<PAGE>
PURSUANT TO RULE NO. 424(b)(5)
REGISTRATION NO. 333-23423
333-89073
The information in this preliminary prospectus supplement is not complete and
may be changed. We have filed a registration statement with the Securities and
Exchange Commission relating to these securities pursuant to Rule 415 under
the Securities Act. This preliminary prospectus supplement is not an offer to
sell nor does it seek an offer to buy these securities in any jurisdiction
where the offer or sale in not permitted.
SUBJECT TO COMPLETION. DATED OCTOBER 14, 1999.
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED MAY 28, 1997
2,000,000 Shares
[LOGO] EMISPHERE TECHNOLOGIES, INC.
Common Stock
Our common stock is quoted on the Nasdaq National Market under the symbol
EMIS. On October 11, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $15.75 per share.
---------
<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discounts and commissions ....................... $ $
Proceeds to Emisphere, before expenses........................ $ $
</TABLE>
We have granted the underwriter an option for a period of 30 days to
purchase up to 300,000 additional shares of common stock.
Hambrecht & Quist LLC is acting as the underwriter of this offering. The
underwriter expects to deliver the shares against payment in New York, New York
on October , 1999.
---------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page S-6.
---------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
Hambrecht & Quist
October , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Prospectus Supplement Page
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<S> <C>
Summary.................................................................... S-3
Risk Factors............................................................... S-6
Use of Proceeds............................................................ S-14
Capitalization............................................................. S-15
Dilution................................................................... S-16
Underwriting............................................................... S-17
Legal Matters.............................................................. S-18
Experts.................................................................... S-18
Where You Can Find More Information........................................ S-19
</TABLE>
<TABLE>
<S> <C>
Annual Report on Form 10-K for the fiscal year ended July 31, 1999..... Annex A
</TABLE>
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ABOUT THIS PROSPECTUS SUPPLEMENT
We have prepared this prospectus supplement to restate our prospectus
dated May 28, 1997. This prospectus supplement supersedes the prospectus dated
May 28, 1997 and the prospectus supplement dated July 21, 1997.
We maintain a web site at "www.emisphere.com." Information presented on
our web site does not constitute part of this prospectus supplement.
Unless we indicate otherwise, information in this prospectus supplement
assumes that the underwriter will not exercise its over-allotment option.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus supplement are incorporated by
reference into this prospectus supplement constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements include (without limitation)
statements regarding: planned or expected studies and trials of oral
formulations that utilize our technology; the timing of the development and
commercialization of our products; potential products that may be developed
using our technology; the potential market size, advantages or therapeutic uses
of our liquid oral heparin formulation or any other product; and the
sufficiency of our available capital resources to meet our funding needs. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
among others, the following: the success of our oral heparin product and our
ability to find a marketing partner to help us commercialize it; the viability
of our product candidates, most of which, other than liquid oral heparin, are
in the early stages of development; the need to obtain regulatory approval for
our liquid oral heparin and other product candidates; our dependence on
collaborative partners to develop and commercialize products and our ability to
fund such efforts with or without partners; the risk of technological
obsolescence and risks associated with our highly competitive industry; our
lack of profitable operations and need for additional capital; our dependence
on patents and proprietary rights; our dependence on others to manufacture our
compounds; the risk of product liability and policy limits of product liability
insurance; potential liability for human clinical trials; our dependence on key
personnel and the quality, judgment and strategic decisions of management and
other personnel; uncertain availability of third-party reimbursement for
commercial medical products; general business and economic conditions; and
other factors referenced or incorporated by reference into this prospectus
supplement.
S-2
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement and the documents incorporated by reference. This summary is not
complete and does not contain all of the information that you should consider
before investing in our common stock. You should read this entire prospectus
supplement and the documents incorporated by reference carefully before making
an investment decision.
Emisphere Technologies, Inc.
Emisphere Technologies, Inc. is a biopharmaceutical company specializing
in the oral delivery of therapeutic macromolecules and other compounds that are
not currently deliverable by oral means. Our objective is to become a leader in
the development of oral macromolecule delivery. Our lead product in development
is a liquid oral heparin formulation for the prevention of blood clots in high-
risk surgery patients. We have completed Phase I and Phase II clinical studies
for this product and plan to begin Phase III trials in late 1999. In addition,
we have developed with Novartis Pharma AG a capsule form of a Novartis
therapeutic protein that is currently in a Phase I clinical study.
Our focus is on developing oral delivery formulations of marketed drugs
that are limited in use because they must be administered intravenously or by
injection. The drugs we target for development, such as heparin, may be off-
patent but their markets are large enough to interest pharmaceutical partners
in an oral formulation. We believe combining available drugs with our carriers
to create orally administrable formulations reduces development risk because
the underlying compound has already been approved for use and its safety and
efficacy are therefore well established. We also believe that our technology
offers a relatively inexpensive route to generating significant new product
opportunities.
We seek opportunities to collaborate with pharmaceutical companies to
apply our oral delivery technology to their therapeutic compounds, whether
currently marketed or in development. Since 1997, we have been engaged in a
research collaboration with Novartis under which Novartis may acquire an
exclusive license to market products utilizing our technologies. Novartis is
currently in a Phase I clinical study with a capsule form of a protein using
our technology. We also have license agreements with Eli Lilly & Company under
which we have granted Lilly exclusive worldwide licenses to use our
technologies to develop and commercialize products involving the oral delivery
of two of Lilly's compounds. Both candidates are currently in preclinical
development. In addition, we are conducting a number of feasibility studies
with pharmaceutical and biotechnology companies for various injectable
compounds.
During 1999, we purchased all of Elan Corporation plc's interest in the
joint venture we formed in 1996 to develop and market oral forms of heparin. We
believe that the complete ownership and control of the technology and rights
relating to our oral heparin products will allow for more rapid clinical
development and commercialization and greater flexibility in negotiating with a
pharmaceutical partner for the marketing rights to these products.
Traditional drug delivery companies have developed technologies to control
the release of drugs and improve dosing regimens. However, there is an emerging
group of drug delivery companies, including Emisphere, that are developing
technologies that offer alternatives to the existing route of drug
administration, including oral administration of previously injectable drugs.
Oral dosage forms of pharmaceuticals are the safest, and typically most
convenient, dosage forms. We believe oral dosage forms are the largest product
segment of the pharmaceutical industry and that the potential market for many
drugs could be expanded by using novel delivery mechanisms for drugs that are
currently available only in an injectable form. We have demonstrated the oral
delivery of heparin in humans and the oral delivery of a variety of other
compounds in animals (including erythropoietin, insulin, human growth hormone,
calcitonin, human parathyroid hormone, cromolyn and deferoxamine). We believe
that annual worldwide sales of injectable formulations of these compounds are
over $8.0 billion and that the market for these compounds could be larger if
oral dosage forms were available.
S-3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by us.......................... 2,000,000 shares
Common stock to be outstanding after this offering.. 14,152,806 shares
Use of proceeds..................................... To fund a portion of the Phase III
clinical program for our liquid oral
heparin formulation, to continue
research and development and for
general corporate purposes. See "Use
of Proceeds."
Nasdaq National Market symbol....................... EMIS
</TABLE>
Unless we specifically state otherwise, the information in this prospectus
supplement does not take into account the issuance of up to 300,000 shares of
common stock which the underwriter has the option to purchase solely to cover
over-allotments. If the underwriter exercises its over-allotment option in
full, 14,452,806 shares of common stock will be outstanding after this
offering.
The number of shares of common stock to be outstanding immediately after
this offering is based upon our shares outstanding as of October 6, 1999 and
does not take into account 4,980,690 shares of common stock issuable upon
exercise of options outstanding at a weighted average exercise price of $10.74
per share, and 848,747 shares available for future grants under our existing
stock option plan and employee stock purchase plan.
------------------
Our principal offices are located at 765 Old Saw Mill River Road,
Tarrytown, New York 10591, and our telephone number is (914) 347-2220.
S-4
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The table below summarizes our financial data for the five fiscal years
ending July 31, 1999. We derived this summary data from our audited financial
statements, which are incorporated by reference from our Annual Report on Form
10-K for the fiscal year ended July 31, 1999. You should read this summary
financial data together with our audited financial statements and the notes to
those audited financial statements.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31,
--------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $ 33 $ 3,131 $ 5,401 $15,868 $ 10,180
Costs and expenses:
Research and development........ 5,802 6,605 7,724 15,190 22,850
Acquisition of in-process
research and development....... -- -- -- -- 9,686
Loss in Ebbisham Ltd............ -- -- 2,550 4,044 3,092
General and administrative...... 2,404 3,337 3,416 5,344 6,051
------- ------- ------- ------- --------
Total costs and expenses....... 8,206 9,942 13,690 24,578 41,679
------- ------- ------- ------- --------
Operating loss................... (8,173) (6,811) (8,289) (8,710) (31,499)
Other income and expense......... 389 703 968 1,644 817
------- ------- ------- ------- --------
Net loss......................... $(7,784) $(6,108) $(7,321) $(7,066) $(30,682)
======= ======= ======= ======= ========
Net loss per share--basic and
diluted......................... $ (1.03) $ (0.72) $ (0.77) $ (0.66) $ (2.63)
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
July 31, 1999
-----------------------
Actual As Adjusted(1)
------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities........ $17,805 $47,174
Working capital......................................... 13,360 42,730
Total assets.......................................... 38,476 67,846
Accumulated deficit..................................... (87,805) (87,805)
Stockholders' equity.................................... 11,287 40,657
</TABLE>
- ------------------
(1) Adjusted to reflect this offering at an assumed offering price of $15.75
per share. See "Use of Proceeds."
S-5
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all of the
other information contained in, or incorporated by reference into, this
prospectus supplement before purchasing our common stock. Investing in our
common stock involves a high degree of risk. Any of the following risks could
materially harm our business, operating results and financial condition and
could result in a complete loss of your investment.
Risks Related to Emisphere Technologies
We are highly dependent on the success of our oral heparin product and we need
to find a marketing partner in order to commercialize it.
Our leading product candidate is a liquid oral heparin USP formulation for
the treatment of deep vein thrombosis. Heparin is currently not available in
oral form. We expect to begin Phase III clinical trials for this product before
the end of December 1999. The outcome of clinical trials is inherently subject
to uncertainty, as is the FDA's drug approval process. We therefore cannot
assure you that the Phase III trials will be successful or that our liquid oral
heparin product will ultimately receive FDA approval.
The manufacture, marketing and distribution of pharmaceuticals is a
formidable undertaking. We do not have the financial resources or expertise to
bring oral heparin to market on our own. For the past three years, our efforts
to develop oral heparin were conducted through our joint venture with Elan. In
July 1999, the joint venture was terminated. As a result, we assumed sole
responsibility for Phase III development and funding. We expect to use a
portion of the net proceeds of this offering to complete the Phase III clinical
trials. However, we will need to find a third party with significant resources
to become our partner in developing, manufacturing, marketing and distributing
oral heparin. We cannot assure you that we will be able to identify a suitable
partner or that we can negotiate favorable terms for our relationship with that
partner. Without a partner, we will need additional funding to complete Phase
III trials.
The success of our liquid oral heparin product will also depend on market
acceptance by doctors, patients and third-party payors. We believe that the
market for heparin would expand if an orally administered version were
available, but we cannot assure you that our oral heparin product will be
welcomed and accepted by doctors, patients and third-party payors. In addition,
our liquid oral heparin product will compete with other forms of heparin and
other anti-coagulants that are produced and marketed by major pharmaceutical
companies with significantly greater resources.
If oral heparin is not approved or we are unable to develop it into a
commercially viable product, our prospects will suffer significantly. We have
no other products that are beyond early Phase I clinical studies.
Our product candidates are in various stages of development, and we cannot be
certain that any will be suitable for commercial purposes.
To be profitable, we must successfully research, develop, obtain
regulatory approval for, manufacture, introduce, market and distribute our
products under development. The time frame necessary to achieve these goals for
any individual product is long and uncertain. Before we can sell any of our
products under development, we must demonstrate through preclinical (animal)
studies and clinical (human) trials that each product is safe and effective for
human use for each targeted indication. We cannot be certain that we will be
able to begin, or continue, our planned clinical trials for our product
candidates, or if we are able, that our product candidates will prove to be
safe and will produce their intended effects.
A number of companies in the drug delivery, biotechnology and
pharmaceutical industries have suffered significant setbacks in clinical
trials, even after showing promising results in earlier studies or trials. We
cannot assure you that favorable results in any preclinical study or early
clinical trial will mean that favorable results will ultimately be obtained in
future clinical trials. Nor can we assure you that results of our limited
animal and human studies are indicative of results that would be achieved in
future animal studies
S-6
<PAGE>
or human clinical studies, all or some of which will be required in order to
have our proposed products obtain regulatory approval. Similarly, we cannot
assure you that any of our product candidates will be approved by the FDA. With
the exception of our clinical studies for oral heparin, we have not completed
any other human clinical studies using our carrier technologies.
Our future business success depends heavily upon regulatory approvals which can
be difficult to obtain for a variety of reasons, including cost.
Our preclinical studies and clinical trials, as well as the manufacturing
and marketing of our technologies, are subject to extensive, costly and
rigorous regulation by various governmental authorities in the United States
and other countries. The process of obtaining required regulatory approvals
from the FDA and other regulatory authorities often takes many years, is
expensive and can vary significantly based on the type, complexity and novelty
of the product candidates. We cannot assure you that any technologies or
carriers developed by us, either independently or in collaboration with others,
will meet the applicable regulatory criteria in order to receive the required
approvals for manufacturing and marketing. Delays in obtaining United States or
foreign approvals could result in substantial additional costs to us, and,
therefore, could adversely affect our ability to compete with other companies.
Additionally, delays in obtaining regulatory approvals encountered by others
with whom we collaborate, or other licensees of ours, could also adversely
affect our business and prospects.
If regulatory approval of a product is granted, the approval may place
limitations on the intended uses of the product we wish to commercialize, and
may restrict the way in which we are permitted to market the product.
We are dependent upon collaborative partners to develop and commercialize
compounds using our carriers.
A key part of our strategy is to form collaborations with pharmaceutical
companies that will assist us in developing, testing, obtaining government
approval for and commercializing oral forms of therapeutic compounds using our
drug delivery technologies. We do not currently possess the ability or
resources necessary to reach these goals alone, and we do not currently intend
independently to market products incorporating our technologies in the
foreseeable future. Other than our strategic alliances with Novartis and Lilly,
we have no commitments or development agreements currently in effect.
Accordingly, we cannot assure you that:
. we will be able to enter into collaborative arrangements to develop
products utilizing our drug delivery technologies;
. any existing or future collaborative arrangements will be successful;
or
. milestones in these agreements will be met.
If we are unable to obtain development assistance and funds from other
pharmaceutical companies to fund a portion of our product development costs and
to commercialize products, we may have to delay, scale back or curtail one or
more of our activities.
Our strategic alliances with Novartis and Lilly may not result in
commercializable products.
Novartis recently initiated a Phase I study in the United Kingdom of a
capsule form of a product resulting from the application of our carrier
technology to a protein macromolecule selected by Novartis. We cannot assure
you that the results desired by Novartis will be achieved or that, even if
achieved, Novartis will exercise its option to license the product for further
commercial development. In December 1999, the research and development phase of
the collaboration, which led to the Phase I study, will end and funding from
Novartis to us for that research and development will cease. Novartis may
choose to commence further research and development regarding a second
compound.
S-7
<PAGE>
While our license agreements with Lilly provide for payments upon reaching
milestones and for royalties in the event a product is successfully
commercialized by Lilly, there is no provision for minimum royalty payments
and, therefore, no guarantee that we will ever receive additional revenues from
the license agreements. The strategic alliance does not require Lilly to use
our technologies exclusively, and we are aware of collaborations between Lilly
and others pursuing non-oral delivery of one of the proteins that is the
subject of our strategic alliance with them. In addition, the strategic
alliance represents the exclusive vehicle through which we may develop and
market orally deliverable products based on the subject proteins and our
carrier technologies.
In September 1998, Lilly formally selected one of our proprietary carriers
for clinical testing of an oral formulation of Lilly's therapeutic protein for
the treatment of osteoporosis. Lilly subsequently incurred unexpected results
with respect to the injectable form of the protein and suspended its
development. As a result, we are awaiting further direction from Lilly on the
project.
We have incurred substantial losses since inception and expect to incur further
losses.
Since our inception in 1986, we have generated significant losses from
operations and we anticipate that we will continue to generate significant
losses from operations for the foreseeable future. At July 31, 1999, our
accumulated deficit was approximately $87.8 million. Operations to date have
been funded with the proceeds from collaborative research agreements, public
and private equity and debt financings and income earned on investments.
We expect to experience a substantial increase in oral heparin clinical
development expenses in fiscal 2000 as the product enters into Phase III
clinical trials, the most expensive phase of the clinical development process.
We will no longer receive funding from our former joint venture partner, Elan.
As a result, we believe that we will continue to incur increasing operating
losses and will require substantial additional financial resources to complete
our oral heparin clinical development program and other research and
development efforts.
We require substantial additional funding.
We will require substantial additional funding in order to complete our
oral heparin clinical development, continue our other research and product
development programs and preclinical testing and clinical trials of other
product candidates, fund our operating expenses, pursue regulatory approvals of
our product candidates, and establish manufacturing and marketing capabilities.
In order to assure funding for our future operations, we will need to obtain a
marketing partner for our liquid oral heparin product and may be required to
obtain financing for Phase III development on our own until a partner is found.
However, we cannot assure you that we will be successful in attracting a
marketing partner or in raising additional capital. In the event that a
marketing partner for our liquid oral heparin product is not found, we expect
that cash, cash equivalents, and marketable securities on-hand, combined with
either additional financing or delaying clinical trials and curtailing
operations will allow us to meet our liquidity requirements into the second
quarter of fiscal 2001.
In the past we have raised additional capital through public and private
equity and debt financings. We cannot assure you that additional capital will
be available on acceptable terms or without severe dilution to the existing
stockholders, if at all. If adequate funds are not available, we will be
required to delay, scale back or eliminate some or all of our research and
development programs.
If we cannot adequately protect our patent and proprietary rights, our business
will suffer.
Our success will depend, in part, on our ability to obtain patent
protection for our products, processes and technologies, to preserve our trade
secrets, and to operate without infringing the proprietary rights of third
parties, in various jurisdictions. We have been granted 39 patents on our drug
delivery technologies in the United States which will expire beginning in 2007.
S-8
<PAGE>
We cannot assure you that any patent applications relating to our
potential products or processes will result in patents being issued, or that
resulting patents, if any, are valid, enforceable or will provide protection
against competitors who challenge our patents, obtain patents that may have an
adverse effect on our ability to conduct business, or are able to circumvent
our patent position. We cannot assure you that we will have the necessary
financial resources to enforce any of our patents.
The manufacture, use or sale of our product candidates may infringe the
patent rights of others. We may be unable to avoid infringement of those
patents and we may have to seek a license, defend an infringement action, or
challenge the validity of those patents in court. We cannot assure you that a
license will be available to us, if at all, on terms and conditions acceptable
to us or that we will prevail in any patent litigation. If we do not obtain a
license under these patents, are found liable for infringement, or are not able
to have the patents declared invalid, we may be liable for significant monetary
damages, may encounter significant delays in bringing products to market, or
may be precluded from participating in the manufacture, use or sale of products
or methods of treatment covered by these patents. We cannot assure you that we
have identified or will identify in the future, United States and foreign
patents that pose a risk of infringement.
Part of our strategy involves collaborative arrangements with other
pharmaceutical companies for the development of new formulations of drugs
developed by others and, ultimately, the receipt of royalties on sales of the
new formulations of those drugs. These drugs are generally the property of the
pharmaceutical companies and may be the subject of patents or patent
applications and other forms of protection owned by the pharmaceutical
companies. To the extent those patents or other forms of protection expire,
become invalid or otherwise ineffective, or to the extent those drugs are
covered by patents or other forms of protection owned by third parties, sales
of those drugs by the collaborating pharmaceutical company may be restricted,
limited or enjoined, or may cease. Accordingly, the potential for royalty
revenues to us may be adversely affected.
To protect our proprietary technologies and processes, we rely in part on
maintaining trade secrets protected by confidentiality agreements with our
partners, employees, consultants and contractors. Nevertheless, we cannot
assure you that these agreements will provide adequate protection for our trade
secrets and other proprietary information in the event of any unauthorized use
or disclosure or in the event others lawfully develop the information.
We are dependent on third parties to manufacture our products.
We currently have no manufacturing facilities for large-scale clinical or
commercial production of any compounds under consideration as products. For the
foreseeable future, we intend to rely on third parties to manufacture our
carriers and potential products.
These third-party manufacturers must comply with the applicable FDA good
manufacturing practice regulations, which include quality control and quality
assurance requirements as well as maintenance of records and documentation.
Manufacturing facilities are subject to ongoing periodic inspection by the FDA
and corresponding state agencies, including unannounced inspections, and must
be licensed before they can manufacture any of our carriers or products. We
cannot assure you that our present or future suppliers will be able to comply
with the applicable good manufacturing practice regulations and other FDA
regulatory requirements. After regulatory approvals are obtained, later
discovery of previously unknown problems or failure to comply with the
regulatory requirements may result in restrictions on the marketing of a
product, withdrawal of the product from the market, seizures, injunctions or
criminal sanctions.
We may face product liability claims related to participation in clinical
trials or the use or misuse of our products.
We have product liability insurance with a policy limit of $5.0 million
per occurrence. The testing, manufacturing and marketing of products for humans
utilizing our drug delivery technologies may expose us
S-9
<PAGE>
to potential product liability and other claims resulting from their use. While
we intend to have human clinical trials conducted by contract research
organizations or our pharmaceutical partners, and to have these parties
indemnify us for claims arising out of those trials, we cannot assure you that
indemnity undertakings, if any, will be sufficient. Similarly, while we have
obtained, and will seek to obtain, waivers of liability from all persons who
participate in human clinical trials conducted by us or on our behalf, we
cannot assure you that waivers will be effective to protect us from liability
or the costs of litigation.
Liability may also result from claims made directly by consumers or by
pharmaceutical companies or others selling our products. We seek to structure
future development programs with pharmaceutical companies that would complete
the development, manufacturing and marketing of the finished product, but the
indemnity undertakings for product liability claims secured by us with the
pharmaceutical companies may later prove to be insufficient. While we may
obtain additional product liability insurance if we determine that such
insurance is desirable, we cannot assure you that the insurance we obtain would
be adequate to fully protect us. In the event of a successful suit against us,
if we do not have adequate product liability insurance coverage, we will be
materially adversely affected.
We are dependent on our key personnel and will need to attract and retain
additional key personnel in the future.
Our success depends upon the continued contributions of our executive
officers and scientific and technical personnel. During our operating history,
many key responsibilities within our company have been assigned to a relatively
small number of individuals. The competition for qualified personnel is
intense, and the loss of services of key personnel could adversely affect our
business. In particular, the loss of the services of Michael M. Goldberg, M.D.,
our Chairman of the Board and Chief Executive Officer, could have a material
adverse effect on our operations. We have an employment agreement through July
2000 with Dr. Goldberg, and have obtained key man insurance in the amount of
$1.0 million on his life.
In addition, we rely on members of our scientific advisory board and
consultants to assist us in formulating our research and development strategy.
All of the members of the scientific advisory board and all of our consultants
are otherwise employed and each such member or consultant may have commitments
to other entities that may limit their availability to us or other interests
that may conflict with our interests.
Risks Related to Our Industry
We face rapid technological change and intense competition.
Our success depends, in part, upon maintaining a competitive position in
the development of products and technologies in an evolving field in which
developments are expected to continue at a rapid pace. We compete with other
drug delivery, biotechnology and pharmaceutical companies, research
organizations, individual scientists and non-profit organizations engaged in
the development of alternative drug delivery technologies or new drug research
and testing, as well as with entities developing new drugs that may be orally
active. Many of these competitors have greater research and development
capabilities, experience, and marketing, financial and managerial resources
than we do, and, therefore, represent significant competition for us.
Additionally, acquisitions of, investments in, or collaborations with
competing drug delivery or biotechnology companies by large pharmaceutical
companies could enhance a competitor's financial, marketing and other
resources. Consolidation among drug delivery and biotechnology companies could
have a similar effect. Accordingly, our competitors may succeed in developing
competing technologies or obtaining government approval for products before we
do. Developments by others may render our product candidates, or the
therapeutic compounds used in combination with our product candidates,
noncompetitive or obsolete.
S-10
<PAGE>
Our products, when developed and marketed, may compete with existing
injectable versions of the same drug, some of which are well established in the
marketplace and manufactured by formidable competitors. For example, our oral
heparin products will compete with injectable heparin, low molecular weight
heparin, and warfarin, an oral anti-coagulant. These products are marketed
throughout the world by very large companies such as Pharmacia & Upjohn, Inc.,
Rhone-Poulenc S.A. and E.I. DuPont de Nemours & Co.
The unavailability of third-party reimbursement may limit the use of our
products, which would adversely affect our business.
The commercial success of our carrier products and technologies are
substantially dependent on whether third-party reimbursement is available for
the use of our products by hospitals, clinics and doctors. The continuing
efforts of government and insurance companies, health maintenance organizations
and other third-party payors of health care costs to contain or reduce costs of
health care may affect our future revenues and profitability, as well as the
availability of capital. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, such as those we are currently
developing. If we do succeed in bringing products to market, we cannot
guarantee that the products will be considered by third-party payors to be cost
effective or outcome effective, or that adequate third-party reimbursement will
be available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product development. Likewise,
legislation and regulations affecting the pricing of pharmaceuticals may change
before our proposed products are approved for marketing.
Commercialized products are subject to continuing regulation.
Even if our products receive regulatory approval, either in the United
States or internationally, we will continue to be subject to extensive
regulatory requirements. These regulations are wide ranging and govern, among
other things:
. adverse drug experience reporting regulations;
. product promotion;
. product manufacturing, including good manufacturing practice ("GMP")
requirements; and
. product changes or modifications.
If we fail to comply or maintain compliance with such laws and
regulations, we may be fined and barred from selling our products. If the FDA
believes that we are not in compliance with the law, it can:
. seize our products;
. mandate a recall;
. stop future sales through injunctive procedures; and
. assess civil and criminal penalties against us.
We may be adversely affected by the "Year 2000" problem.
The "Year 2000" problem relates to many currently installed computers,
software, and other equipment that are not capable of distinguishing 21st
century dates from 20th century dates. As a result, systems used by many
companies, in a very wide variety of applications, will experience operating
difficulties unless they are modified, upgraded, or replaced to process
adequately information involving, related to or
S-11
<PAGE>
dependent upon the century change. If one of our business systems or the
business system of a third party dealing with us fails because of the inability
of the business system to properly read a 21st century date, the results could
have a material adverse effect on our operations.
We have established a team to address our Year 2000 risk. The team has
reviewed our infrastructure and believes that it has identified substantially
all of the major business systems used in connection with our internal
operations. We have completed the process of identifying and correcting the
major business systems that needed to be modified, upgraded, or replaced. Costs
incurred to date to correct Year 2000 problems have not been material to our
results of operations.
We also recognize the risk that suppliers of products, services, and
collaborators with whom we transact business on a worldwide basis may not
comply with Year 2000 requirements. We have initiated formal communications
with significant suppliers and collaborators to determine the extent to which
we are vulnerable if these third parties fail to remediate their own Year 2000
issues. We are unable to determine, at this time, the probability that any
material supplier or collaborator will not be able to correct any Year 2000
problem in a timely manner. In the event any such third parties cannot provide
us with products, services, or continue to collaborate with us, our results of
operations could be materially adversely affected.
Risks Relating to Our Common Stock
Anti-takeover provisions of our corporate charter documents, Delaware law, and
our agreements with collaborators may affect the price of our common stock.
Our Board of Directors has the authority to issue up to 1,000,000 shares
of preferred stock and to determine the rights, preferences and privileges of
those shares without any further vote or action by our stockholders. Of these
1,000,000 shares, 200,000 are currently designated Series A Junior
Participating Cumulative Preferred Stock in connection with our stockholders'
rights plan, and the remaining 800,000 shares remain available for future
issuance. Your rights as a holder of common stock may be adversely affected by
the rights of the holders of any preferred stock that may be issued in the
future. Additional provisions of our certificate of incorporation and by-laws
could have the effect of making it more difficult for a third party to acquire
a majority of our outstanding voting common stock. These include provisions
that classify our board of directors, limit the ability of stockholders to take
action by written consent, call special meetings, remove a director for cause,
amend the by-laws or approve a merger with another company.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law which prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, either alone or together with affiliates and associates, owns (or
within the past three years, did own) 15% or more of the corporation's voting
stock.
We also have a stockholder's right's plan, commonly referred to as a
"poison pill," that makes it difficult, if not impossible, for a person to
acquire control of us without the consent of our Board of Directors.
In addition, we have contractual "standstill" agreements with Lilly,
Novartis and Elan which generally prohibit each company from acquiring shares
of our outstanding voting stock above specified levels. We may enter into
additional standstill agreements with future collaboration partners and with
prospective collaboration partners before we begin negotiating collaborations
with them.
S-12
<PAGE>
Our stock price has been and may continue to be volatile.
The trading price for our common stock has been and is likely to continue
to be highly volatile. The market prices for securities of drug delivery,
biotechnology and pharmaceutical companies, have historically been highly
volatile. Factors that could adversely affect our stock price include:
. fluctuations in our operating results;
. announcements of technological collaborations, innovations or new
products by us or our competitors;
. governmental regulation;
. developments in patent or other proprietary rights;
. public concern as to the safety of drugs developed by us or others;
. the results of preclinical testing and clinical studies or trials by us
or our competitors;
. litigation; and
. general market conditions.
Future sales of common stock, or the prospect of future sales, may depress our
stock price.
Sales of a substantial number of shares of common stock, or the perception
that sales could occur, could adversely affect the market price of our common
stock. As of July 31, 1999, we have outstanding options to purchase up to
3,625,739 shares of common stock which are currently exercisable and additional
options to purchase up to 1,223,989 shares of common stock are exercisable over
the next several years. The holders of these options have an opportunity to
profit from a rise in the market price of our common stock with a resulting
dilution in the interests of the other stockholders. The existence of these
options may adversely affect the terms on which we may obtain additional
financing.
S-13
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds of this offering will be approximately
$29.4 million after deducting underwriting discounts and estimated offering
expenses, based on an assumed offering price of $15.75. We intend to use the
net proceeds of this offering for:
. Phase III clinical testing of our liquid oral heparin formulation;
. continuing research and development; and
. the remainder, if any, for general corporate purposes.
The degree to which we will use proceeds from this offering for these
different purposes will depend on when and if we find a marketing partner for
our oral heparin products. If we do not enter into a marketing partnership for
oral heparin in the near future we will need to seek additional funding in
order to complete Phase III trials.
Numerous factors, including the progress of our Phase III trials, the rate
of our progress in our research and development programs, the results of other
preclinical and clinical studies and the timing of regulatory approvals, may
affect the amounts we spend on each proposed use. Expenditures will also depend
upon the extent to which we establish collaborative research or marketing
arrangements with other companies, the availability of other financing and
other factors.
Pending application of the proceeds from this offering, we intend to
invest the net proceeds in short-term, investment-grade, interest-bearing
instruments.
S-14
<PAGE>
CAPITALIZATION
The table below describes our capitalization at July 31, 1999 and our
capitalization as adjusted to reflect the offering at an assumed offering price
of $15.75 per share and the application of the net proceeds of the offering,
which are estimated to be $29.4 million after deducting underwriting discounts
and estimated offering expenses.
<TABLE>
<CAPTION>
July 31, 1999
------------------
As
Actual Adjusted
-------- --------
(in thousands)
<S> <C> <C>
Debt:
Senior convertible notes(1)............................... $ 2,648 $ 2,648
Note payable.............................................. 20,000 20,000
-------- --------
22,648 22,648
Stockholders' equity:
Preferred Stock, par value $.01 per share, 1,000,000
shares authorized; no shares issued and outstanding,
actual and as adjusted................................... $ -- $ --
Common Stock, par value $.01 per share, 40,000,000 shares
authorized; 12,181,468 shares issued (12,137,968
outstanding) actual; 14,181,468 shares issued (14,137,968
outstanding) as adjusted(2).............................. 122 142
Additional paid-in capital................................ 99,162 128,512
Accumulated deficit....................................... (87,805) (87,805)
Net unrealized gain on marketable securities.............. 1 1
Less 43,500 shares of Common Stock held in treasury, at
cost..................................................... (193) (193)
-------- --------
Total stockholders' equity............................. $ 11,287 $ 40,657
-------- --------
Total capitalization....................................... $ 33,935 $ 63,305
======== ========
</TABLE>
- ------------------
(1) The outstanding balance of our senior convertible notes plus accrued
interest were paid in full on September 15, 1999.
(2) Does not include 4,821,251 shares of common stock issuable upon the
exercise of options outstanding and 994,224 shares available for future
grant under our existing stock option plans and employee stock purchase
plan.
S-15
<PAGE>
DILUTION
At July 31, 1999, we had a net tangible book value of $2.9 million or
$0.24 per share of our common stock. Net tangible book value per share
represents the amount of our total assets less intangible assets such as
purchased technology and deferred financing costs, less total liabilities,
divided by the number of shares of our common stock outstanding. Without taking
into account any changes in net tangible book value after July 31, 1999, other
than the offering, after deducting underwriting discounts and estimated
offering expenses, our pro forma net tangible book value at July 31, 1999 would
have been $32.2 million, or $2.28 per share. This represents an immediate
dilution in pro forma net tangible book value of $13.47 per share to new
investors purchasing shares of common stock in this offering and an immediate
increase in pro forma net tangible book value of $2.04 per share to our
existing stockholders. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share to be paid by a new investor.... $15.75
Net tangible book value per share before offering............... $0.24
Increase in net tangible book value per share attributable to
new investors.................................................. 2.04
-----
Pro forma net tangible book value per share after offering...... 2.28
------
Dilution per share to new investors............................. $13.47
======
</TABLE>
The computation above is based on the number of shares of our common stock
outstanding as of July 31, 1999 which does not include 4,821,251 shares of
common stock issuable upon the exercise of options outstanding and 994,224
shares available for future grant under our existing stock option plan and
employee stock purchase plan. To the extent that outstanding options, or
options issued in the future, are exercised, there will be further dilution to
new investors.
S-16
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement,
Hambrecht & Quist LLC, the underwriter of this offering, has agreed to purchase
from us all of the shares of our common stock offered by this prospectus
supplement.
The underwriting agreement provides that the obligations of the
underwriter are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certificates,
opinions and letters from us, our counsel and independent auditors. The
underwriter has committed to purchase all shares of common stock if any are
purchased.
The underwriter proposes to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus supplement and to selected dealers at such price less a concession
not in excess of $ per share. The underwriter may allow, and the dealers may
reallow, a concession not in excess of $ per share to other dealers. After
the public offering of the shares, the offering price and other selling terms
may be changed by the underwriter.
We have granted to the underwriter an option, exercisable no later than 30
days after the date of this prospectus supplement, to purchase up to 300,000
additional shares of common stock at the public offering price, less the
underwriting discount, set forth on the cover page of this prospectus
supplement. The underwriter may exercise the option in whole or in part, and we
will be obligated, pursuant to the option, to sell shares to the underwriter to
the extent the option is exercised. The underwriter may exercise the option
only to cover over-allotments made in connection with the sale of common stock
offered in this prospectus supplement.
The following table summarizes the compensation that we will pay to the
underwriter in connection with this offering:
<TABLE>
<CAPTION>
Total
--------------------
Without
Per Over- With Over-
Share Allotment Allotment
----- --------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions............... $ $ $
</TABLE>
The offering of the shares is made for delivery when, as and if accepted
by the underwriter and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. Hambrecht & Quist LLC reserves the
right to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify Hambrecht & Quist LLC against liabilities,
including liabilities under the Securities Act, and to contribute to payments
Hambrecht & Quist LLC may be required to make with regard to those potential
liabilities.
We and all of our executive officers and directors have agreed not to
offer, sell, contract to sell, or otherwise dispose of any shares of common
stock, options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into shares of common stock during the period
from the date of this prospectus supplement continuing through the date 90 days
after the date of this prospectus supplement without the prior written consent
of Hambrecht & Quist LLC.
The underwriter may over-allot or effect transactions which stabilize,
maintain or otherwise affect the market price of the common stock at levels
above those which might otherwise prevail in the open market, including by
entering stabilizing bids or effecting syndicate covering transactions. A
stabilizing bid means the placing of any bid or effecting of any purchase for
the purpose of pegging, fixing or maintaining the price of
S-17
<PAGE>
the common stock. A syndicate covering transaction means the placing of any bid
on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with an offering. These
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. This stabilizing, if commenced, may be
discontinued at any time.
In connection with this offering, the underwriter and selling group member
(if any) who is a qualified market maker on the Nasdaq National Market may
engage in passive market making transactions in our common stock on the Nasdaq
National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. During the business day prior to
the pricing of the offering before the commencement of offers or sales of our
common stock, passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $319,000.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York will pass
upon the validity of the common stock and other legal matters related to this
offering. Morgan, Lewis & Bockius LLP, New York, New York will pass upon legal
matters related to this offering for the underwriter.
EXPERTS
The financial statements, as of July 31, 1999 and 1998 and for each of the
three years in the period ended July 31, 1999, included in our Annual Report on
Form 10-K for the year ended July 31, 1999 and incorporated by reference in
this prospectus, have been incorporated herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
S-18
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. You can read and copy these reports, proxy
statements and other information at the Commission's Public Reference Room
located at 450 Fifth Street, N.W., Washington, D.C. 20549. Call (800) SEC-0330
for more information on the Public Reference Room. The Commission maintains an
Internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission. The site's address is "www.sec.gov."
We have filed a Registration Statement on Form S-3 under the Securities
Act with respect to this offering. For further information regarding us and
our common stock you should refer to the Registration Statement and its
exhibits and schedules.
The Commission allows us to "incorporate by reference" the information in
documents that we file with them. This means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus supplement,
and information in documents that we file later with the Commission will
automatically update and supersede this information.
We incorporate by reference the documents listed below and any future
filings we make with the Commission under Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act:
(1) Our Annual Report on Form 10-K for the fiscal year ended July 31, 1999;
(2) The description of our preferred stock purchase rights contained in our
Registration Statement on Form 8-A, dated March 5, 1996; and
(3) The description of our Common Stock contained in our Registration
Statement on Form 8-A, dated September 11, 1990.
We also incorporate by reference into this prospectus supplement all
documents that we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this prospectus supplement and prior to the
termination of this offering.
We will provide a copy of any or all of these documents (other than
exhibits unless the exhibits are specifically incorporated by reference into
the document), without charge, upon written or oral request to: Emisphere
Technologies, Inc., 765 Old Saw Mill River Road, Tarrytown, NY 10591,
Attention: Secretary, telephone (914) 347-2220.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus supplement shall be deemed to be
modified or superseded for the purposes of this prospectus supplement to the
extent that a statement contained in this prospectus supplement or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or supersedes that statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus supplement.
S-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annex A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[XANNUAL]REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1999
OR
[_TRANSITION]REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10615
EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 13-3306985
<S> <C>
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
<CAPTION>
765 Old Saw Mill River Road
Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)
</TABLE>
(914) 347-2220
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock--$.01 par value
Preferred Stock Purchase Rights
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 Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) 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]
As of October 6, 1999, the aggregate market value of registrant's common
stock held by non-affiliates was approximately $180,000,000, based on a closing
sale price of $15.00 per share, and 12,152,806 shares of registrant's common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Business" (Item 1) and "Management's
Discussion and Analysis of Financial Conditions and Results of Operations"
(Item 7), the notes to the Company's audited financial statements (Item 8) and
elsewhere in this Annual Report on Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward looking statements include (without limitation)
statements regarding: planned or expected studies and trials of oral
formulations that utilize the Company's technology; the timing of the
development and commercialization of the Company's products; potential
products that may be developed using Emisphere's technology; the potential
market size, advantages or therapeutic uses of the Company's liquid oral
heparin formulation or any other product; and the sufficiency of the Company's
available capital resources to meet its funding needs. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the success of the Company's
oral heparin product and the Company's ability to find a marketing partner to
help the Company commercialize it; the viability of the Company's product
candidates, most of which, other than liquid oral heparin, are in the early
stages of development; the need to obtain regulatory approval for the
Company's liquid oral heparin and other product candidates; the Company's
dependence on collaborative partners to develop and commercialize products and
the Company's ability to fund such efforts with or without partners; the risk
of technological obsolescence and risks associated with the Company's highly
competitive industry; the Company's absence of profitable operations and need
for additional capital; the Company's dependence on patents and proprietary
rights; the Company's dependence on others to manufacture the Company's
compounds; the risk of product liability and policy limits of product
liability insurance; potential liability for human clinical trials; the
Company's dependence on key personnel and the quality, judgment and strategic
decisions of management and other personnel; uncertain availability of third-
party reimbursement for commercial medical products; general business and
economic conditions; and other factors referenced or incorporated by reference
herein.
2
<PAGE>
PART I
ITEM 1. Business.
Overview
Emisphere Technologies, Inc. ("Emisphere" or the "Company") is a
biopharmaceutical company focused on:
. the development of a family of oral heparin products;
. the application of proprietary synthetic chemical compounds to serve as
"carriers" to facilitate the transport of therapeutic macromolecules and
other compounds across biological membranes; and
. the development, in conjunction with the Company's pharmaceutical
collaborators, of oral formulations of selected therapeutic
macromolecules.
The Company's lead product in development is a liquid oral heparin
formulation. Heparin is an anti-coagulant widely used for preventing deep vein
thrombosis ("DVT"), myocardial infarction and unstable angina. Currently,
heparin must be administered intravenously or by injection. The Company
believes that the worldwide sales of heparin are over $2 billion annually.
Heparin is currently marketed in two principal forms, heparin USP and low
molecular weight heparin. The Company's liquid oral heparin formulation
combines heparin USP with the Company's proprietary molecular carrier.
The lead indication that the Company is pursuing for its liquid oral heparin
formulation is the prevention of DVT. The Company has completed eleven Phase I
clinical studies for various liquid oral heparin formulations. A Phase II
clinical study for the use of liquid oral heparin to prevent DVT in 123
subjects was completed in December 1998. The Phase II study indicated that the
Company's liquid oral heparin formulation was well-tolerated and comparable to
heparin injected subcutaneously in preventing DVT. Based on the results of the
Phase II study, which were reviewed with the Food and Drug Administration (the
"FDA") in August 1999, the Company has designed a Phase III protocol and
expects to begin the dosing of patients by the end of calendar year 1999. In
addition, the Company has produced a prototype tablet form of heparin and
expects to initiate a Phase I clinical study for that product during the first
half of calendar year 2000. The Company is also in the early stages of
developing a tablet form of low molecular weight heparin.
During the 1999 fiscal year, the Company improved the manufacturing process
for its liquid oral heparin carrier, increased the overall purity of the
carrier and significantly decreased the per dose production cost. Based on
these improvements, the Company and its contract manufacturers completed the
validation runs of the carrier required by the FDA to show control over the
manufacturing process and are now capable of producing commercial quantities
of the Company's carrier. During fiscal 1999, the Company also optimized the
composition of its liquid oral heparin formulation and produced a quantity
sufficient to complete the Phase III trials.
In 1999, the Company purchased all of Elan Corporation plc's interest in the
joint venture formed in 1996 to develop and market oral forms of heparin. The
Company believes that the complete ownership and control of the technology and
rights relating to its oral heparin products will allow for more rapid
clinical development and commercialization and will provide greater
flexibility in negotiating a partnership arrangement with a pharmaceutical
company for the marketing of these products. The Company is currently engaged
in discussions with a number of pharmaceutical companies regarding the
commercialization of the Company's oral heparin products, but has not entered
into any understandings or agreements to date. There can be no assurance that
any agreements will be consummated as a result of these discussions.
3
<PAGE>
Emisphere has designed and synthesized a library of over 1,000 potential
carriers and evaluated them for their ability to facilitate the delivery of
therapeutic macromolecules and other compounds across biological membranes,
including intestinal, nasal, buccal, sublingual, subcutaneous or intraocular
membranes, without altering the therapeutic benefits of these molecules. The
Company believes that its technology offers the pharmaceutical industry a
relatively inexpensive route to generating significant new product
opportunities. Beyond enabling the oral delivery of heparin in humans, this
technology has demonstrated the oral delivery in animals of a variety of other
compounds, including erythropoietin, insulin, human growth hormone,
calcitonin, human parathyroid hormone, cromolyn and deferoxamine. The Company
believes that total worldwide sales of the injectable formulations of these
compounds in 1998 were over $8.0 billion and that the market for these
compounds will expand if they become available in oral form.
Emisphere has two corporate partnerships for the development of oral
delivery formulations of compounds beyond heparin. Novartis Pharma AG
("Novartis") initiated a Phase I clinical study in September 1999 in the
United Kingdom for a capsule form of a Novartis protein using the Company's
technology. The Company and Eli Lilly & Company ("Lilly") have entered into
license agreements with respect to two of Lilly's therapeutic proteins in the
area of endocrinology. Both candidates are currently in preclinical
development. In addition, the Company is engaged in feasibility studies
regarding the development of products combining the Company's carriers with
therapeutic compounds selected by its collaborators.
Business Strategy
The Company's objective is to become a leader in developing orally
administered formulations of therapeutic macromolecules and other compounds
that are not currently deliverable by oral means. The Company's strategy to
achieve its objective incorporates the following principal elements:
. Establish a partnership for the heparin family of products to:
- complete the development of and commercialize Emisphere's liquid
oral heparin formulation;
- continue the development of solid dosage forms of heparin USP and
low molecular weight heparin; and
- explore additional indications for which heparin may be beneficial.
. Pursue new product opportunities by:
- identifying additional therapeutic compounds (preferably already
approved for injectable use) that address large markets;
- developing products through Phase I; and
- establishing relationships with partners to complete the development
of and commercialize these products.
. Enter into strategic alliances with pharmaceutical partners who have
marketed products or compounds in development that would benefit from
Emisphere's oral delivery technology.
The Drug Delivery Industry
The drug delivery industry develops technologies for the improved delivery
of therapeutic compounds. These enhancements have focused primarily on safety,
efficacy, ease of patient use and patient compliance. In addition, drug
delivery technologies can be utilized to expand markets for existing products,
as well as to develop new products.
Advances in biotechnology have facilitated the development of a new
generation of biopharmaceutical products based on very large molecules such as
proteins, peptides and nucleic acids. Due to the size of these
4
<PAGE>
molecules, it has been very difficult to transport the resulting macromolecule
drugs across biological membranes and into the bloodstream. Most
macromolecules are therefore delivered by injection. Unfortunately, injection
therapies have many drawbacks that negatively affect patient compliance,
including discomfort, inconvenience and potential for infection. Another
drawback of injection therapies is that they are often performed in hospitals
or doctors' offices, making them both expensive and inconvenient.
To address these problems, several non-invasive routes of macromolecule drug
delivery are being explored. The first is to discover new chemical entities
that have the same desired safety and efficacy of the existing drug, while
having the advantage of being orally deliverable. The second approach involves
developing advanced technologies, including nasal, transdermal (through the
skin), pulmonary (through the lungs) and oral means to deliver the original
drug. To date, these alternatives have experienced limited success. Nasal
delivery has been shown to have low and variable success due to insufficient
amounts of drug absorbed from the nasal passage into the bloodstream.
Transdermal delivery via a drug patch has been relatively unsuccessful thus
far because the skin is naturally impermeable to many macromolecules. Current
pulmonary drug delivery systems, designed to bypass the pitfalls of the
digestive tract, typically deliver only a fraction of the drug to the deep
lung, where absorption into the bloodstream is most likely to occur. Oral
delivery, while heralded as the safest and typically most convenient dosage
formulation, is characterized as being unable to deliver sufficient quantities
of drug compound across the biological membranes of the digestive system and
into the bloodstream.
Oral Drug Delivery
Oral dosage forms of pharmaceuticals are the largest product segment of the
pharmaceutical industry and the Company believes that the potential market for
many drugs could be significantly expanded if an effective oral delivery
technology were developed for therapeutics that are currently available only
as injectable drugs. The Company believes that oral administration would
represent the preferred means of delivery for many pharmaceuticals.
The three main barriers to effective oral drug delivery for humans are:
Degradation of Drugs by Acid and Enzymes: The high acid content and
ubiquitous digestive enzymes of the digestive tract can degrade some drugs
well before they reach the site of absorption into the bloodstream.
Poor Absorption of Drugs through Epithelial Membrane: Many macromolecules
and polar compounds cannot effectively traverse the cells of the epithelial
membrane in the small intestines to reach the bloodstream.
Transition of Drugs to Insoluble Form: Many drugs become insoluble at the
low pH levels encountered in the digestive tract. Since only the soluble
form of the drug can be absorbed into the bloodstream, the transition of
the drug to the insoluble form can significantly reduce the amount
absorbed.
Emisphere's Drug Delivery Technologies
The core of the Company's delivery technologies is the design and synthesis
of compounds that maximize the transport of drugs across biological membranes.
The Company's technologies exploit the properties of supramolecular complexes,
which are formed when two or more compounds are held together in a discrete
geometry by relatively weak molecular interactions. A supramolecular complex
will have a number of properties that are measurably different from its
constituent parts. The Company believes that the supramolecular complexes
formed when its proprietary carrier compounds are formulated with many
injectable drugs will, unlike earlier attempts at oral delivery, allow the
drugs to be transported across gastrointestinal membranes and into the
bloodstream in quantities that are clinically useful and commercially
attractive.
5
<PAGE>
The Company has synthesized a library of over 1,000 well-defined,
proprietary carrier compounds. These carrier molecules vary widely in their
chemical structure, solubility, hydrophobicity, electrostatic and other
physical/chemical properties. The Company believes that, through its thorough
understanding of the individual properties of its proprietary carrier
compounds, it can select and customize carriers to facilitate the oral
delivery of a broad range of individual therapeutic agents.
The Company believes that its oral drug delivery technologies have the
potential to offer the key properties essential for effective and reproducible
oral drug delivery, including:
. absorption of the drug in an appropriate manner;
. consistent release of the drug into the bloodstream;
. lack of toxicity; and
. maintenance of the biological effects of the drug.
In addition, the Company believes that the supramolecular complexes formed
by the Company's carriers may have applications in the delivery of drugs
through other biological membranes, including intestinal, nasal, buccal,
sublingual, subcutaneous and intraocular membranes.
Key Characteristics of the Company's Technologies
The Company believes that its oral delivery approach may have potential
competitive advantages, including:
Broad applicability: The Company's carriers are applicable across a
diverse group of molecules (proteins, carbohydrates, and peptides and other
poorly absorbed compounds);
Stand-alone delivery approach: Oral drug delivery using the Company's
carriers does not rely upon the addition of other agents that can have
adverse effects on the intestinal membranes or digestion process;
Versatility of formulation: The Company believes that various types of
oral formulations, including suspensions, tablets and capsules, can be
created; and
Ease of manufacture: The technology and manufacturing equipment required
to produce the Company's carrier material in commercial quantities are
readily available.
Emisphere believes that an efficient and reproducable delivery system for
macromolecules represents a significant commercial opportunity. Such a system
could improve patient acceptance of macromolecule drug therapy and compliance
with prescribed regimens, thereby improving treatment results and reducing
costs of administration and treatment.
Lead Product Candidate - Heparin
The Company's lead product candidate is a liquid oral heparin formulation
that combines heparin USP and the Company's proprietary molecular carrier.
This product is expected to enter Phase III clinical trials by the end of
December 1999 for the prevention of deep vein thrombosis ("DVT") following
total hip replacement surgery. Heparin and low molecular weight heparin, a
fractionated version of heparin, are widely used anti-coagulants. They are
primarily used for treating and preventing DVT, but are readily prescribed for
acute myocardial infarction, coronary angioplasty, coronary artery bypass
graft surgery, stroke and unstable angina. Currently, heparin is given as
either a continuous intravenous infusion or a subcutaneous injection. Upon
entry into the bloodstream, heparin binds to various coagulation components,
and thereby inhibits the normal blood clotting cascade. Low molecular weight
heparin has, by some measures, a longer half-life than heparin, which means it
remains in the bloodstream longer and therefore may require fewer injections.
Some clinical trials have suggested that dosing regimens of low molecular
weight heparins may be marginally safer and more effective than standard
heparin regimens. However, other studies indicate that heparin has pleiotropic
properties and that the low molecular weight heparins lose some of those
potential properties.
6
<PAGE>
Currently, the use of heparin USP is restricted to the hospital setting.
Because low molecular weight heparin can be dosed less frequently, its
introduction has extended the use of heparin into the home setting, but only
on a limited basis. Under current practice, a course of hospital treatment
with heparin is typically followed by a 30 to 90 day or longer course of out-
patient treatment using warfarin, the only oral anti-coagulant available.
However, warfarin has more negative interactions with other pharmaceuticals
than most FDA approved drugs. The Company believes that the introduction of
oral heparin would not only replace warfarin use, but would also make the 30
to 90 day course of out-patient treatment with heparin more feasible. The
Company also believes that its oral heparin products will ultimately be
applicable for a wide range of anticoagulant/antithrombotic uses.
The Phase II clinical study of Emisphere's liquid oral heparin formulation,
which was completed in December 1998, was conducted with a total of 123
patients in the United States who had undergone hip replacement surgery. It
involved three arms comparing two different doses of the Company's liquid oral
heparin to a dose of heparin administered subcutaneously. The study indicated
that the orally administered heparin utilizing the Company's proprietary
technology was well-tolerated and comparable to heparin administered
subcutaneously in preventing DVT.
In preparation of the investigational new drug application ("IND") for its
liquid oral heparin formulation submitted to the FDA, the Company engaged in
preclinical testing which included, among other things:
. maximum tolerated dose experiments;
. acute and subacute toxicity testing;
. a pharmacological screen;
. mutagenicity testing;
. bulk carrier and formulation stability analysis; and
. absorption, distribution, metabolism and excretion studies.
The results of these tests demonstrated that the carrier, when dosed at
quantities substantially greater than the quantities that the Company proposed
to administer to humans:
. caused no damage to intestinal tissue;
. produced no pharmacological activity on its own;
. was not sequestered in any body tissue; and
. caused no genetic alterations.
A summary of the study results from the first three Phase I studies of
liquid oral heparin was presented at the American Heart Association meeting in
November 1996, and a paper outlining these Phase I clinical study results
appeared in the journal Circulation in October 1998. The results of the Phase
II study were presented at the XVII Congress of the International Society of
Thrombosis and Haemostasis in August 1999.
In 1999, the Company purchased all of Elan's interest in the joint venture
formed in 1996 to develop and market oral forms of heparin. Under the terms of
the purchase agreement, Emisphere (i) issued a $20 million zero coupon note
accruing interest at the rate of 15% per year due July 6, 2006 and (ii) agreed
to pay royalties based on receipt of certain milestone payments, and subject
to an annual maximum, on future sales of heparin products. The Company
believes that the complete ownership and control of the technology and rights
relating to oral heparin products will allow for more rapid clinical
development and commercialization and will provide greater flexibility in
negotiating a partnership agreement with a pharmaceutical partner for the
marketing of these products. The Company is currently engaged in discussions
with a number of pharmaceutical companies regarding the commercialization of
the Company's oral heparin products, but has not entered into any agreements
or understanding to date. There can be no assurance that any agreements will
be consummated as a result of these discussions.
7
<PAGE>
During fiscal 1999, the Company improved the manufacturing process for its
liquid oral heparin carrier, increased the overall purity of the carrier and
significantly decreased the per dose production cost. Based on these
improvements, the Company and its contract manufacturers completed the
validation runs of the carrier required by the FDA to show control over the
manufacturing process and are now capable of producing commercial quantities
of the Company's carrier. During fiscal 1999, the Company also optimized the
composition of its liquid oral heparin formulation and produced a quantity
sufficient to complete the Phase III trials.
Collaboration Agreements
The Company has several strategic alliances and ongoing feasibility studies
with pharmaceutical and biotechnology companies for the development of orally
administrable formulations of therapeutic macromolecules and other compounds.
Novartis Pharma AG. The Company and Novartis have conducted collaborative
research since 1997. Under the terms of their collaboration agreement,
Novartis is making quarterly payments to the Company to fund research
regarding the application of the Company's technology to a protein
macromolecule. In September 1999, Novartis initiated a Phase I clinical study
in the United Kingdom of a capsule form of this protein utilizing the
Company's technology. Novartis may, at its option, enter into a pre-negotiated
license with the Company to commercialize the product. If this option is
exercised, Novartis will be required to make a predetermined milestone payment
to the Company and purchase $5.0 million of the Company's common stock at a
previously negotiated market-based per share price, subject to the Company's
approval. Novartis is required to make another milestone payment and equity
investment upon the initiation of Phase III clinical trials and a further
milestone payment and equity investment upon making its first major market
regulatory application for the product.
The Novartis research collaboration will expire in December 1999, at which
time its quarterly research funding obligations will end. Regardless of this
expiration, Emisphere will receive royalties on sales of any oral products
that may result from the collaboration.
Novartis also has the option to develop a second compound using the
Company's technology. If exercised, the option will extend Novartis' research
funding obligation and result in a predetermined milestone payment to the
Company. Further development of a product using the second compound would
result in a second royalty-bearing license agreement and milestone payments
and equity investments similar to those for the first protein macromolecule.
Eli Lilly & Company. In February 1997, the Company and Lilly entered into a
research collaboration and option agreement to combine Lilly's therapeutic
protein and formulation capabilities with the Company's carrier technologies.
The Lilly agreement provided for periodic payments to the Company to fund a
research and development program to study the use of the Company's
technologies to develop oral and non-oral formulations of two of Lilly's
therapeutic proteins in the area of endocrinology.
The Lilly agreement provided Lilly with a series of options each to acquire
an exclusive worldwide license to use the Company's technologies in
conjunction with oral and non-oral formulations of the two Lilly proteins. In
March 1998, Lilly exercised options for each of the two proteins for oral
formulation. The license agreements provide that Lilly is obligated to seek to
market the oral formulations of the proteins, and that the Company is
obligated to provide a material portion of the supply of carrier necessary for
the production of any such formulations. For so long as Lilly continues to
develop oral formulations of the proteins, Lilly will continue to have options
to acquire licenses to use the Company's technologies in conjunction with non-
oral formulations of the proteins.
The research and development funding portion of the ongoing Lilly
collaboration was completed in February 1999, but Lilly's commitments to
royalties with respect to the two licensed compounds it is developing
continues. The Company has designed and supplied Lilly with carriers for both
therapeutic proteins. In September 1998, Lilly formally selected one of the
Company's proprietary carriers for clinical testing of an oral
8
<PAGE>
formulation of Lilly's therapeutic protein for the treatment of osteoporosis.
Lilly subsequently incurred unexpected results with respect to the injectable
form of its therapeutic protein and suspended its development. As a result,
the Company is awaiting further direction from Lilly on the project. With
respect to Lilly's other therapeutic protein under license from the Company,
Lilly is evaluating the Company's carriers and the Company is awaiting a
report from Lilly on the results of its evaluation.
The Company has received an aggregate of $14.6 million for research and
development and milestone payments under the Novartis and Lilly agreements,
including a $4.0 million milestone payment from Lilly in March 1998. The
Company could receive future payments in the event certain additional
milestones are achieved, and royalty payments if a commercial product results
from the collaboration.
Feasibility Studies. The Company has also entered into a number of proof-of-
concept studies with additional pharmaceutical and biotechnology companies for
various injectable compounds. These feasibility studies are ongoing.
Other Product Candidates
The table below lists a representative sample of product candidates, other
than heparin, for which the Company has demonstrated oral delivery in mammals
using its carrier technologies. Some of these product candidates are the
subject of collaboration agreements. In certain other cases, the Company does
not plan to fund further development unless a collaborator expresses an
interest in doing so.
<TABLE>
<CAPTION>
Product Candidate Primary Indications
----------------- -------------------
<S> <C>
Therapeutic Protein and Peptide Products
Insulin Diabetes
Human Growth Hormone Growth Disorders
Calcitonin Osteoporosis
Human Parathyroid Hormone (analogues) Osteoporosis
Erythropoietin Anemia
Poorly Absorbed Organic Compounds and Vaccines
Cromolyn Asthma/Allergy
Deferoxamine Iron Overload
Vaccines Various
</TABLE>
Therapeutic Protein and Peptide Products
Among the protein and peptide products to which the Company has applied its
carriers are insulin, human growth hormone, calcitonin, parathyroid hormone
analogues, and erythrypoietin. All of these products are currently marketed as
injectable products, with the exception of parathyroid hormone analogues
(which are currently in clinical development in injectable form).
Insulin. Studies performed by groups such as the Diabetes Control and
Complications Trial Research Group have shown that the risk of degenerative
complications can be greatly reduced if people with Type I diabetes (insulin
dependent diabetes) lower their average blood-glucose level toward the
concentrations typical for non-diabetic individuals. However, a patient needs
to inject insulin several times per day in order to properly regulate his or
her glucose level. This level of compliance is difficult to achieve with an
injectable formulation of insulin, and the Company believes an oral
formulation would increase compliance. Emisphere has demonstrated that its
lead carrier for insulin is able to achieve therapeutic utility through oral
delivery in a diabetic rat model comparable to that obtained following
subcutaneous injection of the compound in the same model. The Company has also
demonstrated that the use of its carriers increases the amount of insulin
delivered across pulmonary membranes in rats.
9
<PAGE>
Human Growth Hormone. While a number of new indications are being explored,
the majority of human growth hormone sold is used to treat children with
growth deficiencies. The current preferred dosing regimen in children entails
daily injections for up to 10 years or more. The Company's lead carriers for
recombinant human growth hormone have been tested in rodents and non-human
primates. The tests indicated oral delivery of therapeutic drug levels in
these animals. In addition, growth studies conducted in animal models have
demonstrated that the drug is as active after delivery to the bloodstream
through the gastrointestinal tract as compared to subcutaneous delivery.
Calcitonin. Osteoporosis is a disease that afflicts many post-menopausal
women and older men. Calcitonin is used to treat osteoporosis as an injectable
solution or nasal spray. The Company has demonstrated the oral delivery of
therapeutic drug levels of calcitonin in non-human primates.
Human Parathyroid Hormone (analogues). Currently, a number of pharmaceutical
companies are in various stages of clinical testing to determine whether
certain analogues of human parathyroid hormone (hPTH) are effective in
reducing the bone fractures that are associated with osteoporosis. The Company
has demonstrated oral delivery of three different hPTH analogues in non-human
primates.
Erythropoietin. Anemia is a condition that occurs when the body cannot
produce enough of the red blood cells needed to carry oxygen to the different
parts of the body, resulting in a lack of energy and easy tiring.
Erythropoietin is a glycoprotein hormone that is made in the kidneys and acts
on stem cells in the bone marrow to create red blood cells. The Company has
identified delivery agents for an oral formulation of erythropoietin, has
demonstrated that the oral formulation results in absorption of erythropoietin
in rodents and has filed patents on oral delivery systems for erythropoietin.
Poorly Absorbed Organic Compounds and Vaccines
The majority of pharmaceutical products are small organic molecules.
Pharmaceutical companies often identify biologically active compounds that
cannot be delivered orally due to poor absorption.
Cromolyn. Cromolyn is a mast cell stabilizer used in the treatment of asthma
and allergies. The Company has demonstrated oral delivery of cromolyn in
rodents.
Deferoxamine. Deferoxamine is the only approved iron chelator for use in
treating iron overload resulting from frequent blood transfusions in the
treatment of illnesses such as beta thalassemia and sickle cell anemia.
Currently, dosing involves a 12-hour subcutaneous infusion five days per week.
The Company has demonstrated oral delivery of therapeutic levels of
deferoxamine in non-human primates.
Vaccines. The Company has conducted experiments with a number of antigens to
determine the applicability of its carriers in the field of vaccines. The
result of dosing rodents orally with antigens combined with the Company's
carriers was an increased secretory Immunoglobulin A (sIgA) response,
increased Immunoglobulin G (IgG) response and CD4 T-cell proliferation. These
results indicate that oral vaccination may be possible using the Company's
carriers.
Patents
The Company's strategy is to apply for patent protection on all aspects of
its proprietary chemical and pharmaceutical delivery technologies, including
materials and compositions of matter for both the carrier and complexes of a
carrier with a pharmaceutical or chemical agent. We also seek patent
protection on the processes for manufacturing the carrier, new carriers, uses
of the carriers and improvements on the core technology that are important for
the success of the Company's business.
10
<PAGE>
The Company has patents or pending patent applications for carriers
currently used by the Company in conjunction with heparin, insulin,
calcitonin, human parathyroid hormone, human growth hormone, deferoxamine and
sodium cromolyn. The Company has been granted 39 patents on its drug delivery
technologies in the United States which will expire beginning in 2007, and has
other patents issued or applications pending in various countries around the
world. Ten U.S. patents were issued by the U.S. Patent and Trademark Office
during fiscal 1999. The Company has 42 patent applications relating to its
drug delivery technologies pending in the United States. In addition, the
Company has pending or expects to file patent applications corresponding to
most of its U.S. patents and patent applications in various countries around
the world. The Company has applied to register EMISPHERE as a trademark with
the U.S. Patent and Trademark Office and has also initiated an administrative
proceeding with that office to prevent the registration of a similar mark by
another applicant.
Although the Company has patents for some of its product candidates and has
applied for additional patents, there can be no assurance that patents applied
for will be granted, that patents granted to or acquired by the Company now or
in the future will be valid and enforceable and provide the Company with
meaningful protection from competition or that the Company will possess the
financial resources necessary to enforce any of its patents. There can also be
no assurance that any products developed by the Company (or a licensee) will
not infringe upon any patent or other intellectual property right of a third
party.
The Company also relies upon trade secrets, know-how and continuing
technological advances to develop and maintain its competitive position. To
maintain the confidentiality of trade secrets and proprietary information, the
Company maintains a policy of requiring employees, scientific advisors,
consultants and collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with the Company.
These agreements are designed both to enable the Company to protect its
proprietary information by controlling the disclosure and use of technology to
which it has rights, and to provide for ownership in the Company of
proprietary technology developed at the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information.
Manufacturing
The primary raw materials used in making the carriers for the Company's
heparin products, and the carriers under consideration for the Company's other
product candidates, are readily available from multiple sources and in large
quantities. The Company has no internal capability for the production of any
of its carriers in batch sizes larger than approximately one kilogram. The
Company currently has arrangements with third parties to produce these
carriers in accordance with the FDA's good manufacturing practices ("GMP")
regulations in batch sizes of approximately 200 kilograms. Generally,
commercial manufacturers can produce batch sizes of up to 2,000 kilograms.
The Company is conducting feasibility studies for engineering and location
of its own manufacturing facility. The Company has identified numerous other
commercial manufacturers meeting the FDA's GMP regulations that have the
capability of producing the Company's carriers. The Company will continue to
manufacture carriers on a small scale for research purposes and contract with
third-party producers for clinical testing. Once the engineering studies for
the Company's production facility are completed, the Company will be in a
position to decide whether to make or buy the carriers for future needs. A
third-party manufacturer whose facility complies with the FDA's GMP
regulations is currently producing the Company's carrier and the liquid oral
heparin formulation for its Phase III clinical trials.
Competition
The Company believes that its oral heparin product will be preferred by
doctors and patients over the injectable form. Nevertheless, oral heparin will
compete with generic heparin and low molecular weight heparin, which are only
available in injectable form. Low molecular weight heparin is offered in the
U.S. principally by Pharmacia & Upjohn, Inc. (under the trade name "Fragmin")
and Rhone-Poulenc S.A. (under the trade name "Lovenox"). Internationally,
there are more than ten approved forms of low molecular weight heparin.
Outside of the hospital, where patient compliance with any injectable drug is
difficult to achieve and monitor, warfarin is currently prescribed as an
anticoagulant/antithrombotic. However, for many important indications it is
not
11
<PAGE>
considered as effective as heparin. Warfarin is a generic drug marketed under
the trade name "Coumadin" by E.I. DuPont de Nemours & Co. Because warfarin has
more negative interactions with other pharmaceuticals than most FDA approved
drugs, the Company believes that its oral heparin products will ultimately be
the preferred drug for a wide range of anticoagulant/antithrombotic uses and
that an oral alternative may significantly expand the overall heparin market,
currently constrained by injectable-only administration.
The Company's success depends, in part, upon maintaining a competitive
position in the development of products and technologies in an evolving field
in which developments are expected to continue at a rapid pace. The Company
competes with other drug delivery, biotechnology and pharmaceutical companies,
research organizations, individual scientists and non-profit organizations
engaged in the development of alternative drug delivery technologies or new
drug research and testing, as well as with entities developing new drugs that
may be orally active. Many of these companies and entities have substantially
greater research and development capabilities, experience and marketing,
financial and managerial resources than the Company, and represent significant
competition for the Company.
Additionally, acquisitions of, investments in, or collaborations with,
competing drug delivery or biotechnology companies by large pharmaceutical
companies could enhance a competitor's financial, marketing and other
resources. Consolidation among drug delivery and biotechnology companies could
have a similar effect. Accordingly, the Company's competitors may succeed in
developing competing technologies and obtaining governmental approval for
products before the Company. There can be no assurance that developments by
others will not render the Company's product candidates, or the therapeutic
compounds used in combination with the Company's product candidates,
noncompetitive or obsolete.
Government Regulation
The Company's operations and products under development are subject to
extensive regulation by the FDA and other governmental authorities in the
United States and other governmental authorities in other countries.
The duration of the governmental approval process for marketing new
pharmaceutical substances, from the commencement of preclinical testing to the
receipt of a governmental final letter of approval for marketing a new
substance, varies with the nature of the product and with the country in which
such approval is sought. For entirely new drugs, the approval process could
take eight to ten years or more; however, for reformulations of existing
drugs, the process is typically shorter. In either case, the procedures
required to obtain governmental approval to market new drug products are
costly and time-consuming, requiring rigorous testing of the new drug product.
There can be no assurance that even after such time and expenditures,
regulatory approval will be obtained for any products developed by the
Company.
The steps required before a new human pharmaceutical product can be marketed
or shipped commercially in the United States include, in part, preclinical
testing, the filing of an Investigational New Drug ("IND") notice, the conduct
of clinical trials and the filing with the FDA of either a New Drug
Application ("NDA") for drugs or a Product License Application ("PLA") for
biologics.
In order to conduct the clinical investigations necessary to obtain eventual
regulatory approval, an applicant must file an IND with the FDA to permit the
shipment and use of the drug for investigational purposes. The IND sets forth,
in part, the results of preclinical (laboratory and animal) toxicology and
efficacy testing and the applicant's plans for clinical (human) testing. If
the FDA does not deny the exemption to ship or use the investigative drug or
place a "hold" on clinical testing within 30 days of the submission of the
IND, it becomes effective and clinical testing may begin after Institutional
Review Board approval of research involving human subjects.
Under the FDA's regulations, the clinical testing program required for
marketing approval of a new drug typically involves three clinical phases. In
Phase I, safety studies are generally conducted on normal, healthy human
volunteers to determine the maximum dosages and side effects associated with
increasing doses of the substance being tested. In Phase II, studies are
conducted on small groups of patients afflicted with a specific disease to
gain preliminary evidence of efficacy and to determine the common short-term
side effects and risks
12
<PAGE>
associated with the substance being tested. Phase III involves large-scale
trials conducted on disease-afflicted patients to provide statistical evidence
of efficacy and safety and to provide an adequate basis for product labeling.
Frequent reports are required in each phase and, if unwarranted hazards to
patients are found, the FDA may request modification or discontinuance of
clinical testing until further studies have been conducted. Phase IV testing
is conducted either to meet FDA requirements for additional information as a
condition of approval, or to expand market acceptance of the pharmaceutical
product.
Once clinical testing has been completed pursuant to an IND, the applicant
files an NDA or PLA with the FDA seeking approval for marketing the drug
product. The FDA reviews the NDA or PLA to determine if the drug is safe and
effective, and adequately labeled, and if the applicant can demonstrate proper
and consistent manufacture of the drug. The time required for FDA action on an
NDA or PLA varies considerably, depending on the characteristics of the drug,
whether the FDA needs more information than is originally provided in the NDA
or PLA and whether the FDA finds problems with the evidence submitted.
The facilities of each company involved in the manufacturing, processing,
testing, control and labeling must be registered with and approved by the FDA.
Continued registration requires compliance with GMP regulations. The FDA
conducts periodic establishment inspections to confirm continued compliance
with its regulations.
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to such matters as laboratory and
manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with the Company's
research and development work. Although the Company believes it is in
compliance with these laws and regulations in all material respects, there can
be no assurance that the Company will not be required to incur significant
costs to comply with environmental and other laws or regulations in the
future.
Employees
As of July 31, 1999, the Company had approximately 95 employees, 74 engaged
in scientific research and technical functions and 21 performing
administrative and clerical functions. Of the 95 employees, 28 hold Ph.D. or
M.D. degrees. The Company believes that its relationships with its employees
are good.
13
<PAGE>
Directors and Officers
Set forth below is certain information regarding the officers and directors of
the Company:
<TABLE>
<CAPTION>
Position with the
Name Age Company
------------------------------------------ --- -----------------------------------
<C> <C> <S>
Michael M. Goldberg, M.D.................. 40 Chairman of the Board of
Directors, and Chief Executive
Officer
Robert A. Baughman, Jr., Pharm.D., Ph.D... 50 Senior Vice President, Development
Lewis H. Bender........................... 40 Senior Vice President, Business
Development
Barry B. Kanarek, M.D., Ph.D.............. 52 Senior Vice President, Clinical
Affairs and Chief Medical Officer
Charles H. Abdalian, Jr. ................. 49 Vice President, Chief Financial
Officer and Secretary
Joseph D. Poveromo........................ 35 Controller and Chief Accounting
Officer
Steven Dinh, Ph.D......................... 44 Vice President, Research
John E. Smart, Ph.D....................... 56 Vice President, Director of Basic
Research
Shepard M. Goldberg....................... 44 Vice President, Operations
Jere E. Goyan, Ph.D. (1).................. 69 Director
Mark I. Greene, M.D., Ph.D. (2)........... 51 Director and scientific advisor
Peter Barton Hutt, Esq. (1)............... 64 Director
Howard M. Pack (1)(2)..................... 81 Director
Joseph R. Robinson, Ph.D. (2)............. 60 Director and scientific advisor
Robert J. Levenson........................ 58 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Michael M. Goldberg, M.D. has served as Chairman of the Board of Directors
since November 1991 and as Chief Executive Officer and a director of the
Company since August 1990. In addition, Dr. Goldberg served as President of
the Company from August 1990 to October 1995. Dr. Goldberg received a B.S.
degree from Rensselaer Polytechnic Institute and an M.D. from Albany Medical
College of Union University in 1982 and an MBA from Columbia University
Graduate School of Business. Pursuant to an employment agreement with the
Company, Dr. Goldberg is to serve as Chairman and Chief Executive Officer of
the Company and is to be nominated to serve as a member of the Board of
Directors.
Robert A. Baughman, Jr., Pharm.D., Ph.D. has been with the Company since
September 1991, as Senior Vice President since September 1993, Director of
Development since June 1994 and Vice President and Director, Research and
Development before then. Dr. Baughman holds a B.S. from Loyola University and
a Pharm.D. and a Ph.D. in pharmaceutical chemistry from the University of
California, San Francisco.
Lewis H. Bender has been with the Company since 1993, as Senior Vice
President of Business Development since April 1997, Vice President of Business
Development since October 1995 and Director of Business Development before
then. Mr. Bender received a B.S. degree and an M.S. in chemical engineering
from the Massachusetts Institute of Technology, an M.A. in international
studies from the University of Pennsylvania and an MBA from the Wharton School
of the University of Pennsylvania.
Barry B. Kanarek, M.D., Ph.D. joined the Company in May of 1998. From
January 1997 to March 1998, he was Vice President, Medical Operations for the
Americas at ClinTrials Research Inc. Before that he was with Glaxo-Wellcome,
most recently as Vice President of Medical Affairs, where he also served as
acting head of Medical Operations, sat on the U.S. site Operating Committee,
co-chaired the Product Strategy committee and acted as Chief Medical Officer
during the integration phase of the combination of Glaxo and Wellcome. Dr.
Kanarek received his M.D. and Ph.D. from the University of Salamanca in Spain.
Charles H. Abdalian, Jr. has been with the Company since April 1999. He was
previously Executive Vice President and Chief Financial Officer of ClinPath
Associates, Inc. during 1998, Vice President and Chief Financial Officer of
Del Laboratories, Inc. from 1997 to 1998, Chief Financial Officer of the
medical products manufacturing subsidiary of W.R. Grace & Co. from 1994 to
1997 and a partner with Coopers & Lybrand prior to 1994. Mr. Abdalian holds an
MBA from the Wharton School of the University of Pennsylvania.
14
<PAGE>
Joseph D. Poveromo, the Company's Controller and Chief Accounting Officer
since July 1994, has been with the Company since 1993. He was previously
Controller of a private pet food company and held senior accounting positions
with the public accounting firms of Marshall Granger & Company and Rayfield &
Licata. Mr. Poveromo received a B.B.A. degree in public accounting from Pace
University.
Steven Dinh, Ph.D. joined the Company in April of 1999. He was previously
Vice President and Chief Scientific Officer with Lavipharm Laboratories and
held various research positions in transdermal product development and basic
pharmaceutics research with Novartis Pharmaceuticals Corp. from 1997 to 1998,
with CIBA-Geigy Corporation from 1987 to 1996 and with E. I. DuPont de Nemours
& Co. from 1982 to 1987. Dr. Dinh holds a Sc.D. in Chemical Engineering from
the Massachusetts Institute of Technology.
John E. Smart, Ph.D. joined the Company in 1996 as Vice President, Director
of Research and has been Director of Basic Research since 1998. He was
previously the Vice President of Research at Creative Biomolecules, Inc., a
biopharmaceutical company. He received his Ph.D. in biochemistry and
biophysics from the California Institute of Technology and has over 20 years
of experience in academia and the health care industry.
Shepard M. Goldberg, has been with the Company as Vice President,
Operations, since April of 1998. He was previously President and owner of two
regional distribution businesses. He received a B.S. in electrical engineering
from Polytechnic Institute of N.Y. and an MBA from Adelphi University. Mr.
Goldberg is a first cousin of Michael M. Goldberg, M.D., Chairman and Chief
Executive Officer of the Company.
Jere E. Goyan, Ph.D. has been a director of the Company since 1992. Until
his retirement in 1999, he was President, Chief Operating Officer, and a
director of Alteon, Inc., a development stage pharmaceutical company. He
started at Alteon as Senior Vice President Research and Development in January
1993. He was previously a Professor of Pharmacy and Pharmaceutical Chemistry
and the Dean of the School of Pharmacy at the University of California, San
Francisco, and has served in various other academic, administrative and
advisory positions, including that of Commissioner of the FDA. He currently
serves as a director of the biopharmaceutical companies Atrix Laboratories
Inc., SciClone Pharmaceuticals and Boehringer Ingelheim.
Mark I. Greene, M.D., Ph.D. has been a director of the Company since 1995.
He has been the John Eckman Professor of Medical Science, School of Medicine
at the University of Pennsylvania for more than five years. He currently
serves as a director of Ribi ImmunoChem Research, Inc., a biopharmaceutical
company.
Peter Barton Hutt, Esq. has been a director of the Company since 1992. He
has been a partner for over five years at the law firm of Covington & Burling
in Washington, D.C., where he specializes in the practice of food and drug
law. He currently serves as a director of the biopharmaceutical companies
Interneuron Pharmaceuticals, Inc. and Sparta Pharmaceuticals, Inc.
Howard M. Pack has been a director of the Company since its inception in
1986 and served as Executive Vice President of Finance from the Company's
inception until his retirement in October 1988.
Joseph R. Robinson, Ph.D. has been a director of the Company since 1997. He
has been Professor of Pharmacy and Ophthalmology at the University of
Wisconsin for more than the past five years. He currently serves as a director
of Cima Laboratories, Inc., a pharmaceutical company.
Robert J. Levenson has been a director of the Company since 1998. He has
been Executive Vice President of First Data Corporation for more than the past
five years. He previously held positions as Senior Executive Vice President
and Chief Operating Officer of Medco Containment Services, Inc. and as Group
President of Automatic Data Processing, Inc. He currently serves as a director
of First Data Corporation, Superior Telecom, Inc. and Vestcom International,
Inc.
Dr. Sam Milstein departed from the Company as of January 1999. He had
previously served as the Company's President, Chief Scientific Officer and
Secretary. He was expected to serve as Chief Executive Officer of a subsidiary
investigating the use of novel drug design technologies for the treatment of
drug-resistant microbial infections. However, no work has commenced on this
project to date.
15
<PAGE>
Scientific Advisors
The Company's scientific advisors consult with the Company on developments
relating to current and future forms of drug delivery technology, chemistry,
gastro-intestinal physiology and protein structure. As a group, the scientific
advisors possess substantial experience in biomaterials, controlled release
and polymeric delivery systems, proteins, pharmaceutics, analytical techniques
and immunology. The scientific advisors also consult with the Company on
aspects of drug delivery product planning and feasibility studies and assist
Company scientists in establishing research priorities, provide guidance for
the Company's clinical evaluation programs, advise Company scientists of new
developments and alert the Company to potential collaborators. In addition,
the Company has funded various research projects and collaborations with a
number of its scientific advisors and it intends to continue to expand its
scientific collaborations with current and future scientific advisors.
None of the scientific advisors are employees of the Company. Scientific
advisors devote only a small portion of their time to the affairs of the
Company and have other commitments to, or consulting or advisory contracts
with, other institutions which may compete with their obligations to the
Company. The Company requires each of its scientific advisors to execute a
confidentiality agreement upon the commencement of his or her relationship
with the Company. The agreements generally provide that all confidential
information made known to the individual during the term of the relationship
shall be the exclusive property of the Company and shall be kept confidential
and not disclosed to third parties except in specified circumstances.
Scientific advisors receive annual compensation, are reimbursed for their
expenses for each meeting attended and are granted stock options on a case-by-
case basis. Drs. Greene and Robinson also serve as directors of the Company.
Set forth below are the names, positions and areas of expertise of the
Company's scientific advisors.
<TABLE>
<CAPTION>
Name and Position Area of Expertise
----------------- -----------------
<C> <S>
Mark I. Greene, M.D., Ph.D. Immunology, computer modeling
Professor of Medicine,
Department of Pathology,
School of Medicine
University of Pennsylvania
Joseph R. Robinson, Ph.D. Mucoadhesives, pharmaceutics and
Professor, School of Pharmacy gastrointestinal physiology
University of Wisconsin
Garret FitzGerald, M.D. Anticoagulants and
Robinette Professor of Cardiovascular antithrombotics and clinical
Medicine, Director, Center for research
Experimental Therapeutics
Director, Clinical Research Center
University of Pennsylvania
Scott Berkowitz, M.D Disorders of hemostasis and
Assistant Clinical Professor of Medicine thrombosis; clinical trial design
Duke University
Elazer Edelman, M.D., Ph.D Indicators for
Director anticoagulant/antithrombotic
Harvard-MIT Biomedical Engineering therapy
Center
Robert Linhardt, Ph.D. Structure, activity, analysis and
Professor synthesis of complex
College of Pharmacy carbohydrates
University of Iowa
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Name and Position Area of Expertise
----------------- -----------------
<S> <C>
Sam Money, M.D. Indicators for nonclinical antithrombotic modeling
Head of Vascular Surgery
Ochsner Clinic
Russell Hull, M.D. Anticoagulants and antithrombotic and clinical research
Professor of Medicine
University of Calgary
Joshua Korzenik, M.D. Gastroenterology and clinical research
Assistant Professor of
Gastroenterology
Washington University School of Medicine
Victor J. Marder, M.D. Anticoagulants and antithrombotics and clinical research
Director of Vascular Medicine
University of California at Los Angeles
</TABLE>
ITEM 2. Properties
The Company currently leases approximately 68,000 square feet of office
space at 765 Old Saw Mill River Road, Tarrytown, New York for use as executive
offices and laboratories. The current lease expires in September 2007 with a
ten year extension at then-current rates at the Company's option.
ITEM 3. Legal proceedings
The Company is not party to any litigation that is expected to have a
material effect on the operations or business of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the over-the-counter market and
prices are quoted on the Nasdaq National Market system under the symbol EMIS.
The following sets forth the range of high and low bid prices for the Common
Stock for the periods indicated, as reported by Nasdaq.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31, High Low
-------------------------- ---- ----
<S> <C> <C>
1998
First quarter........................................... $ 24 $15 3/8
Second quarter.......................................... 23 14 3/4
Third quarter........................................... 21 15 1/2
Fourth quarter.......................................... 17 5/8 10
1999
First quarter........................................... $10 1/4 $ 5
Second quarter.......................................... 19 1/8 7 1/8
Third quarter........................................... 18 3/8 7 1/2
Fourth quarter.......................................... 10 1/2 6 1/2
2000
First quarter (through October 6)....................... $18 1/8 $ 7 9/16
</TABLE>
17
<PAGE>
As of October 6, 1999 there were approximately 300 stockholders of record
and 12,152,806 shares of Common Stock outstanding. The closing price for the
Company's Common Stock on October 6, 1999 was $15.00.
The Company has never paid cash dividends and does not intend to pay cash
dividends in the foreseeable future. The Company intends to retain earnings,
if any, to finance the growth of its business.
ITEM 6. Selected Financial Data
The following selected financial data for the five years ended July 31, 1999
have been derived from the financial statements of the Company and notes
thereto, which have been audited by independent accountants. There were no
dividends declared or paid by the Company during the five years ended July 31,
1999.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31,
--------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
Statement of Operations Data:
Revenue.......................... $ 33 $ 3,131 $ 5,401 $15,868 $ 10,180
------- ------- ------- ------- --------
Costs and expenses:
Research and development........ 5,802 6,605 7,724 15,190 22,850
Acquisition of in-process
research and development....... -- -- -- -- 9,686
Loss in Ebbisham Ltd............ -- -- 2,550 4,044 3,092
General and administrative...... 2,404 3,337 3,416 5,344 6,051
------- ------- ------- ------- --------
Total costs and expenses....... 8,206 9,942 13,690 24,578 41,679
------- ------- ------- ------- --------
Operating loss................... (8,173) (6,811) (8,289) (8,710) (31,499)
Other income and expense......... 389 703 968 1,644 817
------- ------- ------- ------- --------
Net loss......................... $(7,784) $(6,108) $(7,321) $(7,066) $(30,682)
======= ======= ======= ======= ========
Net loss per share--Basic and
diluted......................... $ (1.03) $ (0.72) $ (0.77) $ (0.66) $ (2.63)
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
July 31,
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and
marketable securities........... $ 5,620 $18,237 $33,690 $34,828 $17,805
Working capital.................. 5,173 17,799 31,323 31,457 13,360
Total assets................... 7,549 20,039 36,897 53,690 38,476
Long-term liabilities............ 55 45 35 10,598 22,050
Accumulated deficit.............. (36,628) (42,736) (50,057) (57,123) (87,805)
Stockholders' equity............. 6,899 19,267 33,398 31,281 11,287
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Emisphere Technologies, Inc. is a biopharmaceutical company specializing in
the oral delivery of therapeutic macromolecules and other compounds that are
not currently deliverable by oral means. Since its inception in 1986, the
Company has devoted substantially all of its efforts and resources to research
and development conducted on its own behalf and through collaborations with
corporate partners and academic research institutions. The Company has no
product sales to date. The major sources of the Company's working capital have
been proceeds from various public and private equity and debt financings,
reimbursement of expenses and other payments from corporate partners, and
income earned on the investment of available funds. Neither inflation nor
seasonality significantly affect the Company's operations.
18
<PAGE>
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
The Company's contract research revenues were $10.2 million in fiscal 1999,
a decrease of $5.7 million, or 35.8%, compared to fiscal 1998. The decrease
was the result of the Company's discontinuing its joint venture with Elan for
the development of oral heparin and the completion of the research and
development funding portion of the ongoing Lilly collaboration. In addition,
revenues in fiscal 1998 included a $4.0 million milestone payment from Lilly.
The Company received no milestone payments in fiscal 1999.
Total operating expenses were $41.7 million in fiscal 1999, an increase of
$17.1 million, or 70%, compared to fiscal 1998. The details of the increase
are as follows:
Research and development costs were $22.9 million in fiscal 1999, an
increase of $7.7 million, or 50%, compared to fiscal 1998. This increase is
mainly attributable to increased costs related to oral heparin Phase II
clinical studies, costs associated with initiating Phase III clinical trials,
including purchases of heparin, contract manufacturing of the Company's
carriers, and a number of toxicology studies. In addition, during fiscal 1999,
the Company expanded its laboratory and analytical capabilities in connection
with its oral heparin development program and its collaboration with Novartis.
This resulted in an increase in scientific personnel and associated laboratory
supply costs. The Company also experienced an increase in rental expense from
a lease of laboratory and administrative office space entered into in fiscal
1998. The Company expects that its research and development spending will
increase as its liquid oral heparin enters into Phase III clinical trials in
the fourth quarter of calendar 1999.
The $9.7 million non-cash charge incurred in fiscal 1999 for acquired in-
process research and development is related to the Company's acquisition of
Elan's ownership interest in Ebbisham, Ltd. (the Company's former joint
venture with Elan). The loss in Ebbisham was $3.1 million in fiscal 1999, a
decrease of $1.0 million, or 24%, compared to fiscal 1998. This decrease is
primarily attributable to the lower level of joint development efforts with
Elan preceding the change of control. All oral heparin development expenses
are now classified as research and development expenses.
General and administrative expenses were $6.1 million in fiscal 1999, an
increase of $0.7 million, or 13%, compared to fiscal 1998. This increase is
primarily the result of an increase in personnel and related expenses
associated with an increase in management and administrative staff positions,
severance in connection with the departure of a senior executive officer,
contract systems consulting services, and real estate taxes in connection with
the new facility.
As a result of these factors, the Company's operating loss was $31.5 million
in fiscal 1999, an increase of $22.8 million, compared to an operating loss of
$8.7 million in fiscal 1998.
The Company's other income and expenses were $0.8 million in fiscal 1999, a
decrease of $0.8 million, or 50%, from fiscal 1998. This decrease is primarily
the result of interest expense on the Company's senior convertible notes and a
$20.0 million note payable.
Based on the above factors, the Company sustained a net loss of $30.7
million in fiscal 1999, an increase of $23.6 million, compared to a net loss
of $7.1 million in fiscal 1998.
Fiscal 1998 Compared to Fiscal 1997
The Company's contract research revenues were $15.9 million in fiscal 1998,
an increase of $10.5 million, compared to $5.4 million fiscal 1997. The
increase was the result of the Company receiving research and development
funding from its collaborators over a greater part of the fiscal year.
Total operating expenses were $24.6 million in fiscal 1998, an increase of
$10.9 million, or 80%, compared to fiscal 1997. The details of the increase
are as follows:
19
<PAGE>
Research and development costs were $15.2 million in fiscal 1998, an
increase of $7.5 million, or 97%, compared to fiscal 1997. This increase is
mainly attributable to increased personnel and laboratory supply costs in
connection with the collaborations with Novartis, Lilly and the ongoing
clinical work for heparin. The Company also increased its funding of outside
consultants and universities engaged to conduct studies to help advance the
Company's scientific research efforts, perform services related to the
manufacturing of the Company's carriers and consult on the Company's ongoing
clinical studies with heparin. The Company also experienced an increase in
rental expense in connection with a new lease for laboratory space.
The loss in Ebbisham was $4.0 million in fiscal 1998, an increase of $1.5
million, or 59%, compared to fiscal 1997. This increase is attributable to
increased costs associated with ongoing clinical development of oral heparin.
General and administrative expenses were $5.3 million in fiscal 1998, an
increase of $1.9 million, or 56%, compared to fiscal 1997. This increase is
primarily the result of an increase in contract system consulting services in
connection with an ongoing information technology project. The Company also
experienced an increase in rental expense in connection with payments for a
new lease for administrative office space and an increase in personnel and
related expenses associated with an increase in administrative staff
positions. This increase was partially offset by a decrease in legal and
professional fees paid in connection with the finalization of the Ebbisham
joint venture and the agreement with Lilly during fiscal 1997. In connection
with the relocation of its operations, the Company incurred a charge of $0.3
million, which represented the write-down of leasehold improvements on its old
facility.
As a result of these factors, the Company's operating loss was $8.7 million
in fiscal 1998, an increase of $0.4 million, or 5%, compared to fiscal 1997.
The Company's other income and expense was $1.6 million in fiscal 1999, an
increase of $0.7 million, or 70%, compared to fiscal 1997. This increase was
primarily the result of increased returns on the Company's larger investment
portfolio. This increase was partially offset by interest expense related to
the Company's $13.5 million senior convertible notes issued in fiscal 1998.
Based on the above factors, the Company sustained a net loss of $7.1 million
in fiscal 1998, a decrease of $0.3 million or 3%, compared to fiscal 1997.
Liquidity and Capital Resources
As of July 31, 1999, the Company had working capital of $13.4 million. Total
cash, cash equivalents and marketable securities were $17.8 million, a
decrease of $17.0 million compared to July 31, 1998. The decrease was
primarily due to the increased rate of spending on the oral heparin Phase II
study and Phase III clinical development costs, including those incurred by
its former joint venture, and capital expenditures during the fiscal year. The
Company also repaid $1.1 million of its outstanding senior convertible notes
during fiscal 1999 and repaid the outstanding balance of $2.7 million in
September 1999.
The Company's operations over the last three years have been financed
primarily with $26.8 million in equity financing, $13.5 million in debt
financing and $31.4 million in research and development funding and milestone
payments.
In connection with the termination of the joint venture, the Company issued
a $20.0 million, zero coupon note payable in July 2006 to an affiliate of
Elan. The note accrues interest at 15%, compounded semi-annually, and requires
no periodic cash interest payments. The $20.0 million principal amount, along
with accrued interest, can be paid in part or in full, at the Company's
election, after a new drug application for oral heparin has been filed with
the FDA. Under certain circumstances, the Company has the option to require
Elan to subscribe to Emisphere common stock at then-current market prices.
20
<PAGE>
As part of the termination of the Ebbisham joint venture, Elan committed to
provide the Company with up to $15.0 million in loans, subject to various
conditions, including the Company attaining certain liquid oral heparin Phase
III milestones by October 31, 1999. The Company does not expect to meet these
milestones by that date or to receive any loans from Elan.
In September 1999, Novartis initiated a Phase I clinical study of a capsule
form of one of their protein macro molecules using the Company's oral drug
delivery technology. Novartis is funding the study, and may elect to enter
into a pre-negotiated licensing agreement with the Company at any time until
March 2000. If this election is made, Novartis will be required to pay the
Company a predetermined milestone and purchase $5.0 million of common stock at
a previously negotiated market-based per share price, subject to the Company's
approval. The Novartis research collaboration will expire in December 1999, at
which time its quarterly research and development funding obligations will
end. Emisphere will receive royalties on sales of any oral products that may
result from the collaboration.
Novartis has an option to develop a second compound using the Company's
technology which, if exercised, would extend Novartis' research funding
obligation and result in a predetermined milestone payment to the Company.
Further development of a product using the second compound would result in a
second royalty-bearing license agreement and milestone payments and equity
investments similar to those for the first protein macromolecule.
In March 1998, Lilly executed license agreements for two proteins and
Emisphere received a $4.0 million milestone payment in connection with the
licenses. The research and development funding portion of the ongoing Lilly
collaboration was completed in February 1999. The Company has supplied Lilly
with carriers for both therapeutic proteins. These carriers are undergoing
preclinical evaluations at Emisphere and Lilly. During fiscal 1999, Lilly
suspended development of one of the proteins pending further review by them of
the injectable version of the protein. The Company is awaiting further
direction from Lilly with respect to both compounds. The Company could receive
future payments in the event certain milestones are achieved, and royalty
payments if a commercial product results from the collaboration.
During the two fiscal years ending July 31, 1999, the Company spent $12.3
million in leasehold improvements and scientific equipment, (approximately
$3.7 million and $8.6 million during fiscal 1999 and 1998, respectively).
These purchases were in connection with the build-out of the Company's newly
leased research and administrative facility in Tarrytown, New York, as well as
the acquisition of laboratory equipment to support its increased research
activities. Purchases of laboratory equipment included pilot scale
manufacturing equipment to enable the development of tablet and capsule dosage
form prototypes. In connection with the new lease, the lessor reimbursed the
Company $1.3 million for leasehold improvements. With the completion of this
facility, the Company expects capital expenditure levels to decrease in fiscal
2000 to below $2.0 million.
The Company expects to incur a substantial increase in liquid oral heparin
clinical development expenses in fiscal 2000 as the product enters into Phase
III clinical trials, the most expensive phase of the clinical development
process, and will no longer receive funding from its former joint venture
partner, Elan. As a result, the Company expects to continue to incur
increasing operating losses and will require substantial resources to continue
its liquid oral heparin clinical development program and ongoing research and
development efforts.
In order to assure funding for its future operations, the Company will need
to obtain a marketing partner for its oral heparin product and may be required
to obtain financing for Phase III development on its own until a partner is
found. However, no assurances can be given that the Company will be successful
in attracting a
21
<PAGE>
marketing partner or in raising additional capital. In the event that the
Company is unable to raise adequate financing before December 1999, management
would be required to significantly curtail operations, including delaying the
commencement of oral heparin Phase III clinical trials and reducing levels of
research and development and administrative activities. In the event that a
marketing partner for the oral heparin product is not found, the Company
expects that cash, cash equivalents, and marketable securities on-hand,
combined with and contingent upon either additional financing and/or delaying
clinical trials and curtailment of operations, will be adequate to meet its
liquidity requirements into the second quarter of fiscal 2001.
Year 2000 Compliance
The "Year 2000" problem relates to many currently installed computers,
software, and other equipment that are not capable of distinguishing 21st
century dates from 20th century dates. As a result, some systems used by many
companies, in a very wide variety of applications, will experience operating
difficulties unless they are modified, upgraded, or replaced to adequately
process information involving, related to or dependent upon the century
change. If a business system used by the Company or a third party dealing with
the Company fails because of the inability of the business system to properly
read a 21st century date, the results could have a material adverse effect on
the Company.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 business systems failures and has established
a team to address Year 2000 risk. The team has reviewed the Company's internal
infrastructure and believes that it has identified substantially all of the
major business systems used in connection with its internal operations. The
Company has completed the process of identifying and correcting the major
business systems that needed to be modified, upgraded, or replaced. Costs
incurred to date to correct Year 2000 problems have not been material to our
results of operations.
The Company also recognizes the risk that suppliers of products, services,
and collaborators with whom the Company transacts business on a worldwide
basis may not comply with Year 2000 requirements. The Company has initiated
formal communications with significant suppliers and collaborators to
determine the extent to which the Company is vulnerable if these third parties
fail to remediate their own Year 2000 issues. The review is ongoing and the
Company is unable to determine, at this time, the probability that any
material supplier or collaborator will not be able to correct any Year 2000
problem in a timely manner. In the event any such third parties cannot provide
the Company with products, services, or continue the collaborations with the
Company, the Company's results of operations could be materially adversely
affected.
Based on the above, the Company does not believe it needs to develop a
comprehensive contingency plan with respect to the Year 2000 problem. The
Company will continue to monitor its own business systems and, to the extent
possible, evaluate the business systems of its third party suppliers and
collaborators to ensure progress on this critical matter. However, if the
Company identifies significant risk related to the Year 2000 compliance, or
progress deviates from anticipated timelines, the Company will develop
contingency plans as deemed necessary at that time.
Impact of the Future Adoption of Recently Issued Accounting Standards
Management believes that future adoption of recently issued accounting
standards will not have a material impact on the Company's financial
statements.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
At July 31, 1999, the Company did not hold any market risk sensitive
instruments.
ITEM 8. Financial Statements and Supplementary Data
The financial statements and financial statement schedules are set forth
starting on page F-1 hereof.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
22
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to the Company's directors and executive officers
is contained in Part I hereof.
Based solely on a review of the reports under Section 16(a) of the Exchange
Act and representations furnished to the Company during the last fiscal year,
the Company believes that each of the persons required to file such reports is
in compliance with all applicable filing requirements.
ITEM 11. Executive Compensation
The following table sets forth information regarding the aggregate
compensation paid by the Company for the three fiscal years ended July 31,
1999 to the Company's Chief Executive Officer and the four other most highly
compensated executive officers whose total compensation exceeded $100,000
during the last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Fiscal Annual Stock Other
Name and Principal Position Year Compensation (1) Option Grants (2)
--------------------------- ------ --------------- -------------- -------
<S> <C> <C> <C> <C>
Michael M. Goldberg, M.D.... 1999 $369,215 7,445 shares $10,000
Chairman of the Board and 1998 388,506 6,687 shares 9,792
Chief Executive Officer 1997 359,880 4,985 shares(3) 4,750
Robert A. Baughman, Jr.,
Pharm.D, Ph.D.............. 1999 $212,260 79,022 shares $ 8,907
Senior Vice President and 1998 175,000 2,844 shares 7,000
Director of Development 1997 195,337 22,724 shares 4,750
Lewis H. Bender............. 1999 $180,250 3,427 shares $ 7,420
Senior Vice President, 1998 180,096 3,052 shares 7,000
Business Development 1997 144,479 51,843 shares 2,748
Barry B. Kanarek, M.D.,
Ph.D. (4).................. 1999 $273,000 5,071 shares $ 1,667
Senior Vice President,
Clinical 1998 65,625 126,611 shares --
Affairs and Chief Medical
Officer
Charles H. Abdalian, Jr.
(5)........................ 1999 $ 75,410 100,708 shares $ --
Vice President,
Chief Financial Officer and
Secretary
</TABLE>
- --------
(1) Annual compensation consists solely of base salary except that (i) Drs.
Goldberg and Baughman and Mr. Bender were also paid in lieu of earned
vacations $0, $15,385 and $0, respectively, during fiscal 1999, $40,190,
$0 and $10,096, respectively, during fiscal 1998 and $31,280, $22,212 and
$0, respectively, during fiscal 1997 and (ii) the Company forgave loans in
the amounts of $48,000 and $49,682 to Dr. Kanarek and Dr. Baughman,
respectively, which were originally made in connection with each joining
the Company. As to each individual named, the aggregate amounts of all
perquisites and other personal benefits, securities and property not
included in the summary compensation table above or described below do not
exceed the lesser of $50,000 or 10% of their annual compensation.
(2) Other compensation consists solely of matching contributions made by the
Company under a defined contribution plan available to substantially all
employees.
(3) Does not include options to purchase 562,315 shares of common stock
granted to Dr. Goldberg in 1992 in connection with his employment
agreement. During fiscal 1997, the Board of Directors deemed 262,315 of
the options to have been granted under the Company's 1991 Stock Option
Plan and 300,000 of the options to have been granted under the Company's
1995 Non-Qualified Stock Option Plan. The Board also extended from July
1997 to July 2002 the expiration dates for such options.
(4) Dr. Kanarek became an executive officer of the Company in June 1998.
(5) Mr. Abdalian became an executive officer of the Company in April 1999.
23
<PAGE>
The following table sets forth certain information relating to stock option
grants to the executive officers named above during fiscal 1999.
STOCK OPTION GRANTS DURING THE FISCAL YEAR ENDED JULY 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Number of Value at Assumed
Shares Percent of Total Annual Rates of
Underlying Option Shares Stock Price
Options Granted Granted to Exercise Price Expiration Appreciation for
Name (1) Employees (2) per Share (1) Date Option Term
- ---- --------------- ---------------- -------------- ---------- ---------------------
5% 10%
---------------------
<S> <C> <C> <C> <C> <C> <C>
Michael M. Goldberg..... 1,429 * $ 9.69 2/1/99 $ 2,443 $ 2,443
2,342 * 7.25 5/1/99 2,997 2,997
2,136 * 6.59 8/1/99 2,443 2,443
1,538 * 9.00 11/1/99 2,443 2,443
Robert A. Baughman,
Jr. ................... 75,000 10.5% $ 9.50 12/14/08 $ 448,087 $ 1,135,542
677 * 9.69 2/1/99 1,158 1,158
1,099 * 7.25 5/1/99 1,406 1,406
1,157 * 6.59 8/1/99 1,324 1,324
1,089 * 9.00 11/1/99 1,731 1,731
Lewis H. Bender......... 677 * $ 9.69 2/1/99 $ 1,158 $ 1,158
905 * 7.25 5/1/99 1,158 1,158
1,073 * 6.59 8/1/99 1,228 1,228
772 * 9.00 11/1/99 1,228 1,228
Barry B. Kanarek........ 870 * $ 9.69 2/1/99 $ 1,489 $ 1,489
1,163 * 7.25 5/1/99 1,489 1,489
1,301 * 6.59 8/1/99 1,489 1,489
1,737 * 9.00 11/1/99 2,759 2,759
Charles H. Abdalian,
Jr. ................... 100,000 13.9% $10.63 3/23/09 $ 668,201 $ 1,693,351
708 * 9.00 11/1/99 1,125 1,125
</TABLE>
- --------
*Less than 1%
(1) Options that expired or will expire in 1999 were all granted under the
Company's Employee Stock Purchase Plan or Non-Qualified Employee Stock
Purchase Plan at exercise prices equal to the lower of the fair market
value on the date of grant or 85% of the fair market value on the date of
exercise. Options expiring in 2008 and 2009 were all granted under the
Company's 1991 Stock Option Plan at prices equal to the fair market value
on the date of grant. The number of shares and the exercise price per
share set forth for the options expiring on November 1, 1999 assume that
the closing price on the date of exercise will be no lower than $10.59 per
share.
(2) The total number of option shares granted during the 1999 fiscal year to
employees includes 100,373 shares under the Company's Employee Stock
Purchase Plan or Non-Qualified Employee Stock Purchase Plan and 603,375
shares under the Company's 1991 Stock Option Plan.
24
<PAGE>
The following table sets forth information as to the exercise of options
during fiscal 1999 and the number and value of unexercised options held by the
executive officers named above as of July 31, 1999.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Exercises During Shares Underlying Value of Unexercised
the Fiscal Year Unexercised Options In-the-Money Options (1)
------------------------------ --------------------------- -------------------------
Number of
Name Shares Acquired Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael M. Goldberg..... 2,161 $ 4,862(2) 1,483,353(7) 150,000 $ 1,535 --
2,631 2,863(3)
2,639 30,283(4)
1,505 15,404(4)
1,429 10,092(5)
2,342 4,099(6)
Robert A. Baughman,
Jr..................... 822 $ 1,850(2) 160,268 50,000 $11,635 --
1,064 1,158(3)
677 4,781(5)
1,099 1,923(6)
Lewis H. Bender......... 1,085 $ 2,441(2) 80,576 61,400 $56,342 $8,400
1,064 1,158(3)
677 4,781(5)
905 1,583(6)
Barry B. Kanarek........ 1,611 $ 1,753(3) 25,000 100,000 -- --
870 6,144(5)
1,163 2,035(6)
Charles H. Abdalian,
Jr..................... -- -- -- 100,000 -- --
</TABLE>
- --------
(1) Based on a closing price of $7.50 on July 31, 1999 on the Nasdaq National
Market.
(2) Based on a closing price of $9.69 on August 3, 1998, the date of exercise,
on the Nasdaq National Market.
(3) Based on a closing price of $7.25 on November 2, 1998, the date of
exercise, on the Nasdaq National Market.
(4) Based on a closing price of $13.125 on December 28, 1999, the date of
exercise, on the Nasdaq National Market.
(5) Based on a closing price of $16.75 on February 1, 1999, the date of
exercise, on the Nasdaq National Market.
(6) Based on a closing price of $9.00 on May 3, 1999, the date of exercise, on
the Nasdaq National Market.
(7) Includes 130,000 shares with respect to which Dr. Goldberg has transferred
options to members of his family and with respect to which Dr. Goldberg
disclaims beneficial interest.
Employment Agreements
The Company has entered into an employment agreement with Michael M.
Goldberg expiring on July 31, 2000. Pursuant to the agreement, Dr. Goldberg is
to serve as Chairman and Chief Executive Officer of the Company at an annual
salary of $391,400 for the 2000 fiscal year and is to be nominated to serve as
a member of the Board of Directors. Also pursuant to the agreement, Dr.
Goldberg was granted an option to purchase 750,000 shares of the Common Stock
at an exercise price of $8.625 per share.
The agreement provides that, upon termination by the Company either without
cause or for any reason following a Change of Control (as defined in the
agreement) or upon termination by Dr. Goldberg following an uncured breach or
bankruptcy by the Company, the Company will make severance payments equal to
the greater of the compensation payable under the agreement from the date of
termination to July 31, 2001 or one year's compensation under the agreement.
25
<PAGE>
Sam J. Milstein served as President, Chief Scientific Officer and Secretary
of the Company until January 1999. The Company paid Dr. Milstein $124,064 for
his service as an officer of the Company through January 4, 1999 and paid or
accrued for the payment of $489,309 to Dr. Milstein in connection with his
departure from the Company.
Compensation of Directors
Directors receive no cash compensation in their capacity as directors.
Directors who are not employees of the Company receive, pursuant to the
Company's Stock Option Plan for Outside Directors (the "Directors Plan"),
options to purchase shares of the Common Stock. Messrs. Hutt and Pack and Drs.
Goyan and Greene have each received an initial option to purchase 70,000
shares under the Directors Plan in effect prior to January 29, 1997. Under the
Directors Plan as currently in effect, Dr. Robinson and Mr. Levenson have each
received an initial option to purchase 35,000 shares and Messrs. Hutt and Pack
and Dr. Goyan have each received an additional option to purchase 21,000
shares. The exercise prices are $13.00 per share for the initial options
granted to Messrs. Hutt and Pack and Dr. Goyan, $8.625 for the initial option
granted to Dr. Greene, $23.50 for the initial option granted to Dr. Robinson,
$6.125 for the initial option granted to Mr. Levenson and $13.75 for the
additional options granted to Messrs. Hutt and Pack and Dr. Goyan. In the
event the holder of an option ceases to serve as a director of the Company,
the option may be exercised with respect to the fully vested shares within six
months thereafter and will terminate immediately with respect to all unvested
shares.
In addition, for each meeting of the Board or a committee thereof attended,
directors have a right to receive, pursuant to the Directors Deferred
Compensation Stock Plan, a number of shares of the Common Stock, based on the
closing price of the Common Stock on the date of the meeting and an amount
determined by the Board as compensation for the meeting. For meetings attended
during the 1999 fiscal year, Drs. Goyan, Greene and Robinson and Messrs.
Levenson and Pack each earned the right to receive 487 shares and Mr. Hutt
earned the right to receive 343 shares.
During the 1999 fiscal year Dr. Robinson was granted, pursuant to a
consulting agreement with the Company, an option to purchase 30,000 shares of
the Common Stock for $10.00 per share.
26
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of October 6, 1999,
except as noted, regarding the beneficial ownership of the Common Stock by (i)
each person or group known to the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each director and nominee for
director of the Company, (iii) each executive officer of the Company named
below and (iv) all directors and executive officers of the Company as a group.
Except as otherwise specified, the named beneficial owner has sole voting and
investment power over the shares listed.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Percent of
Name and Address of Beneficial Owner (1) Ownership (2) Class
- ---------------------------------------- -------------------- ----------
<S> <C> <C>
Amerindo Investment Advisors Inc. and
affiliates (3)............................... 1,065,000 8.8%
One Embarcardero Center, Suite 2300
San Francisco, California 94111-3162
Elan International Services Ltd. ............ 940,000 7.7%
102 St James Court
Flatts Smiths FL04
Bermuda
SAFECO Corporation........................... 856,935 7.1%
SAFECO Plaza
Seattle, Washington 98185
Sam J. Milstein, Ph.D........................ 710,246 5.5%
105 Willow Avenue
Larchmont, New York 10538
Kenneth Greif................................ 674,706 5.4%
1270 Avenue of the Americas
New York, New York 10019
Michael M. Goldberg, M.D. ................... 1,405,267(4) 10.4%
Howard M. Pack............................... 174,363 1.4%
Jere E. Goyan, Ph.D. ........................ 84,000 *
Peter Barton Hutt, Esq. .................... 84,000 *
Mark I. Greene, M.D., Ph.D. ................. 77,000 *
Joseph R. Robinson, Ph.D. ................... 46,000 *
Robert J. Levenson........................... 15,000(5) *
Robert A. Baughman, Jr., Pharm.D., Ph.D. .... 164,968 1.3%
Lewis H. Bender ............................. 85,705 *
Barry B. Kanarek, M.D., Ph.D. ............... 28,150 *
Charles H. Abdalian, Jr. .................... -- --
All directors and executive officers as a
group (11 persons).......................... 2,164,453(4)(5) 15.3%
</TABLE>
- --------
*Less than 1%
(1) Unless otherwise specified, the address of each beneficial owner is c/o
the Company, 765 Old Saw Mill River Road, Tarrytown, New York 10591.
27
<PAGE>
(2) The number of shares set forth for Dr. Milstein and Mr. Greif and for each
director and executive officer of the Company and for Dr. Milstein
includes the following number of shares with respect to which such
individual has the right, exercisable within 60 days, to acquire
beneficial ownership upon exercise of options granted by the Company:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Dr. Milstein.................................................... 708,051
Mr. Greif....................................................... 244,706
Dr. Goldberg.................................................... 1,353,353
Mr. Pack........................................................ 84,000
Dr. Goyan....................................................... 84,000
Mr. Hutt........................................................ 84,000
Dr. Greene...................................................... 77,000
Dr. Robinson.................................................... 46,000
Mr. Levenson.................................................... 7,000
Dr. Baughman.................................................... 160,268
Mr. Bender...................................................... 80,176
Dr. Kanarek..................................................... 25,000
All directors and executive officers as a group................. 2,000,797
</TABLE>
(3) Based on a Schedule 13G/A filed February 12, 1999, Amerindo Investment
Advisors Inc., a California corporation, Amerindo Investment Advisors,
Inc., a Panama corporation, Alberto W. Vilar and Gary A. Tanaka share
voting and dispositive power with respect to 1,065,000 shares.
(4) Does not include 130,000 shares with respect to which members of Dr.
Goldberg's family have the right to acquire beneficial ownership upon
exercise of options and with respect to which Dr. Goldberg disclaims
beneficial ownership.
(5) Includes 1,000 shares held by the Robert J. and Mira Levenson Family
Foundation, with respect to which shares Mr. Levenson disclaims beneficial
ownership.
ITEM 13. Certain Relationships and Related Transactions
None of the transactions, business relationships and indebtedness required
to be described by this Item are applicable to the Company.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) A list of the financial statements filed as a part of this report is set
forth on page F-1 hereof. A list of the exhibits filed as a part of this
report is set forth in the Exhibit Index starting immediately after the
financial statements.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Company
filed a Current Report on Form 8-K dated July 2, 1999 reporting Item 2
Acquisition or Disposition of Assets and including financial statements and
pro forma financial information that was filed by amendment on September 14,
1999.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: October 12, 1999
Emisphere Technologies, Inc.
/s/ Michael M. Goldberg
by:__________________________________
Michael M. Goldberg, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Michael M. Goldberg Director, Chairman of October 12,
_____________________________________ the Board and Chief 1999
Michael M. Goldberg, M.D. Executive Officer
/s/ Jere E. Goyan Director October 12,
_____________________________________ 1999
Jere E. Goyan, Ph.D
/s/ Peter Barton Hutt Director October 12,
_____________________________________ 1999
Peter Barton Hutt
/s/ Howard M. Pack Director October 12,
_____________________________________ 1999
Howard M. Pack
/s/ Mark I. Greene Director October 12,
_____________________________________ 1999
Mark I. Greene, M.D., Ph.D.
/s/ Joseph R. Robinson Director October 12,
_____________________________________ 1999
Joseph R. Robinson, Ph.D.
/s/ Robert J. Levenson Director October 12,
_____________________________________ 1999
Robert J. Levenson
/s/ Charles H. Abdalian, Jr. Vice President, Chief October 12,
_____________________________________ Financial Officer and 1999
Charles H. Abdalian, Jr. Secretary
/s/ Joseph D. Poveromo Controller and Chief October 12,
_____________________________________ Accounting Officer 1999
Joseph D. Poveromo
29
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
Index
<TABLE>
<CAPTION>
Emisphere Technologies, Inc. Page(s)
- ---------------------------- -----------
<S> <C>
Report of Independent Accountants.................................. F-2
Financial Statements:
Balance Sheets as of July 31, 1999 and 1998...................... F-3
Statements of Operations for the fiscal years ended July 31,
1999, 1998 and 1997............................................. F-4
Statements of Cash Flows for the fiscal years ended July 31,
1999, 1998 and 1997............................................. F-5
Statements of Stockholders' Equity for the fiscal years ended
July 31, 1999, 1998 and 1997.................................... F-6
Notes to Financial Statements.................................... F-7 - F-20
<CAPTION>
Ebbisham Limited
- ----------------
<S> <C>
Report of Independent Accountants.................................. F-21
Financial Statements:
Balance Sheet as of July 31, 1998................................ F-22
Statements of Operations for the period from August 1, 1998 to
July 2, 1999, the fiscal year ended July 31, 1998, the period
from September 26, 1996 (inception) to July 31, 1997, and the
cumulative period from September 26, 1996 (inception) to July 2,
1999............................................................ F-23
Statements of Stockholders' Deficit for the cumulative period
from September 26, 1996 (inception) to July 2, 1999 including
the period from August 1, 1998 to July 2, 1999, the fiscal year
ended July 31, 1998, and the period from September 26, 1996
(inception) to July 31, 1997.................................... F-24
Statements of Cash Flows for the period from August 1, 1998 to
July 2, 1999, the fiscal year ended July 31, 1998, the period
from September 26, 1996 (inception) to July 31, 1997, and the
cumulative period from September 26, 1996 (inception) to July 2,
1999............................................................ F-25
Notes to Financial Statements.................................... F-26 - F-28
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Emisphere Technologies, Inc. :
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Emisphere Technologies, Inc., at
July 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1999 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
September 30, 1999
F-2
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
BALANCE SHEETS
July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents....................... $ 11,461,126 $ 21,358,308
Marketable securities........................... 6,343,515 13,469,733
Receivable due from Ebbisham Ltd................ -- 7,710,056
Prepaid expenses and other current assets....... 694,366 729,587
------------ ------------
Total current assets.......................... 18,499,007 43,267,684
Equipment and leasehold improvements, at cost, net
of accumulated depreciation and amortization..... 11,500,767 9,619,856
Purchased technology, net of accumulated
amortization of $46,902.......................... 8,395,415 --
Deferred financing costs, net of accumulated
amortization of $137,718 and $67,500............. 21,015 742,500
Other assets...................................... 60,164 59,970
------------ ------------
Total assets.................................. $ 38,476,368 $ 53,690,010
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................ $ 834,959 $ 724,848
Accrued expenses................................ 1,656,388 1,002,233
Senior convertible notes, current portion....... 2,647,603 3,500,000
Investment deficiency in Ebbisham Ltd........... -- 6,583,670
------------ ------------
Total current liabilities..................... 5,138,950 11,810,751
Note payable...................................... 20,000,000 --
Senior convertible notes.......................... -- 10,000,000
Deferred lease liability.......................... 2,050,042 598,111
------------ ------------
Total liabilities............................. 27,188,992 22,408,862
------------ ------------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; authorized
1,000,000 shares; none issued and outstanding.. -- --
Common stock, $.01 par value; authorized
40,000,000 shares; issued 12,181,468 shares
(12,137,968 outstanding) in 1999 and 11,037,238
shares (10,993,738 outstanding) in 1998........ 121,815 110,372
Additional paid-in capital...................... 99,161,980 88,481,742
Accumulated deficit............................. (87,804,852) (57,123,403)
Accumulated other comprehensive income.......... 1,246 5,250
------------ ------------
11,480,189 31,473,961
Less, common stock held in treasury, at cost;
43,500 shares in 1999 and 1998................. (192,813) (192,813)
------------ ------------
Total stockholders' equity.................... 11,287,376 31,281,148
------------ ------------
Total liabilities and stockholders' equity.... $ 38,476,368 $ 53,690,010
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
For the fiscal years ended July 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Contract research revenues............ $ 10,179,925 $15,868,310 $ 5,400,880
------------ ----------- -----------
Costs and expenses:
Research and development............ 22,849,687 15,189,811 7,723,995
Acquisition of in-process research
and development.................... 9,685,794 -- --
Loss in Ebbisham Ltd................ 3,092,125 4,043,712 2,549,956
General and administrative
expenses........................... 6,051,215 5,344,665 3,416,061
------------ ----------- -----------
41,678,821 24,578,188 13,690,012
------------ ----------- -----------
Operating loss.................... (31,498,896) (8,709,878) (8,289,132)
------------ ----------- -----------
Other income and expense:
Investment income................... 1,466,216 1,879,840 967,827
Rental income....................... 218,376 -- --
Interest expense.................... (867,145) (236,250) --
------------ ----------- -----------
817,447 1,643,590 967,827
------------ ----------- -----------
Net loss.......................... $(30,681,449) $(7,066,288) $(7,321,305)
============ =========== ===========
Net loss per share, basic and
diluted.............................. $ (2.63) $ (0.66) $ (0.77)
============ =========== ===========
Weighted average shares outstanding,
basic and diluted.................... 11,668,893 10,777,728 9,519,028
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
For the fiscal years ended July 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(30,681,449) $(7,066,288) $(7,321,305)
------------ ----------- -----------
Adjustments to reconcile net loss to
net cash used in operating
activities:
Acquired in-process research and
development....................... 9,685,794 -- --
Loss in Ebbisham Ltd............... 3,092,125 4,043,712 2,549,956
Depreciation and amortization...... 1,586,412 953,615 441,768
Increase (decrease) in deferred
lease liability................... 1,451,931 563,569 (10,281)
Non-cash compensation.............. 275,000 295,000 250,000
Non-cash interest expense.......... 258,333 -- --
Amortization of deferred financing
cost.............................. 137,718 67,500 --
Amortization of discount on
marketable securities............. 69,717 13,440 --
Amortization of purchased
technology........................ 46,902 -- --
Net realized gain on sale of
marketable securities............. (1,254) (14,123) (60)
Write-off of leasehold
improvements...................... -- 337,961 --
Changes in assets and liabilities:
Decrease (increase) in receivable
due from
Ebbisham Ltd...................... 7,710,056 (7,061,270) (648,786)
Decrease (increase) in prepaid
expenses and other current
assets............................ 35,221 (281,473) (158,345)
(Increase) in deferred financing
cost.............................. -- (810,000) --
(Increase) in investment in
Ebbisham Ltd...................... (7,225,440) -- (9,998)
(Increase) decrease in other
assets............................ (194) 4,273 (3,000)
Increase in accounts payable and
accrued expenses.................. 505,934 539,018 196,786
------------ ----------- -----------
Total adjustments.................. 17,628,255 (1,348,778) 2,608,040
------------ ----------- -----------
Net cash used in operating
activities........................ (13,053,194) (8,415,066) (4,713,265)
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures................. (3,730,814) (8,601,855) (1,036,993)
Purchases of marketable securities... (3,346,350) (14,938,128) (13,550,937)
Proceeds from sales of marketable
securities.......................... 10,400,101 12,741,076 8,645,357
------------ ----------- -----------
Net cash provided by (used in)
investing activities.............. 3,322,937 (10,798,907) (5,942,573)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of options and
employee stock purchases............ 957,213 610,814 1,179,609
Redemption of senior convertible
notes............................... (1,124,138) -- --
Proceeds from issuance of long-term
debt................................ -- 13,500,000 --
Net proceeds from issuance of common
stock............................... -- 4,062,500 19,970,522
------------ ----------- -----------
Net cash (used in) provided by
financing activities.............. (166,925) 18,173,314 21,150,131
------------ ----------- -----------
Net (decrease) increase in cash and
cash equivalents.................. (9,897,182) (1,040,659) 10,494,293
Cash and cash equivalents, beginning of
year.................................. 21,358,308 22,398,967 11,904,674
------------ ----------- -----------
Cash and cash equivalents, end of
year.................................. $ 11,461,126 $21,358,308 $22,398,967
============ =========== ===========
Supplemental disclosure of cash flow
information:
Interest paid........................ $ 158,671
============
Non-cash investing and financing
activities:
Note issued for purchased
technology........................ $ 20,000,000
============
Conversion of debt to equity....... $ 9,459,468
============
Capital expenditures in accounts
payable........................... $ 263,490
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the fiscal years ended July 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated Common Stock
Common Stock Other Held In Treasury
------------------- Additional Accumulated Comprehensive ----------------
Shares Amount Paid-in Capital Deficit Income (Loss) Shares Amount Total
---------- -------- --------------- ------------ ------------- ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1996.. 9,450,760 $ 94,508 $62,129,161 $(42,735,810) $(28,291) 43,500 $(192,813) $ 19,266,755
------------
Net loss................ (7,321,305) (7,321,305)
Unrealized gain on
securities............. 52,798 52,798
------------
Comprehensive loss...... (7,268,507)
------------
Sale of common stock
under employee stock
purchase plans and
exercise of options.... 133,117 1,331 1,178,278 1,179,609
Issuance of common stock
in connection with a
public offering, net of
expenses............... 1,150,000 11,500 19,959,022 19,970,522
Issuance of stock
options in exchange for
services rendered...... 250,000 250,000
---------- -------- ----------- ------------ -------- ------ --------- ------------
Balance, July 31, 1997.. 10,733,877 107,339 83,516,461 (50,057,115) 24,507 43,500 (192,813) 33,398,379
------------
Net loss................ (7,066,288) (7,066,288)
Unrealized loss on
securities............. (19,257) (19,257)
------------
Comprehensive loss...... (7,085,545)
------------
Sale of common stock
under employee stock
purchase plans and
exercise of options.... 53,361 533 610,281 610,814
Exercise of warrants by
Elan International
Services Ltd........... 250,000 2,500 4,060,000 4,062,500
Issuance of stock
options in exchange for
services rendered...... 295,000 295,000
---------- -------- ----------- ------------ -------- ------ --------- ------------
Balance, July 31, 1998.. 11,037,238 110,372 88,481,742 (57,123,403) 5,250 43,500 (192,813) 31,281,148
------------
Net loss................ (30,681,449) (30,681,449)
Unrealized loss on
securities............. (4,004) (4,004)
------------
Comprehensive loss...... (30,685,453)
------------
Sale of common stock
under employee stock
purchase plans and
exercise of options.... 144,628 1,447 955,766 957,213
Conversion of senior
convertible debt, net
of costs............... 999,602 9,996 9,449,472 9,459,468
Issuance of stock
options in exchange for
services rendered...... 275,000 275,000
---------- -------- ----------- ------------ -------- ------ --------- ------------
Balance, July 31, 1999.. 12,181,468 $121,815 $99,161,980 $(87,804,852) $ 1,246 43,500 $(192,813) $ 11,287,376
========== ======== =========== ============ ======== ====== ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
July 31, 1999
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. Emisphere Technologies, Inc. (the "Company") is a
biopharmaceutical company specializing in the oral delivery of therapeutic
macromolecules and other compounds that are not currently deliverable by oral
means. Since its inception in 1986, the Company has devoted substantially all
of its efforts and resources to research and development conducted on its own
behalf and through collaborations with corporate partners and academic
research institutions. The Company has no product sales to date.
The Company expects to incur a substantial increase in oral heparin clinical
development expenses in fiscal 2000 as the product enters into Phase III
clinical trials, the most expensive phase of the clinical development process,
and will no longer receive funding from its former joint venture partner, Elan
Corporation. As a result, management believes that the Company will continue
to incur increasing operating losses and will require substantial financial
resources to continue its oral heparin clinical development program and on
going research and development efforts.
In order to assure funding for its future operations, the Company will need
to obtain a marketing partner for its oral heparin product and may be required
to obtain financing for Phase III development on its own until a partner is
found. However, no assurances can be given that the Company will be successful
in attracting a marketing partner or in raising additional capital. In the
event that the Company is unable to raise adequate financing before December
1999, management would be required to significantly curtail operations,
including delaying the commencement of oral heparin Phase III clinical trials
and reducing levels of research and development and administrative activities.
In the event that a marketing partner for the oral heparin product is not
found, the Company expects that cash, cash equivalents, and marketable
securities on-hand, combined with either additional financing and/or delaying
clinical trials and curtailment of operations will be adequate to meet its
liquidity requirements into the second quarter of fiscal 2001.
Concentration of Credit Risk. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of cash
equivalents and marketable securities. The Company invests excess cash in
accordance with a policy objective seeking to preserve both liquidity and
safety of principal. The Company generally invests its excess funds in
obligations of the U.S. government and its agencies, bank deposits, mortgage-
backed securities, and investment grade debt securities issued by corporations
and financial institutions. The Company holds no collateral for these
financial instruments.
Cash and Cash Equivalents. The Company considers all highly liquid,
interest-bearing debt instruments with a maturity of three months or less when
purchased to be cash equivalents.
Equipment and Leasehold Improvements. Equipment and leasehold improvements
are stated at cost. Depreciation and amortization are provided for on the
straight-line basis over the estimated useful life of the asset. Leasehold
improvements are amortized over the life of the lease or of the improvements,
whichever is shorter. Expenditures for maintenance and repairs that do not
materially extend the useful lives of the respective assets are charged to
expense as incurred. The cost and accumulated depreciation or amortization of
assets retired or sold are removed from the respective accounts and any gain
or loss is recognized in operations.
Purchased Technology. Purchased technology is amortized on a straight-line
basis over a period of 15 years, the average life of the related patents.
Impairment of Long-Lived Assets. The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances, such as the manner
in which an asset is used, indicate that their carrying amount may not be
recoverable. Impairment losses are recognized when a long-lived asset's
carrying value
F-7
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
exceeds the expected undiscounted cash flows related to that asset. The amount
of the impairment loss is the difference between the carrying value and the
fair market value of the asset. The fair market value of an asset is
determined based upon discounted cash flows.
Deferred Financing Costs. Direct costs incurred in connection with obtaining
financing have been capitalized and are being amortized on a basis that
approximates the interest method over the term of the financing.
Deferred Lease Liabilities. Various leases entered into by the Company
provide for rental holidays and escalations of the minimum rent during the
lease term, as well as additional rent based upon increases in real estate
taxes and common maintenance charges. The Company records rent expense from
leases with rental holidays and escalations using the straight-line method,
thereby prorating the total rental commitment over the term of the lease.
Under this method, the deferred lease liability represents the differences
between the minimum cash rental payments and the rent expense computed on a
straight-line basis.
Revenue Recognition. The Company is currently engaged in contract research
and development of its proprietary technology. Revenue derived from contract
research and feasibility studies is recognized as the related services are
performed. Revenue earned upon the achievement of research and development
milestones is recorded when such milestones are achieved.
Patent Costs. As a result of research and development efforts conducted by
the Company, it has received, applied for, or is in the process of applying
for a number of patents to protect proprietary inventions. Costs incurred in
connection with patent applications have been expensed as incurred.
Purchased In-Process Research and Development. Purchased in-process research
and development represents the value assigned in a purchase business
combination to research and development projects of the acquired business that
were commenced but not yet completed at the date of acquisition and which, if
unsuccessful, have no alternative future use. Amounts assigned to purchased
in-process research and development are charged to expense at the consummation
date of the purchase business combination.
Income Taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. These liabilities and assets are
determined based on differences between the financial reporting and tax basis
of assets and liabilities measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Stock-Based Employee Compensation. The accompanying financial position and
results of operations of the Company have been prepared in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Under APB No. 25, generally no compensation expense is recognized in
connection with the awarding of stock option grants to employees, provided
that, as of the grant date, all terms associated with the award are fixed and
the quoted market price of the Company's stock as of the grant date is equal
to or less than the option exercise price.
Disclosure required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), including pro
forma operating results had the Company prepared its financial statements in
accordance with the fair value based method of accounting for stock-based
compensation, has been included in Note 9.
The fair value of options and warrants granted to non-employees for goods or
services are included in the financial statements and expensed as the goods
are utilized or the services performed.
F-8
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
Net Loss Per Share. Net loss per share, basic and diluted, is computed using
the weighted average number of shares of the Company's common stock
outstanding during the period. Had the Company been in a net income position,
diluted earnings per share would have included the shares used in the
computation of basic net loss per share, as well as an additional 2,559,295,
4,029,129, and 4,128,298 shares for the fiscal years ended July 31, 1999,
1998, and 1997, respectively, relating to outstanding options (after
application of the Treasury Stock Method).
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments. The carrying amounts for cash, cash
equivalents, accounts payable, and accrued expenses approximate fair value
because of their short-term nature. The carrying amounts for the Company's
debt instruments approximate fair value.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Impact of the Future Adoption of Recently Issued Accounting
Standards. Management believes that the future adoption of recently issued
accounting standards will not have a material impact on the Company's
financial statements.
2. Marketable Securities
The Company considers its marketable securities to be "available-for-sale,"
as defined by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS No. 115").
Accordingly, unrealized holding gains and losses are excluded from operations
and reported as a net amount in a separate component of stockholders' equity.
The following table summarizes the amortized cost basis and aggregate fair
value of marketable securities, and the unrealized holding gains and losses,
at July 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Unrealized Holding
-----------------------
Amortized
Cost Basis Fair Value Gains (Losses) Net
----------- ----------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
1999
Maturities less than one
year:
Corporate debt securities.. $ 3,848,268 $ 3,849,615 $4,294 $(2,948) $1,347
Maturities between one and
three years:
U.S. government
securities................ 994,001 993,900 -- (101) (101)
Corporate debt securities.. 1,500,000 1,500,000 -- -- --
----------- ----------- ------ ------- ------
$ 6,342,269 $ 6,343,515 $4,294 $(3,049) $1,246
=========== =========== ====== ======= ======
1998
Maturities less than one
year:
Corporate debt securities.. $ 4,300,701 $ 4,301,393 $1,161 $ (469) $ 692
Maturities between one and
three years:
Corporate debt securities.. 9,163,782 9,168,340 6,058 (1,500) 4,558
----------- ----------- ------ ------- ------
$13,464,483 $13,469,733 $7,219 $(1,969) $5,250
=========== =========== ====== ======= ======
</TABLE>
F-9
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
Realized gains and losses are included as a component of investment income.
For the fiscal years ended July 31, 1999, 1998, and 1997, gross realized gains
and losses were not significant. In computing realized gains and losses, the
Company determines the cost of its marketable securities on a specific
identification basis. Such cost includes the direct costs to acquire the
securities, adjusted for the amortization of any discount or premium. The fair
value of marketable securities has been estimated based on quoted market
prices.
3. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
Useful Lives
in Years 1999 1998
------------- ----------- -----------
<S> <C> <C> <C>
Equipment............................... 3-7 $ 6,133,395 $ 4,674,232
Leasehold improvements.................. Life of lease 11,167,029 9,269,339
----------- -----------
17,300,424 13,943,571
Less, Accumulated depreciation and
amortization........................... 5,799,657 4,323,715
----------- -----------
$11,500,767 $ 9,619,856
=========== ===========
</TABLE>
During May 1998, the Company relocated its operations and subleased certain
office and laboratory space. In connection with the sublease, the Company
recorded a charge of approximately $300,000 to general and administrative
expenses, which represented the writedown of leasehold improvements, net of
accumulated amortization, at the subleased space offset by the excess of
sublease rental income over related rental expense.
4. Accrued Expenses
Accrued expenses consist of the following as of July 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Compensation....................................... $ 343,500 $ 266,000
Professional fees.................................. 379,000 203,000
Interest........................................... 292,164 168,750
Other.............................................. 641,724 364,483
---------- ----------
$1,656,388 $1,002,233
========== ==========
</TABLE>
5. Senior Convertible Notes Payable
In 1998, the Company issued $13.5 million of its 5% Senior Convertible
Notes, due May 1, 2001 (the "Notes"). Interest is payable annually in arrears
and at the Company's option can be made either in cash or, subject to certain
conditions, in shares of the Company's common stock. At July 31, 1999 and
1998, the Company had accrued $33,830 and $168,750, respectively, of interest
on the Notes.
In connection with the issuance of the Notes, the Company incurred direct
costs to obtain the financing of approximately $800,000. Such amount has been
classified as deferred financing costs. Amortization of these costs totaled
$137,718 and $67,500 for the fiscal years ended July 31, 1999 and 1998,
respectively.
During 1999, the note holders converted principal and interest of
approximately $9.7 million and $315,000, respectively, into 999,602 shares of
the Company's common stock. Deferred financing costs of $583,767 were
F-10
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
recorded as a reduction to additional paid-in-capital upon conversion of the
notes. In addition, the Company repaid $1.1 million of the Notes in cash. In
June 1999, certain terms and covenants were modified, including increasing the
amount of additional indebtedness allowed and changing the due date to
September 15, 1999. The remaining balance of approximately $2.7 million and
interest thereon were repaid on that date.
As of July 31, 1999, the estimated fair value of the Notes approximated
their carrying value, based on near term maturity.
6. Commitments
Leases. The Company leases office and laboratory space under noncancelable
leases expiring in various years through 2008. As of July 31, 1999, future
minimum rental payments are as follows:
<TABLE>
<CAPTION>
Minimum
Years Ending July 31, Rental Payments
--------------------- ---------------
<S> <C>
2000..................................................... $ 1,034,120
2001..................................................... 1,187,864
2002..................................................... 1,121,826
2003..................................................... 1,308,544
2004..................................................... 1,333,200
Thereafter............................................... 4,110,700
-----------
$10,096,254
===========
</TABLE>
As described in Note 3, in July 1998, the Company entered into a sublease
(the "Sublease") for a portion of its former premises, which extends to
January 2002.
As of July 31, 1999, future minimum rentals to be received under the
Sublease are as follows:
<TABLE>
<CAPTION>
Minimum
Rentals to
Years Ending July 31, be Received
--------------------- -----------
<S> <C>
2000......................................................... $272,200
2001......................................................... 218,866
2002......................................................... 111,995
--------
$603,061
========
</TABLE>
Rent expense for the fiscal years ended July 31, 1999, 1998 and 1997 was
approximately $1,078,692, $1,230,000 and $256,000, respectively. Additional
charges for real estate taxes and common maintenance charges for the fiscal
years ended July 31, 1999 and 1998, were $240,000 and $459,000, respectively.
Other. The Company, for the fiscal years ended July 31, 1999, 1998 and 1997,
made payments for research totaling approximately $578,000, $847,000 and
$847,000, respectively, to several universities and a research organization
(the "Entities"). Certain members of the Company's Board of Directors are
affiliated with these Entities.
7. Income Taxes
As of July 31, 1999, the Company has available, for tax reporting purposes,
unused net operating loss carry-forwards of approximately $72.0 million, which
will expire in various years from 2001 to 2013. The Company's
F-11
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
research and experimental tax credit carry-forwards expire in various years
from 2001 to 2013. Future ownership changes may limit the future utilization
of these net operating loss and research and development tax credit carry-
forwards as defined by the Internal Revenue Code. The tax effect of temporary
differences, net operating loss carry-forwards, and research and experimental
tax credit carry-forwards as of July 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets and valuation allowance:
Accrued liabilities........................ $ 980,130 $ 356,194
Equipment and leasehold improvements....... 722,317 70,132
Net operating loss carry-forwards.......... 29,415,588 19,404,873
Research and experimental tax credit carry-
forwards.................................. 2,936,205 2,454,215
Valuation allowance........................ (34,054,240) (22,285,414)
------------ ------------
$ -- $ --
============ ============
</TABLE>
8. Stockholders' Equity
a. During 1999, the Company's shareholders voted to increase the number of
common shares authorized from 20.0 million to 40.0 million shares.
b. The Company's certificate of incorporation provides for the issuance of
1,000,000 shares of preferred stock with the rights, preferences,
qualifications, and terms to be determined by the Company's Board of
Directors. As of July 31, 1999 and 1998, there were no shares of preferred
stock outstanding.
c. In 1996, the Board of Directors (the "Board") adopted a stockholder
rights plan in which Preferred Stock Purchase Rights (the "Rights") were
granted at the rate of one one-hundredth of a share of Series A Junior
Participating Cumulative Preferred Stock ("A Preferred Stock") at an exercise
price of $80 for each share of the Company's common stock.
The Rights are not exercisable, or transferable apart from the common stock,
until the earlier of (i) ten days following a public announcement that a
person or group of affiliated or associated persons have acquired beneficial
ownership of 20% or more of the outstanding common stock of the Company or
(ii) ten business days (or such later date, as defined) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person, or group, of 20% or more of the outstanding common
stock of the Company.
Furthermore, if the Company enters into consolidation, merger, or other
business combinations, as defined, each Right would entitle the holder upon
exercise to receive, in lieu of shares of A Preferred Stock, a number of
shares of common stock of the acquiring company having a value of two times
the exercise price of the Right, as defined. The Rights contain antidilutive
provisions, are redeemable at the Company's option, subject to certain defined
restrictions, for $.01 per Right, and expire on February 23, 2006.
As a result of the Rights dividend, the Board designated 200,000 shares of
preferred stock as A Preferred Stock. A Preferred Stockholders will be
entitled to a preferential cumulative quarterly dividend of the greater of
$1.00 per share or 100 times the per share dividend declared on the Company's
common stock. Shares of A Preferred Stock have a liquidation preference, as
defined, and each share will have 100 votes and will vote together with the
common shares.
F-12
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
d. The Company adopted the provision of Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). The statement
establishes standards for the reporting and display of comprehensive income
and its components. The disclosures required by SFAS 130 have been included
within the statement of stockholders' equity. The effects of income taxes on
comprehensive loss was not material.
9. Stock Plans
Stock Option Plans. Under the Company's 1991 Stock Option Plan and the 1995
Non-Qualified Stock Option Plan (individually, the "91 Plan" and "95 Plan,"
respectively, or collectively, the "Plans") a maximum of 2,500,000 and
2,350,000 shares of the Company's common stock, respectively, are available
for awards to employees, consultants, and other individuals who render
services to the Company. The 91 Plan provides for the grant of either
incentive stock options ("ISOs"), as defined by the Internal Revenue Code, or
options which do not qualify as ISOs. An independent committee of the Board,
which determines option terms including exercise price and vesting period,
awards the options. Generally, the options expire within a five to ten-year
period as determined by the committee and as defined by the Plans. The terms
of the 95 Plan provide for the granting to officers and other key employees
the option to purchase the Company's common stock. The number and terms of
each grant will be determined by an independent committee of the Board, which
will determine option exercise price, termination date, vesting, and
expiration date. Options granted under the Plans generally vest over a five-
year period. As of July 31, 1999, shares available for future grants under the
Plans amounted to 734,065.
The following table summarizes stock option information for the Plans as of
July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- --------------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life in Years Exercise Price Exercisable Exercise Price
-------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.50 86,737 5.76 $ 1.50 67,977 $ 1.50
$2.63 3,937 5.78 $ 2.63 3,787 $ 2.63
$4.00-
$4.40 71,124 4.81 $ 4.01 70,324 $ 4.01
$6.13-
$9.00 1,630,175 6.70 $ 8.33 1,223,000 $ 8.63
$9.50-
$13.75 1,766,134 4.46 $11.67 1,347,214 $12.03
$15.13-
$21.25 454,322 7.75 $17.17 157,138 $17.74
$23.00-
$23.25 8,000 5.92 $23.09 4,000 $23.19
--------- ---------
$1.50-
$23.25 4,020,429 5.78 $10.60 2,873,440 $10.45
========= =========
</TABLE>
F-13
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
Transactions involving stock options awarded under the Plans during fiscal
1997, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Number Average
Outstanding Exercise Price Exercisable Exercise Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, July 31, 1996... 1,981,418 $ 8.90 506,962 $ 9.75
1997
Granted................ 1,260,531 $12.43
Canceled............... (43,000) $13.75
Exercised.............. (33,323) $ 9.86
---------
Balance outstanding
July 31, 1997......... 3,165,626 $10.23 1,868,085 $10.98
1998
Granted................ 340,272 $17.08
Canceled............... (6,350) $15.50
Exercised.............. (15,819) $ 5.98
---------
Balance outstanding
July 31, 1998......... 3,483,729 $10.85 2,012,463 $10.95
1999
Granted................ 603,375 $ 8.84
Canceled............... (57,420) $10.90
Exercised.............. (9,255) $ 2.59
---------
Balance outstanding
July 31, 1999......... 4,020,429 $10.60 2,873,440 $10.45
=========
</TABLE>
Outside Directors' Plan The Company has adopted a stock option plan for
outside directors who are neither officers nor employees of the Company nor
holders of more than 5% of the Company's common stock (the "Outside Directors'
Plan"). This plan, as amended, provides for the granting of options to
directors (i) to purchase 35,000 shares of the Company's common stock on the
date of initial election or appointment to the Board and (ii) to purchase
21,000 shares on the fifth anniversary thereof and every three years
thereafter. The options have an exercise price equal to the fair market value
of the Company's common stock on the date of grant, vest at the rate of 7,000
shares per year, and expire ten years after the date of grant.
The following table summarizes stock option information for the Outside
Directors' Plan as of July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- --------------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life in Years Exercise Price Exercisable Exercise Price
-------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$6.13-
$8.63 105,000 7.16 $ 7.80 70,000 $ 8.63
$13.00-
$13.75 273,000 3.90 $13.17 252,000 $13.13
$23.50 35,000 7.51 $23.50 14,000 $23.50
------- -------
$6.13-
$23.50 413,000 5.04 $12.68 336,000 $12.62
======= =======
</TABLE>
F-14
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
Transactions involving stock options awarded under the Outside Directors'
Plan during fiscal 1997, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Number Average
Outstanding Exercise Price Exercisable Exercise Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, July 31, 1996... 280,000 $11.91 196,666 $12.63
1997
Granted................ 98,000 $17.23
-------
Balance outstanding
July 31, 1997......... 378,000 $13.29 243,333 $12.40
-------
1998
Balance outstanding
July 31, 1998......... 378,000 $13.29 291,332 $12.51
1999
Granted................ 35,000 $ 6.13
-------
Balance outstanding
July 31, 1999......... 413,000 $12.68 336,000 $12.62
=======
</TABLE>
Directors' Deferred Compensation Stock Plan Pursuant to the Directors'
Deferred Compensation Stock Plan (the "Directors' Deferred Plan") adopted
during the 1998 fiscal year, outside directors have a right to receive for
each meeting of the Board or a committee thereof attended a number of shares
of the Company's common stock equal to the amount determined by the Board as
compensation for the meeting divided by the fair market value of the Company's
common stock on the date of the meeting. An aggregate of 25,000 shares of the
Company's common stock has been reserved for issuance under the Directors'
Deferred Plan. During fiscal 1999 and 1998, the outside directors earned the
rights to receive an aggregate of 2,778 shares and 570 shares, respectively.
Under the terms of the Directors' Deferred Plan, shares are to be issued to a
director within six months after he or she ceases to serve on the Board.
Non-Plan Options The Company's Board of Directors has issued options to an
executive officer ("Executive"), and a former executive officer, the Emisphere
Charitable Foundation, and a consultant not covered by the Plans or the
Outside Directors' Plan ("Non-Plan Options"). The respective employment
agreement for the Executive also contains provisions whereby the Executive is
allowed to borrow defined amounts from the Company in connection with exercise
of options. Outstanding loans bear interest at rates, as defined. The Board
determines the number and terms of each grant (option exercise price, vesting,
and expiration date). Non-Plan Options generally vest over a five-year period.
The following table summarizes stock option information for the Non-Plan
Options as of July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
-------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$8.00-$ 9.75 387,822 1.82 $8.65 387,822 $8.65
</TABLE>
F-15
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
Transactions involving awards of Non-Plan Options during fiscal 1997, 1998
and 1999 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Number Average
Outstanding Exercise Price Exercisable Exercise Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, July 31, 1996... 1,470,853 $11.28 496,822 $9.59
1997
Canceled............... (987,031) $12.61
Exercised.............. (60,000) $ 8.23
---------
Balance outstanding
July 31, 1997......... 423,822 $ 8.62 423,822 $8.62
1998
Canceled............... (1,000) $18.50
---------
Balance outstanding
July 31, 1998......... 422,822 $ 8.59 422,822 $8.59
1999
Exercised.............. (35,000) $ 8.00
---------
Balance outstanding
July 31, 1999......... 387,822 $ 8.65 387,822 $8.65
=========
</TABLE>
Employee Stock Purchase Plans The Company has adopted two employee stock
purchase plans (the "Purchase Plans") -- the 1994 Employee Stock Purchase Plan
(the "Qualified Plan") and the 1994 Non-Qualified Employee Stock Purchase Plan
(the "Non-Qualified Plan"). The Purchase Plans provide for the grant to all
employees of options to purchase the Company's common stock. These options are
granted for dollar amounts of up to 15% of an employees' quarterly
compensation. The exercise price per share is equal to the lesser of the fair
market value of the Company's common stock on the date of grant or 85% of the
fair market value on the date of exercise. Options are granted automatically
on the first day of each fiscal quarter and expire six months after the date
of grant. The Qualified Plan is not available for employees owning more than
5% of the Company's common stock and imposes certain other quarterly
limitations on the option grants. Options under the Non-Qualified Plan are
granted to the extent that the option grants are restricted under the
Qualified Plan. The Purchase Plans provide for the issuance of up to 500,000
shares of the Company's common stock under the Qualified Plan and 100,000
shares under the Non-Qualified Plan.
Purchases of common stock during the fiscal years ended July 31, 1999, 1998
and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Qualified Plan Non-Qualified Plan
---------------------- -----------------------
Shares Shares
Purchased Price Range Purchased Price Range
--------- ------------ --------- -------------
<S> <C> <C> <C> <C>
1999........................ 92,276 $4.83-$ 9.68 8,097 $ 6.16-$ 9.68
1998........................ 34,851 $8.23-$17.21 2,749 $13.76-$16.47
1997........................ 31,348 $6.30-$17.75 8,111 $6.26-$ 13.18
</TABLE>
At July 31, 1999, shares reserved for future purchases under the Qualified and
Non-Qualified Plans were 201,568 and 58,591, respectively.
Pro Forma Operating Results The following tables summarize the Company's pro
forma operating results had compensation costs for the Plans, Outside
Directors' Plan, Directors' Deferred Plan, the Non-Plan Options, and the
Purchase Plans been determined in accordance with the fair value-based method
of accounting
F-16
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
for stock-based compensation as prescribed by SFAS No. 123. Since option
grants awarded during 1999, 1998 and 1997 vest over several years and
additional awards are expected to be issued in the future, the pro forma
results shown below are not likely to be representative of the effects, on the
future years of the application of the fair value-based method. Except as
noted above, the options exercise price equals the quoted market price of the
Company's common stock on the date of grant.
<TABLE>
<CAPTION>
Fiscal Years Ended July 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss................. $35,446,893 $10,409,698 $15,408,336
Pro forma net loss per share....... $ (3.04) $ (0.97) $ (1.53)
</TABLE>
For the purpose of the above pro forma calculation, the fair value of each
option granted was estimated on the date of grant using the Black-Scholes
option pricing model. The weighted-average fair value of the options granted
during 1999, 1998 and 1997 was $5.94, $10.96 and $6.82, respectively. The
following assumptions were used in computing the fair value of options
granted: expected volatility of 80%, expected lives of five years (except for
the Purchase Plans where the expected lives are six months), zero divided
yield, and weighted-average risk-free interest rate of 5.2% in 1999, 5.9% in
1998, and 6.4% in 1997.
10. Retirement Plan
The Company has a defined contribution retirement plan (the "Plan"), the
terms of which, as amended, allow eligible employees who have met certain age
and service requirements to participate, by electing to contribute a
percentage of their compensation to be set aside to pay their future
retirement benefits as defined by the Plan. The Company has agreed to make
discretionary contributions to the Plan. For the fiscal years ended July 31,
1999, 1998 and 1997 the Company made contributions to the Plan totaling
approximately $183,000, $139,000 and $58,000, respectively.
11. Net Loss Per Share
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of common shares outstanding.
For the fiscal years ended July 31, 1999, 1998, and 1997, the Company reported
net losses and, therefore, no common stock equivalents were included in the
computation of diluted net loss per share, since such inclusion would have
been antidilutive.
12. The Emisphere Charitable Foundation, Inc.
During 1993, the Board authorized the incorporation of The Emisphere
Charitable Foundation, Inc. (the "Foundation"). The Foundation has since been
incorporated and intends to seek tax exempt status under section 501(c)(3) of
the Internal Revenue Code. The Foundation's charitable purpose is to grant
financial assistance to pay expenses incurred by persons or their families who
are suffering from serious, debilitating, or prolonged illnesses. The Company
intends to contribute cash and Company stock options to the Foundation. Two
officers of the Company are directors of the Foundation. The Foundation
currently has 15,000 options to acquire an equal number of shares of the
Company's common stock at an exercise price of $9.75 per share.
13. Ebbisham Limited
Ebbisham Limited ("Ebbisham"), an Irish corporation owned jointly by Elan
Corporation, plc ("Elan") and the Company until July 1999 when it became a
wholly subsidiary of the Company, was formed in September 1996 to develop and
market heparin products using technologies contributed by Elan and the
Company. Elan
F-17
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
provided the initial funding of $4.5 million. Thereafter, Elan and the Company
provided funding equally. During the year ended July 31, 1999, Elan and the
Company each contributed approximately $7.5 million to fund Ebbisham's
operations.
In fiscal 1996, the Company issued and sold to an affiliate of Elan 600,000
shares of the Company's common stock and warrants to purchase an additional
250,000 shares, at $16.25 per share, for a total of $7.5 million. In fiscal
1998, Elan exercised the warrants.
Pursuant to agreements with Elan and Ebbisham, the Company performed certain
research and development services on behalf of Ebbisham. In connection
therewith, the Company recognized contract research revenues during each of
the three fiscal years ended July 31, 1999 of approximately $5.7 million, $7.1
million, and $4.0 million, respectively. As of July 31, 1998, amounts due from
Ebbisham for services rendered totaled approximately $7.7 million.
In July 1999, Emisphere acquired Elan's ownership interest in Ebbisham, in
exchange for a seven year $20.0 million zero coupon note (the "Ebbisham Note")
carrying a 15% interest rate, compounding semi-annually, plus royalties on
oral heparin product sales, subject to an annual maximum, and certain
milestone payments. Under certain conditions, Elan has agreed to subscribe to
the Company's common stock. This transaction resulted in Ebbisham becoming a
wholly owned subsidiary of the Company.
The acquisition of Elan's ownership interest in Ebbisham has been accounted
for in accordance with the purchase method of accounting. The purchase price
of approximately $18.1 million ($20.4 million, including transaction costs,
net of purchase accounting adjustments for accrued funding liabilities in
excess of actual funding requirements of $2.3 million) has been allocated $9.7
million and $8.6 million to acquired in-process research and development,
which was expensed at the date of acquisition, and purchased technology,
respectively.
As of the acquisition date, it was determined that the acquired in-process
research and development had not reached technological feasibility and did not
have an alternative future use. Approximately 48%, 80%, and 80% of the
research and development effort remained to be completed for liquid heparin,
solid dosage heparin, and solid dosage low molecular weight heparin,
respectively, as of the acquisition date. Before these products can be
commercialized, the Company is required to complete Phase III clinical trials
for liquid heparin, initiate and complete Phase I through III clinical studies
for both solid dosage forms of heparin and low molecular weight heparin, and
file New Drug Applications with the United States Food and Drug
Administration. The Company currently estimates the cost to complete clinical
trials and obtain regulatory approval to be in excess of $30.0 million. The
Company expects to complete development of liquid heparin in fiscal 2002. In
valuing the acquired in-process research and development, the Company used
discounted cash flows over a 10-year period and risk adjusted discount rates
ranging from 20% to 45%, depending on the product's stage of development.
Purchased technology is being amortized using the straight-line method over
its expected useful life of approximately 15 years.
In conjunction with the above transaction, Elan committed to provide the
Company with up to $15.0 million in financial support for Phase III clinical
trials of oral heparin. The provision by Elan of these loans is subject to the
Company attaining certain clinical milestones and other conditions, including
the commencement of oral heparin Phase III clinical trials by October 31,
1999. The Company does not anticipate commencement of such trials within the
stipulated period.
F-18
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
The following unaudited pro forma information presents a summary of
consolidated results of operations assuming the acquisition had taken place at
the beginning of each fiscal year and excludes the write-off of acquired in-
process research and development of approximately $9.7 million:
<TABLE>
<CAPTION>
(Unaudited)
Fiscal
Years Ended July 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales......................................... $ 4,400,000 $ 8,800,000
Net loss...................................... $(25,500,000) $(14,800,000)
Net loss per share............................ $ (2.19) $ (1.37)
</TABLE>
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
that actually would have resulted had the acquisition occurred on the date
indicated or that may result in the future.
Selected financial data of Ebbisham, prior to acquisition, as of July 31,
1998, for the period from August 1, 1998 to July 2, 1999 (the acquisition
date), the fiscal year ended July 31, 1998, and the period from September 26,
1996 (inception) to July 31, 1997, are as follows:
Balance Sheet Data
<TABLE>
<CAPTION>
July 31, 1998
-------------
<S> <C> <C> <C>
Assets
Cash..................................................... $ 741,184
============
Liabilities and Stockholders' Deficit
Accounts payable (1)..................................... $ 9,408,518
Subordinated debt........................................ 4,500,000
Stockholders' deficit.................................... (13,167,334)
------------
Total liabilities and stockholders' deficit $ 741,184
============
</TABLE>
Statement of Operations Data
<TABLE>
<CAPTION>
Period from
Fiscal September 26,
Period from Year Ended (inception)
August 1, 1998 to July 31, to
July 2, 1999 1998 July 31, 1997
----------------- ----------- -------------
<S> <C> <C> <C>
Total revenue...................... $ 104,829 $ 32,760 $ 72,045
Total expenses (2)................. (6,289,084) (8,120,183) (5,171,956)
----------- ----------- -----------
Net loss........................... $(6,184,255) $(8,087,423) $(5,099,911)
=========== =========== ===========
</TABLE>
- --------
(1) Includes $7,710,056 due the Company at July 31, 1998.
(2) Includes $5,732,805, $7,061,270, and $3,999,733 related to services
performed by the Company on behalf of Ebbisham for the period from August
1, 1998 to July 2, 1999, the year ended July 31, 1998, and the period from
September 26, 1996 (inception) to July 31, 1997.
14. Strategic Alliances
The Company performs research and development for others pursuant to
research collaborations and feasibility studies. Under the research
collaborations, Emisphere will be reimbursed for development costs and may be
entitled to payments if certain development milestones are achieved. In
addition, the collaborations
F-19
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
July 31, 1999
contain provisions, which require the Company to negotiate the terms of a
licensing agreement contemplating the exclusive worldwide use of the Company's
proprietary technology. All of the Company's research collaborations are
generally cancelable by the partners without significant financial penalty to
the collaborator. Feasibility studies are of short duration and are designed
to evaluate the applicability of the Company's drug delivery carriers to
specific drugs. Costs associated with research and development collaborations
and feasibility studies are expected to approximate the revenues recognized.
In December 1997, the Company and Novartis Pharma AG ("Novartis") entered
into a research collaboration to investigate the Company's technology for oral
delivery of two selected Novartis compounds. The agreement provides for an
initial research collaboration period expiring in December 1999 and two
options on the part of Novartis to acquire exclusive licenses to use the
Company's technologies for the development and commercialization of oral
formulations of the Novartis compounds.
In the event Novartis exercises its technology license options, it has the
obligation (subject to the Company's approval) to purchase up to $16 million
of the Company's Common Stock. This investment may be made in four tranches at
prices based on market prices at the time of exercise. The first tranche is
subject to certain price limitations.
Under the agreement, Novartis has made quarterly payments to the Company for
work performed by the Company in connection with the collaboration and is to
make future payments in the event certain milestones are achieved. In
September 1999, Novartis initiated clinical testing of a solid oral dosage
form of one of their compounds using the Company's oral drug delivery
technology.
In February 1997, the Company and Eli Lilly & Company ("Lilly") entered into
an agreement to combine Lilly's therapeutic protein and formulation
capabilities with the Company's carrier technologies. The agreement provided
for periodic payments to the Company to fund a research and development
program, which was completed during fiscal 1999. Under the agreement, the
Company granted to Lilly a series of options to acquire licenses to use the
Company's technologies. In fiscal 1998, Lilly exercised two of its options and
entered into two license agreements to use the Company's technologies in
connection with two proteins.
During fiscal year 1999, Lilly suspended development of one of the proteins
pending further review by them of the injectable version of the protein. With
respect to the second protein, Emisphere designed and supplied "carriers" to
Lilly for evaluation. As a result, Emisphere is awaiting further direction
from Lilly on both compounds. The above license agreements provide for future
payments, in the event certain milestones are achieved, as defined, as well as
royalty payments if a commercial product results from the collaboration. As of
July 31, 1999, these license agreements were in effect.
During the fiscal years ended July 31, 1999, 1998 and 1997, the agreements
with Novartis and Lilly generated revenues to the Company of $4.3 million,
$8.8 million (including milestone payments of $4.0 million from Lilly) and
$1.4 million, respectively.
F-20
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Ebbisham Limited:
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of Ebbisham Limited ("Ebbisham") (a
development stage enterprise) at July 31, 1998, and the results of its
operations and its cash flows for the period from September 26, 1996
(inception) to July 31, 1997, the year ended July 31, 1998, the period from
August 1, 1998 through July 2, 1999 and the cumulative period from September
26, 1996 (inception) to July 2, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Ebbisham's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As described in Note 7 to the financial statements, in July 1999, Emisphere
Technologies, Inc. ("Emisphere") acquired Elan Corporation plc's 50% ownership
interest in Ebbisham and, therefore, Ebbisham became a wholly owned subsidiary
of Emisphere. These financial statements have been prepared as of and for the
periods prior to the Emisphere acquisition.
PricewaterhouseCoopers LLP
New York, New York
September 10, 1999
F-21
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
July 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash........................................................... $ 741,184
------------
Total assets..................................................... $ 741,184
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Due to Elan Corporation plc.................................... $ 1,698,462
Due to Emisphere Technologies, Inc. ........................... 7,710,056
Accrued expenses............................................... --
------------
Total current liabilities........................................ 9,408,518
Subordinated debt................................................ 4,500,000
------------
Total liabilities................................................ 13,908,518
------------
Stockholders' deficit:
"A" ordinary shares, par value $1.00 per share, 5,000,000
shares authorized, 10,000 shares issued and outstanding at
July 31, 1998. "B" ordinary shares, par value $1.00 per share,
5,000,000 shares authorized, 10,000 shares issued and
outstanding at July 31, 1998.................................. 20,000
Deficit accumulated during the development stage............... (13,187,334)
------------
Total stockholders' deficit...................................... (13,167,334)
------------
Total liabilities and stockholders' deficit...................... $ 741,184
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
period from Cumulative for
For the September 26, the period from
period from For the 1996 September 26,
August 1, fiscal year (inception) 1996
1998 to ended through (inception)
July 2, July 31, July 31, through
1999 1998 1997 July 2, 1999
----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Interest income....... $ 104,829 $ 32,760 $ 72,045 $ 209,634
Expenses:
Research and
development.......... (6,165,393) (8,120,183) (5,171,956) (19,457,532)
General and
administrative....... (123,691) -- -- (123,691)
----------- ----------- ----------- ------------
Net loss................ $(6,184,255) $(8,087,423) $(5,099,911) $(19,371,589)
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
STATEMENTS OF STOCKHOLDERS' DEFICIT
For the period from September 26, 1996 (inception) to July 2, 1999,
including the period from August 1, 1998 to July 2, 1999,
the fiscal year ended July 31, 1998, and the period from September 26, 1996
(inception) to July 31, 1997
<TABLE>
<CAPTION>
Number of shares
-----------------
Ordinary Ordinary Ordinary Ordinary Accumulated
"A" "B" "A" "B" deficit Total
-------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ordinary shares issued
in consideration for
cash................... 10,000 10,000 $10,000 $10,000 $ $ 20,000
Net loss for the period
from September 26, 1996
(inception) to July 31,
1997................... (5,099,911) (5,099,911)
------ ------ ------- ------- ------------ ------------
Balance at July 31,
1997................... 10,000 10,000 10,000 10,000 (5,099,911) (5,079,911)
Net loss for the year
ended July 31, 1998.... (8,087,423) (8,087,423)
------ ------ ------- ------- ------------ ------------
Balance at July 31,
1998................... 10,000 10,000 10,000 10,000 (13,187,334) (13,167,334)
Net loss for the period
from August 1, 1998 to
July 2, 1999........... (6,184,255) (6,184,255)
------ ------ ------- ------- ------------ ------------
Balance at July 2,
1999................... 10,000 10,000 $10,000 $10,000 $(19,371,589) $(19,351,589)
====== ====== ======= ======= ============ ============
</TABLE>
F-24
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Cumulative
For the for the
For the period from period from
period from September 26, September
August 1, For the 1996 26, 1996
1998 fiscal (inception) (inception)
to year ended through through
July 2, July 31, July 31, July 2,
1999 1998 1997 1999
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $ (6,184,255) $(8,087,423) $(5,099,911) $(19,371,589)
Changes in assets and
liabilities:
Increase (decrease)
in payable to Elan
Corporation plc.... (1,698,462) 1,058,913 639,549 --
Increase (decrease)
in payable to
Emisphere
Technologies,
Inc................ (7,684,826) 7,061,270 648,786 25,230
Increase in accrued
expenses........... 10,408 -- -- 10,408
------------ ----------- ----------- ------------
Net cash (used in)
provided by operating
activities............. (15,557,135) 32,760 (3,811,576) (19,335,951)
Cash flows from
financing activities:
Proceeds from issuance
of share capital..... -- -- 20,000 20,000
Proceeds from issuance
of subordinated
debt................. 26,847,699 -- 4,500,000 31,347,699
Repayment of
subordinated debt.... (11,949,233) -- -- (11,949,233)
------------ ----------- ----------- ------------
Net cash provided by
financing activities... 14,898,466 -- 4,520,000 19,418,466
Net (decrease) increase
in cash................ (658,669) 32,760 708,424 82,515
Cash at beginning of
period................. 741,184 708,424 -- --
------------ ----------- ----------- ------------
Cash at end of period... $ 82,515 $ 741,184 $ 708,424 $ 82,515
============ =========== =========== ============
</TABLE>
F-25
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business:
Ebbisham Limited ("Ebbisham"), an Irish corporation, was formed as an
equally owned joint venture between Elan Corporation plc ("Elan") and
Emisphere Technologies, Inc. ("Emisphere") (collectively, the "Partners"), in
September 1996 to develop and market heparin products utilizing technologies
contributed by the Partners. In July 1999, Emisphere acquired 100% of Elan's
ownership interest in Ebbisham (see Note 7). As a development stage
enterprise, Ebbisham's primary efforts to date have been devoted to research
and development and raising capital.
2. Summary of Significant Accounting Policies:
Basis of Preparation
The accompanying financial statements of Ebbisham were prepared in
accordance with generally accepted accounting principles in the United States.
Cash
The carrying amount reported in the balance sheet for cash approximates its
fair value. Cash subjects Ebbisham to concentrations of credit risk.
Income Taxes
Ebbisham accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS 109"). SFAS 109 requires that Ebbisham recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined on the basis of the
difference between the tax bases of assets and liabilities and their
respective financial reporting amounts ("temporary differences") at enacted
tax rates in effect for the years in which the temporary differences are
expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
3. Subordinated Debt:
Subordinated debt consists of the following:
<TABLE>
<CAPTION>
Due to Due to
Elan Emisphere
------------ -----------
<S> <C> <C>
Balance at July 31, 1998...................... $ 4,500,000 $ --
Current activity:
Loans....................................... 7,449,233 19,398,466
Repayments.................................. (11,949,233) --
------------ -----------
Balance at July 2, 1999....................... $ -- $19,398,466
============ ===========
</TABLE>
F-26
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The subordinated debt is interest-free until Ebbisham has sufficient equity,
as defined, and has earned a profit after tax in the preceding financial year
of not less than $100,000.
The rate of interest in a given financial year is as follows:
. 5% if profits after tax for that financial year exceed $100,000 but do
not exceed $5,000,000.
. 10% if profits after tax for that financial year exceed $5,000,000 but
do not exceed $10,000,000.
. 15% if profits after tax for that financial year exceed $10,000,000.
The debt is subordinated to the claims of all other creditors of Ebbisham.
4. Stockholders' Deficit:
Ebbisham's certificate of incorporation provides for the issuance of five
million ordinary "A" shares and five million ordinary "B" shares. The rights
and terms of both types of shares are identical except that Elan held the
ordinary "A" shares through July 2, 1999 and by Emisphere subsequent to that
date, and Emisphere holds the ordinary "B" shares.
5. Income Taxes:
Ebbisham is subject to the provisions of tax laws in Ireland. Accordingly,
in the event that Ebbisham earns royalty income for its patents in the future,
such amounts may be exempt from income tax under certain circumstances. In
addition, in the event that taxable profits are derived from Ebbisham's
manufacture of products, a tax would be imposed on profits earned at tax rates
ranging from 10% to 32%. Ebbisham has available net operating loss
carryforwards of approximately $13 million, which, under certain
circumstances, may be available to offset taxable income arising in the
future. As a result of the uncertainty of whether Ebbisham will have future
taxable income and whether the net operating losses being carried forward will
be available to offset such taxable income, Ebbisham has established a
valuation allowance equal to the total deferred tax asset. The total deferred
tax asset, net of the valuation allowance, was not material.
6. Related Party Transactions:
On September 26, 1996 (inception), Ebbisham entered into certain agreements
with Elan and Emisphere relating to the research and development of an oral
heparin product under development. In accordance with these agreements, the
Partners perform certain research and development activities on behalf of
Ebbisham. For the period from August 1, 1998 through July 2, 1999, Ebbisham
incurred research and development expenses for work performed by Elan and
Emisphere in the amount of $432,588 and $5,732,805, respectively. For the year
ended July 31, 1998, Ebbisham incurred research and development expenses for
work performed by Elan and Emisphere in the amount of $1,058,913 and
$7,061,270, respectively. For the period from September 26, 1996 (inception)
through July 31, 1997, Ebbisham incurred research and development expenses for
work performed by Elan and Emisphere in the amount of $1,172,233 and
$3,999,733, respectively. Cumulatively, for the period from September 26, 1996
(inception) through July 2, 1999, Ebbisham incurred research and development
expenses for work performed by Elan and Emisphere of $2,663,734 and
$16,793,808, respectively.
7. Ownership:
In July 1999, Emisphere acquired Elan's ownership interest in Ebbisham in
exchange for a seven-year $20 million zero coupon note. The acquisition, which
resulted in Ebbisham becoming a wholly owned subsidiary of Emisphere, will be
accounted for by Emisphere in accordance with the purchase method of
accounting. The
F-27
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
accompanying financial statements are presented as of and for the periods prior
to Emisphere's acquisition. As such, the accompanying financial statements do
not reflect purchase accounting adjustments recorded by Emisphere relating to
this change in ownership.
8. Subsequent Event:
In September 1999, Emisphere initiated procedures to liquidate Ebbisham.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,000,000 Shares
[LOGO] EMISPHERE TECHNOLOGIES, INC.
Common Stock
------------------
PROSPECTUS SUPPLEMENT
------------------
Hambrecht & Quist
------------------
October , 1999
------------------
You should rely only on information contained in this prospectus
supplement. We have not authorized anyone to provide you with information
different from that contained in this prospectus supplement. We are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus supplement is accurate only as of the date of this prospectus
supplement, regardless of the time of delivery of this prospectus supplement or
of any sale of our common stock.
We have not taken any action in any jurisdiction outside the United States
to permit a public offering of the common stock or possession or distribution
of this prospectus supplement in any such jurisdiction. Persons who come into
possession of this prospectus supplement in jurisdictions outside the United
States are required to inform themselves about and to observe any restrictions
as to this offering and the distribution of this prospectus supplement
applicable to that jurisdiction.
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