officer) March 28, 1999
Vincent D. Romeo, Ph.D.
/s/ Andrew Zinzi Chief Financial Officer March 28, 1999
- ----------------------------------- (Principal Financial and Accounting Officer)
Andrew Zinzi
/s/ Devin N. Wenig Director March 28, 1999
- -----------------------------------
Devin N. Wenig
/s/ Joe Girsky Director, Treasurer March 28, 1999
- -----------------------------------
Joel Girsky
/s/ Bruce R. Thaw Director March 28, 1999
- -----------------------------------
Bruce R. Thaw
/s/ Grant W. Denison Director March 28, 1999
- -----------------------------------
Grant W. Denison
/s/ Dr. Ian R. Ferrier Director March 28, 1999
- -----------------------------------
Dr. Ian R. Ferrier
/s/ Alvin Katz Director March 28, 1999
- -----------------------------------
Alvin Katz
/s/ John V. Pollock Director March 28, 1999
- -----------------------------------
John V. Pollock
</TABLE>
-33-
<PAGE> 35
Index to Exhibits
Exhibit No. Description
10.21 Employment Agreement with Andrew P. Zinzi
10.22 Termination and Release Agreement with Schwarz Pharma, Inc.
-34-
<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
AGREEMENT, dated this 27th day of December, 1999 between Nastech
Pharmaceutical Company Inc., a Delaware corporation ("Employer") with offices at
45 Davids Drive, Hauppauge, NY and Andrew P. Zinzi ("Employee").
W I T N E S S E T H :
WHEREAS, the Employee is currently employed as Chief Financial
Officer ("CFO") for the Employer and the Employer and Employee wish to enter
into an employment and compensation arrangement on the following terms and
conditions:
1. Employment. Subject to the terms and conditions of this
Agreement, including specifically Section 12, Employer agrees to employ Employee
for a period commencing from the effective date of this Agreement and ending
December 31, 2001 to serve as the Chief Financial Officer ("CFO") and to serve
in such capacitates consistent with his position as CFO as the Employer may from
time to time designate. Employee hereby accepts such employment and agrees to
devote his full time and best efforts to the duties provided herein. If Employee
shall remain in the full time employ of the Company beyond December 31, 2001
without any written agreement between the parties, this Agreement shall be
deemed to continue on a month-to-month basis and either party shall have the
right to terminate this Agreement at the end of any ensuing calendar month on
written notice of at least 30 days.
2. Compensation. For services rendered to Employer during the term
of this Agreement, Employer shall compensate Employee with a salary, payable in
accordance with Employer's standard payroll practices in effect, from time to
time, of $165,000 per annum. Employee's salary may be adjusted for merit and/or
cost of living increases, as determined by Employer in its sole discretion.
The Employee shall also be entitled to annual incentive compensation
of up to thirty (30%) of the applicable base salary if the Employer's combined
corporate and department objectives as set forth in the Employer's annual
business plan are achieved. The nature and extent of such compensation shall be
approved by the Compensation Committee of the Company's Board of Directors no
later than sixty (60) days following the end of the Employer's fiscal year.
(1)
<PAGE> 2
3. Stock Options. As further compensation, Employee acknowledges the
receipt of 35,000 incentive stock options (subject to allowable limitations set
forth in the Internal Revenue Code of 1986, as amended, hereinafter stock
options) as an incentive to enter into this Agreement. The stock options were
issued at the fair market value of the Employer's common stock as of the date
grant and shall then be vested at 50% per full year of service (and shall not be
vested for interim periods on a pro-rata basis, except as otherwise provided in
the applicable Stock Option Agreement) from the date of grant, over a two year
period, all of the foregoing to be in accordance with the provisions of
Employer's Stock Option Plan, as may be amended from time to time, which is
incorporated by reference herein. The Common Stock to be issued upon the
exercise of said options has been registered under the Securities Act of 1933.
Employee's stock options may be increased during the term of this Agreement, as
determined by Employer in its sole discretion.
4. Expenses. Employer shall pay or reimburse Employee for all
expenses normally reimbursed by Employer, reasonably incurred by him in
furtherance of his duties hereunder and authorized and approved by the Employer
upon submission by him of vouchers or an itemized list thereof prepared in
compliance with such rules relating thereto as the Employer may, from time to
time, adopt and as may be required in order to permit such payments as proper
deductions to Employer under the Internal Revenue Code of 1986, as amended, and
the rule and regulations adopted pursuant thereto now or hereafter in effect.
5. Benefits. The Employee shall be entitled to participate in or be
covered by any Health and/or Retirement and Executive Compensation plans adopted
by the Employer from time to time.
6. Insurance and Indemnity. The Employer shall use its best efforts
to maintain, at its expense, officers and directors fiduciary liability
insurance covering the Employee in an amount not less than $5 million. The
Employer shall also indemnity the Employee, to the fullest extent permitted by
law, from any liability asserted against or incurred by the Employee, including
attorney's costs, in his capacity as an officer of Employer. This indemnity
shall survive termination of the Agreement.
(2)
<PAGE> 3
7. Noncompetition.
A. The Employee agrees that, except in accordance with his duties
under this Agreement on behalf of the Employer, he will not during the term of
this Agreement:
Participate in, be employed in any capacity by, serve as director,
consultant, agent or representative for, or have any material direct interest in
any enterprise (other than as a passive investor in a publicly traded company)
which is engaged in the business of distributing, selling or otherwise trading
in products which are competitive to any of the Employer's technology or
products distributed, sold or otherwise traded in by the Employer during the
term of the Employee's employment with the Employer, or which are competitive to
any products being actively developed, with the bona fide intent to market same,
by the Employer during the term of the Employee's employment with the Employer;
B. The Employee hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Employer upon any breach of the terms of this Section 7 by the
Employee, and the Employee therefore agrees that the Employer, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 7 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.
8. Assignment of Patents. Employee shall disclose fully to the
Employer any and all discoveries of a scientific nature relating to Employer's
business he shall make and any and all ideas, concepts or inventions of a
scientific nature relating to Employer's business which he shall conceive or
make during his period of employment, or during the period of six months after
his employment shall terminate, which are in whole or in part the result of his
work with the Employer. Such disclosure is to be made promptly after each
discovery or conception, and the discovery, idea, concept or invention will
become and remain the property of the Employer, whether or not patent
applications are filed thereon. Upon request and at the expense of the Employer,
the Employee shall make application through the patent solicitors of the
Employer for letters patent of the United States and any and all other countries
at the discretion of the Employer on such discoveries, ideas and inventions, and
to assign all such applications to the Employer, or at its order, forthwith,
without additional payment by the Employer during his period of employment and
for reasonable
(3)
<PAGE> 4
compensation for time actually spent by the Employee at such work at the request
of the Employer after the termination of the employment. He is to give the
Employer, its attorneys and solicitors, all reasonable assistance in preparing
and prosecuting such applications and, on request of the Employer, to execute
all papers and do all things that may be reasonably necessary to protect the
right of the Employer and vest in it or its assigns the discoveries, ideas or
inventions, applications and letters patent herein contemplated. Said
cooperation shall also include all actions reasonably necessary to aid the
Employer in the defense of its rights in the event of litigation.
9. Trade Secrets.
(a) In the course of the term of this Agreement, it is
anticipated that the Employee shall have access to secret or confidential
technical and commercial information, records, data, specifications, systems,
formulas, methods, plans, policies, inventions, material and other knowledge
("Confidential Material") owned by the Employer and its subsidiaries. The
Employee recognizes and acknowledges that included within the Confidential
Material are the Employer's confidential commercial information, technology,
methods of manufacture, clinical studies, pre-clinical data and related
materials, all as they may exist from time to time, and that they are valuable
special and unique aspects of the Employer's business. All such Confidential
material shall be and remain the property of the Employer. Except as required by
his duties to the Employer, the Employee shall not, directly or indirectly,
either during the term of his employment or at any time thereafter, disclose or
disseminate to anyone or make use of, for any purpose whatsoever, any
Confidential Material. Upon termination of his employment, the Employee shall
promptly deliver to the Employer all Confidential Material (including all copies
thereof) which are in the possession or under the control of the Employee. The
Employee shall not be deemed to have breached this Section 9 if the Employee
shall be specifically compelled by lawful order of any judicial, legislative, or
administrative authority or body to disclose any confidential material or else
face civil or criminal penalty or sanction.
(b) The Employee hereby agrees that damages and any other
remedy available at law would be inadequate to redress or remedy any loss or
damage suffered by the Employer upon any breach of the terms of this Section 9
by the Employee, and the Employee therefore agrees that the Employer, in
addition to recovering on any claim for damages or obtaining any other remedy
available at law, also may enforce the terms of this Section 9 by injunction or
specific performance, and may obtain any other appropriate remedy available in
equity.
(4)
<PAGE> 5
10. Vacation. Employee shall be entitled to vacation (with a minimum
of three weeks vacation which shall not accrue or accumulate from year to year,
except as provided by Employer), sick days, personal days and holidays as shall
be governed by Employer's standard personnel policies, which shall be provided
to Employee.
11. Termination.
(a) Employee's employment with Employer shall be at will.
Either Employer or the Employee may terminate this Agreement and Employee's
employment at any time, with or without Cause or Good Reason (as such terms are
defined below), in its or his sole discretion, upon thirty (30) days prior
written notice of termination.
(b) Without limiting the foregoing Section 12(a), (i) the
Employee may terminate his employment with the Employer at any time for Good
Reason, or (ii) the Employer may terminate his employment at any time for Cause.
Good Reason shall mean death, Disability (as defined below) or a termination of
employment as a result of a substantial diminution in the Employee's
responsibilities, or a reduction in base salary or a demotion in title as CFO or
demotion in position as CFO of a publicly held company. Cause shall mean (i) the
Employee's willful, repeated or neglectful failure to perform his duties
hereunder or to comply with any reasonable or proper direction given by or on
behalf of the Employer's Chief Executive Officer and approved by the Board of
Directors following five (5) days written notice to such effect, other than any
Employee's refusal to execute any document or statement that contains erroneous
or misleading financial information; (ii) the Employee being guilty of serious
misconduct on the Company's premises or elsewhere, whether during the
performance of his duties or not, which may cause damage to the reputation of
the Employer or render it difficult for the Employee to satisfactorily continue
to perform his duties; (iii) the Employee being found guilty in a criminal court
of any offense of a nature likely to affect the reputation of the Employer or to
prejudice its interests if the Employee were to continue to be employed by the
Employer; (iv) the Employee's commission of any act of fraud, theft or
dishonesty, or any intentional tort against the Company; or (v) the Employee's
violation of any of the material terms, covenants, representations or warranties
contained in this Agreement.
(5)
<PAGE> 6
(c) "Disability" shall mean that the Employee, in the good
faith determination of the Board of Directors of the Employer, is unable to
render services of the character contemplated hereby and that such inability (i)
may be expected to be permanent, or (ii) may be expected to continue for a
period of at least three (3) consecutive months (or for shorter periods totaling
more than six (6) months during any period of twelve consecutive months).
Termination resulting from Disability may only be effected after at least thirty
(30) days written notice by the Employer of its intention to terminate the
Employee's employment.
(d) "Termination Date" shall mean (i) if this Agreement is
terminated on account of death, the date of death; (ii) if this Agreement is
terminated for Disability, the date established by the Company pursuant to
Section 11(c) hereof; (iii) if this Agreement is terminated by the Employer, the
date on which a notice of termination is given to the Employee; (iv) if the
Agreement is terminated by the Employee, the date the Employee ceases work.
12. Severance.
(a) If (i) the Employer terminates the employment of the
Employee against his will and without Cause, or (ii) the Employee terminates his
employment for Good Reason, the Employee shall be entitled to receive salary,
incentive compensation and vacation accrued through the Termination Date plus
six month's salary payable in one lump-sum at the Termination Date and all stock
options shall become exercisable and shall remain exercisable for a period of
one year after such Termination Date. Notwithstanding the foregoing, the
Employer shall not be required to pay any severance pay for any period following
the Termination Date if the Employer violates the provisions of Section 8,
Section 9 or Section 10 of this Agreement. In such event, the Employer shall
provide written notice to the Employee detailing such violation.
(b) If (i) the Employee voluntarily terminates his employment
other than for Good Reason, or (ii) the Employee is terminated by the Employer
for Cause, then the Employee shall be entitled to receive salary, incentive
compensation and accrued vacation through the Termination Date plus all stock
options that are exercisable shall remain exercisable for a period of one year
after such Termination Date.
(6)
<PAGE> 7
(c) In addition to the provisions of Section 13(a) and 13(b)
hereof, to the extent COBRA shall be applicable to the Employer or as provided
by law, the Employee shall be entitled to continuation of group health plan
benefits for a period of one (1) year following the Termination Date if the
Employee makes the appropriate conversion and payments.
(d) The Employee acknowledges that, upon termination of his
employment, he is entitled to no other compensation, severance or other benefits
other than those specifically set forth in this Agreement or the Stock Option
Agreement.
13. Payment and Other Provisions After Change of Control
(a) In the event Employee's employment with the Employer is
terminated following the occurrence of a Change of Control (other than as a
consequence of death or disability) either (x) by the Employer for any reason
other than for Cause, or (y) by Employee for Good Reason, then Employee shall be
entitled to receive from the Employer, in lieu of the severance payment
otherwise payable pursuant to Section 12, the following:
(i) Base Salary: Employee's annual base salary as
in effect at the date of termination shall be paid on the date of termination;
(ii) Incentive Compensation: The amount of the
Employee's target incentive compensation under the applicable Incentive
Compensation Plan for the fiscal year in which the date of termination occurs,
shall be paid on the date of termination; and
(iii) Other Benefits: Notwithstanding the vesting
period provided for in the Employer's Stock Option Plan and any related stock
option agreements between the Employer and the Employee for stock options
("options") granted Employee by the Employer all of options shall be fully
vested and exercisable for a period of two years from the Termination Date.
(b) For purposes of this Agreement, the term "Change in
Control" shall mean:
(i) The acquisition, other than from the Employer, by any individual,
entity or group (within the meaning of Rule 13d-3 promulgated
under the Exchange Act or any successor provision) of 50% or more
of either (a) the then outstanding shares of Common Stock of the
Employer or (b) the combined voting power of the then outstanding
voting securities of the Employer entitled to vote generally in
the election of directors (the "Voting
(7)
<PAGE> 8
Securities").
(ii) Individuals who, as of the Effective Date of this Agreement,
constitute the Board (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board.
(iii) Approval by the Shareholders of the Employer of a reorganization,
merger or consolidation (a "Business Combination"), in each case,
with respect to which all or substantially all holders of the
outstanding Common Stock or Voting Securities immediately prior to
such Business Combination do not, following such Business
Combination, beneficially own, directly or indirectly, more than
60% of, respectively, the then outstanding shares of common stock
or the combined voting power of the then Voting Securities
entitled to vote generally in the election of directors, as the
case may be, of the Employer resulting from the Business
Combination, or
(iv) (a) a complete liquidation or dissolution of the Employer or (b) a
sale or other disposition of all or substantially all of the
assets of the Employer with respect to which, following such sale
or disposition, more than 60% of, respectively, the then
outstanding Common Shares or Voting Securities is then owned
beneficially, directly or indirectly, by all or substantially all
of the equity holders, respectively, of the Common Shares or
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Common
Shares or Voting Securities, as the case may be, immediately prior
to such sale or disposition.
(c) In the event that involuntary termination of Employee as
CFO occurs subsequent to change in senior management or the appointment of a new
Chairman of the Board of Directors, the Company would (i) continue to pay base
salary and health benefits for the remaining term of this Agreement, provided
the Employee remains unemployed in the official capacity as a CFO, and such
payments would not be less than six months salary and benefits, and (ii) all
stock options currently outstanding would become vested and exercisable through
December 31, 2002.
14. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered or
certified mail, return receipt requested to his residence in the case of the
Employee, or to its principal office in the case of the Employer, or to such
other addresses as they may respectively designate in writing.
15. Entire Agreement; Waiver. This Agreement contains the entire
understanding of the parties and may not be changed orally but only by an
agreement in writing, signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought. Waiver of or failure to
exercise any rights provided by this Agreement in any respect shall not be
deemed a waiver of any further or future rights.
(8)
<PAGE> 9
16. Assignment. Employee's rights hereunder are personal to and
shall not be transferable nor assignable by the Employee. This Agreement shall
bind and inure to the benefit of the Employee and the Employer and their
respective legal representatives, successors and assigns.
17. Arbitration. Any and all claims, disputes, or controversies
arising out of or related to this Agreement, or the breach thereof, shall be
resolved exclusively by arbitration in Suffolk County, New York, in accordance
with the rules of the American Arbitration Association then in existence. The
determination or award rendered therein shall be binding and conclusive upon the
parties, and judgment may be entered thereon in accordance with applicable law
in any court having jurisdiction. No party shall be entitled to seek or be
awarded punitive damages.
18. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
19. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, NASTECH PHARMACEUTICAL COMPANY INC. has caused
this instrument to be signed by a duly authorized officer and the Employee has
hereunto set his hand the day and year first above written.
NASTECH PHARMACEUTICAL COMPANY INC.
By /s/ Vincent D. Romeo
-------------------------------
VINCENT D. ROMEO
/s/ Andrew P. Zinzi
- ----------------------------------
ANDREW P. ZINZI
(9)
<PAGE> 1
TERMINATION AND RELEASE AGREEMENT
THIS TERMINATION AND RELEASE AGREEMENT, dated as of December 15, 1999
("Agreement"), is between Nastech Pharmaceutical Company, Inc., a Delaware
corporation ("Nastech"), and Schwarz Pharma, Inc., a Delaware corporation
("Schwarz").
W I T N E S S E T H:
WHEREAS, Schwarz and Nastech entered into that certain License and Supply
Agreement, dated as of December 11, 1997 (the "License Agreement"); and
WHEREAS, Buyer and Seller have decided to amicably terminate the License
Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency is hereby acknowledged, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined herein shall
have the meanings given them in the License Agreement.
2. Disposition of License and Supply Agreement. As of the Effective
Date (as defined in Section 5.1 below), the License Agreement shall be
terminated and shall have no further force and effect. No party to the License
Agreement shall have any rights or obligations thereunder, including, without
limitation, with respect to any unpaid obligation to pay any milestone payments.
3. Mutual Release. As of the Effective Date, each of Schwarz and
Nastech (each a "Releasing Party") for itself, its predecessors, successors,
assigns, affiliates, officers, directors, agents and employees, does hereby
release, remise and forever discharge each other party hereto and its respective
successors, affiliates, assigns, officers, directors, agents and employees
(collectively, such Releasing Party's "Releasees"), from any and all claims,
demands, rights of action, causes of action, lawsuits, damages, indebtedness,
liabilities, obligations, losses or expenses of any nature whatsoever and
remedies therefor, duty or relationship, acts, omissions, misfeasance,
malfeasance, causes of action, sums of money, accounts, compensation, contracts,
controversies, promises, choices in action, rights of indemnity or liability of
any type, kind, nature, description or character whatsoever, and irrespective of
how, why or by reason of what facts, whether known or unknown, suspected or
unsuspected, whether heretofore now existing or hereafter arising, which could,
might or may be claimed to exist, whether liquidated or unliquidated, whether
existing in law or equity and whether known or unknown, foreseen or unforeseen,
which the Releasing Party has or has had, or may hereafter claim to have had,
against any Releasees arising from, under or in connection with the License
Agreement, the negotiation thereof or the relationships created thereunder, and
any transactions and documents in connection therewith, related thereto or
contemplated thereby, provided, however, that nothing in this Section 3 shall
affect the rights, duties and obligations of the Releasing Parties pursuant to
this Agreement.
<PAGE> 2
4. Remedies.
4.1 In the event of any breach or threatened breach by either party
hereto of any covenant, warranty, agreement, understanding of provision (the
"terms") of this Agreement, each party acknowledges and agrees that the other
parties would be irreparably harmed; and, in the event of any breach of the
terms of this Agreement, each party agrees that each of the other parties shall
be entitled, if it so elects, in addition to any other legal or equitable
remedies available to it, to institute and prosecute any proceeding in any court
of competent jurisdiction, either at law or in equity, and shall be entitled to
such relief as may be available to it, at law or in equity, including, but not
limited to, an injunction or an order for specific performance.
4.2 If, for any reason, a part of this Agreement is deemed
unenforceable in any court of law of competent jurisdiction, the remaining
provisions of this Agreement shall be enforced to the greatest extent possible
as if said unenforceable part were omitted. Failure by any party at any time to
require performance by the other party of any provision hereto shall in no way
affect the full right to require such performance at any time thereafter, nor
shall the waiver by either party of the breach of any provision hereof be a
waiver of any succeeding breach of the same or any other provision.
5. Payments.
5.1 On the date hereof, Nastech shall pay Schwarz $250,000 by wire
transfer of immediately available funds to such account or accounts as shall be
designated by written notice from Schwarz to Nastech on or prior to the date
hereof. The date that Schwarz receives such $250,000 payment shall be the
"Effective Date" for all purposes hereunder.
5.2 Nastech agrees to pay Schwarz one-half of all Consideration
received, including, without limitation, upfront payments, milestone payments,
royalties and any other payments, whether received directly or indirectly,
through intermediaries or otherwise, in respect of Scopolamine. Payments to
Schwarz pursuant to this Section 5.2 shall (i) be made in immediately available
funds within 3 business days of Nastech's receipt of the Consideration
underlying such payment and (ii) continue until Schwarz receives payments
totaling a Net Present Value (as defined below) of $3,500,000. "Net Present
Value" shall mean, with respect to the amount of payments to be received by
Schwarz under this Section 5.2, an amount that compensates for the time value
of money by accruing quarterly compounded interest at the rate of 8.5% per
annum on the unpaid portion of such payment from the earlier of (i) the date
that is 12 months after the date hereof or (ii) the date that Nastech signs an
agreement for license, sale or other disposition of Scopolamine, until the date
such payment is received by Schwarz. "Consideration" shall mean, money or the
Fair Market Value of in-kind consideration. The "Fair Market Value" of any
in-kind consideration received shall be the value determined by the parties in
good faith or if the parties can not agree, by a Professional Appraiser.
"Professional Appraiser" shall mean, with respect to the valuation of in-kind
payments, a professional appraiser (e.g., an
<PAGE> 3
accounting firm or investment bank) which is experienced in valuing like assets
and which is appointed by the parties. Payments pursuant to this Section 5.2
shall be applied by Schwarz first against interest accrued and unpaid and
second, to the outstanding principal balance.
5.3 Nastech will not, through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by it, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 5
and in the taking of all such action as may be necessary or appropriate in order
to protect Schwarz against impairment.
5.4 In the event that Nastech breaches its obligations under this
Section 5, Schwarz, may, after 10 days prior written notice to Nastech (during
which period Nastech may cure such breach), declare all or any portion of the
outstanding payments due under this Section 5 to be due an payable, whereupon
the full unpaid amount of such payments which shall be so declared due and
payable shall be and become immediately due and payable, without further notice,
demand or presentment (which is hereby specifically waived by Nastech).
6. Reports.
6.1 Until Nastech has satisfied its obligations pursuant to Section
5.2, Nastech shall provide to Schwarz a report, within 30 days of the end of
each quarter, stating a summary of all activities undertaken by Nastech or its
affiliates with respect to Scopolamine as well as all monies and other
Consideration received by Nastech or its affiliates in respect of Scopolamine
during such quarter, including, without limitation, upfront payments, milestone
payments and royalties, whether received directly or indirectly, through
intermediaries or otherwise, from the sale and licensing of Scopolamine.
6.2 Nastech and its affiliates shall keep full, true and accurate
books of account containing all particulars that may be necessary for the
purpose of showing amounts owing pursuant to Section 5.2. Such books of account
shall be kept at Nastech's principal place of business. Such books and the
supporting data shall be open, at all reasonable times and upon reasonable
notice during the term of this Agreement and for 2 years after its termination,
to the inspection of a firm of certified public accountants selected by Schwarz
and reasonably acceptable to Nastech, for the purpose of verifying amounts owing
pursuant to Section 5.2. Except as otherwise provided in this Section, the cost
of any such examination shall be paid by Schwarz. In the event that any such
inspection reveals that the actual amounts owing pursuant to Section 5.2 exceeds
the amounts paid by Nastech more than 5% during the period covered by the
inspection, Nastech shall promptly pay Schwarz the amount by which Nastech
previously underpaid under Section 5.2, plus interest at the rate of 12% per
annum, and shall reimburse Schwarz for the fees and expenses paid to such
accountants in connection with their inspection.
<PAGE> 4
7. Miscellaneous.
7.1 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
7.2 Nastech shall not assign any of its rights or obligations under
this Agreement without the prior written consent of Schwarz.
7.3 Each party hereto has voluntarily entered into and executed this
Agreement after having had the opportunity to be advised by legal counsel of its
choice of the effects, significance and consequence of this Agreement.
7.4 This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and cannot be modified or amended
except by an agreement made in writing by all the parties hereto.
7.5 Each party hereto acknowledges that it has not relied upon any
representation of any kind made by any other party in making the foregoing
release.
7.6 It is hereby further understood and agreed that the acceptance of
delivery of this Agreement by the parties released hereby shall not be deemed or
construed as an admission of liability of any nature whatsoever arising from or
related to the subject of this Agreement.
7.7 Publicity. The parties agree that no publicity release or
announcement concerning the transactions contemplated hereby shall be issued
without the advance written consent of the other, except as such release or
announcement may be required by law, in which case the party making the release
or announcement shall, before making any such release or announcement, use
reasonable efforts to afford the other party a reasonable opportunity to review
and comment upon such release or announcement.
7.8 This Agreement may be signed in any number of counterparts, all of
which together shall constitute one and the same document.
7.9 Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT SHALL BE
BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN
THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. EACH OF
PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF
THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET
FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY
IN CONNECTION WITH SUCH LITIGATION. EACH OF PARTIES HERETO FURTHER IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS
<PAGE> 5
BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT
THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR
HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY
SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT ANY OF THE PARTIES HERETO
HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM
ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO
JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR
ITS PROPERTY, SUCH PARTY HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF
ITS OBLIGATIONS UNDER THIS AGREEMENT.
[Signatures Next Page]
<PAGE> 6
IN WITNESS WHEREOF, the parties have duly executed this Termination and
Release Agreement as of the day and year first above written.
SCHWARZ PHARMA, INC.
By: /s/ Klaus Veitinger
------------------------
Klaus Veitinger, President and CEO
NASTECH PHARMACEUTICAL COMPANY, INC.
By: /s/ Vincent D. Romeo
------------------------
Name: Vincent D. Romeo
Title: President/CEO
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<PERIOD-START> JAN-01-1999
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