<PAGE>
As filed with the Securities and Exchange Commission on February 22, 2000
Registration No. 333-30358
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3306985
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
</TABLE>
765 Old Saw Mill River Road
Tarrytown, New York 10591
(914) 347-2220
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Michael M. Goldberg, M.D.
Emisphere Technologies, Inc.
765 Old Saw Mill River Road
Tarrytown, New York 10591
(914) 347-2220
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
Edwin S. Maynard, Esq. David W. Pollak, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison Morgan, Lewis & Bockius LLP
1285 Avenue of the Americas 101 Park Avenue
New York, New York 10019 New York, New York 10178
(212) 373-3000 (212) 309-6058
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 22, 2000
PROSPECTUS
2,500,000 Shares
[LOGO] EMISPHERE TECHNOLOGIES, INC.
Common Stock
Our common stock is quoted on the Nasdaq National Market under the symbol
EMIS. On February 18, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $65.50 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 underwriters an option for a period of 30 days to
purchase up to 375,000 additional shares of common stock.
The underwriters are severally underwriting the offered shares. The
underwriters expect to deliver the shares against payment in New York, New York
on March , 2000.
--------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 6.
--------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
Chase H&Q
Deutsche Banc Alex. Brown
Warburg Dillon Read LLC
Adams, Harkness & Hill, Inc.
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 3
Risk Factors............................................................... 6
Use of Proceeds............................................................ 14
Capitalization............................................................. 15
Dilution................................................................... 16
Selected Financial Data.................................................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 18
Business................................................................... 22
Management................................................................. 33
Principal Stockholders..................................................... 37
Underwriting............................................................... 38
Legal Matters.............................................................. 39
Experts.................................................................... 39
Where You Can Find More Information........................................ 40
Index to Financial Statements.............................................. F-1
</TABLE>
------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus or incorporated by reference into
this prospectus and oral statements made from time to time by our
representatives 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; prospects for our salmon calcitonin product candidate in
development with a partner; 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, our ability to fund such efforts with or without
partners and uncertainty as to the timing or outcome of commercialization
decisions made by our collaborative 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 referred to or incorporated by reference into this prospectus.
2
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus
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 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 commenced Phase III trials for this product in
December 1999 and began dosing patients in January 2000. In addition, we have
developed with Novartis Pharma AG a capsule form of salmon calcitonin which
incorporates our technology. Salmon calcitonin is a compound used in the
treatment of osteoporosis. Novartis completed a Phase I clinical study for this
product in October 1999. The study's results, released in January 2000,
indicated that Novartis had reached its targeted endpoint of achieving
therapeutic blood levels of salmon calcitonin using our solid dosage
formulation. In February 2000, Novartis agreed to execute its option to acquire
an exclusive license to develop and commercialize this product.
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
proprietary 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 also 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 has agreed to
acquire an exclusive license to develop and commercialize oral salmon
calcitonin. We believe that the results of the Novartis Phase I clinical study
of salmon calcitonin represent the first time that a protein macromolecule was
successfully delivered in solid oral dosage form without chemical modification
of the molecule or damage to the biological membrane. 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 us, that are developing
technologies that offer alternatives to the existing route of drug
administration, including oral administration of previously injectable drugs.
3
<PAGE>
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 and, with our collaborator, salmon calcitonin in humans and
the oral delivery of a variety of other compounds in animals (including
insulin, human growth hormone, human parathyroid hormone, erythropoietin,
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.
The Offering
<TABLE>
<S> <C>
Common stock offered by us.......................... 2,500,000 shares
Common stock to be outstanding after this offering.. 17,021,037 shares
Use of proceeds..................................... To fund development of preclinical
stage programs, to fund the Phase
III clinical program for our liquid
oral heparin formulation until a
suitable marketing partner is found
or until completion 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
does not take into account the issuance of up to 375,000 shares of common stock
which the underwriters have the option to purchase solely to cover over-
allotments. If the underwriters exercise their over-allotment option in full,
17,396,037 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 January 31, 2000 and
does not take into account 4,915,345 shares of common stock issuable upon
exercise of options outstanding at a weighted average exercise price of $10.72
per share, and 817,716 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.
We maintain a web site at "www.emisphere.com." Information presented on
our web site does not constitute part of this prospectus.
4
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The table below provides a summary of our financial data for the five
fiscal years ended July 31, 1999, the three months ended October 31, 1998 and
1999 and as of October 31, 1999. We derived the summary data for the five
fiscal years ended July 31, 1999 from our audited financial statements, which
were audited by PricewaterhouseCoopers LLP, our independent accountants. We
derived the summary data for the three months ended October 31, 1998 and 1999
and as of October 31, 1999 from our unaudited financial statements. We prepared
our unaudited financial statements on the same basis as our audited financial
statements and included all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial data. Operating
results for the three months ended October 31, 1999 are not necessarily
indicative of the results that may be expected for the full year. You should
read this summary financial data together with our financial statements and the
notes to those financial statements.
<TABLE>
<CAPTION>
Three Months
Ended
Fiscal Year Ended July 31, October 31,
-------------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 33 $ 3,131 $ 5,401 $15,868 $ 10,180 $ 3,579 $ 625
------- ------- ------- ------- -------- ------- -------
Costs and expenses:
Research and
development........... 5,802 6,605 7,724 15,190 22,850 4,299 8,745
Acquisition of in-
process research and
development........... -- -- -- -- 9,686 -- --
Loss in Ebbisham Ltd... -- -- 2,550 4,044 3,092 1,161 --
General and
administrative........ 2,404 3,337 3,416 5,344 6,051 1,360 1,258
------- ------- ------- ------- -------- ------- -------
Total costs and
expenses............. 8,206 9,942 13,690 24,578 41,679 6,820 10,003
------- ------- ------- ------- -------- ------- -------
Operating loss.......... (8,173) (6,811) (8,289) (8,710) (31,499) (3,241) (9,378)
Other income (expense).. 389 703 968 1,644 817 261 (505)
------- ------- ------- ------- -------- ------- -------
Net loss................ $(7,784) $(6,108) $(7,321) $(7,066) $(30,682) $(2,980) $(9,883)
======= ======= ======= ======= ======== ======= =======
Net loss per share--
basic and diluted...... $ (1.03) $ (0.72) $ (0.77) $ (0.66) $ (2.63) $ (0.27) $ (0.81)
======= ======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1999
------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(2)
------- ------------ --------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities.............................. $ 5,905 $29,405 $182,441
Working capital.......................... 5,190 28,690 181,726
Total assets............................. 26,181 49,681 202,717
Long-term liabilities.................... 23,088 23,088 23,088
Accumulated deficit...................... (97,688) (97,688) (97,688)
Stockholders' equity..................... 1,600 25,100 178,136
</TABLE>
- ------------------
(1) Gives effect to the issuance of 2,300,000 shares of common stock in a
public offering completed on November 2, 1999 as if it had occurred on
October 31, 1999. The net proceeds of that offering were approximately
$23.5 million.
(2) Further adjusted to reflect this offering at an assumed public offering
price of $65.50 per share. See "Use of Proceeds."
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 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 UF formulation for
the prevention of deep vein thrombosis. Heparin is currently not available in
oral form. We commenced Phase III clinical trials for this product in December
1999 and began dosing patients in January 2000. 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 liquid oral heparin to market on our own. In July 1999, we assumed sole
responsibility for Phase III development and funding. We will need to find a
third party with significant resources to become our partner in manufacturing,
marketing and distributing liquid 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.
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 our liquid oral heparin is not approved or we are unable to develop it
into a commercially viable product, our prospects will suffer significantly.
Other than our oral formulation of salmon calcitonin, which has successfully
completed an initial Phase I clinical study, we have no other products that
have entered into human 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
6
<PAGE>
limited animal and human studies are indicative of results that would be
achieved in future animal studies 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.
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 projects.
Our strategic alliances with Novartis and Lilly may not result in
commercializable products.
Novartis completed a Phase I study in the United Kingdom in October 1999
of a capsule form of salmon calcitonin developed using our carrier technology.
In February 2000, Novartis agreed to execute its option to acquire an exclusive
license to develop and commercialize this product. However, we cannot assure
you that, despite the positive results achieved in the Phase 1 study, Novartis
will be successful in continuing the commercial development of oral salmon
calcitonin.
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. Our strategic alliance with Lilly does not require
Lilly to use our technologies exclusively, and we are aware of collaborations
between Lilly and others pursuing non-oral delivery of both of the proteins
that are 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 their 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. On October 31, 1999, our
accumulated deficit was approximately $97.7 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 we conduct Phase III clinical trials,
the most expensive phase of the clinical development process. As a result, we
believe that we will continue to incur increasing operating losses for the
foreseeable future.
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 44 patents on our drug
delivery technologies in the United States which will expire beginning in 2007.
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
8
<PAGE>
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 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 that we secure from 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 may require additional funding.
We may require additional funding in order to continue our research and
product development programs and preclinical testing and clinical trials, fund
our operating expenses, pursue regulatory approvals
9
<PAGE>
of our product candidates and establish manufacturing capabilities. We cannot
assure you that we will be successful in raising additional capital. In the
event that a marketing partner for our oral heparin product is not found, we
expect that cash, cash equivalents and marketable securities on-hand, combined
with the proceeds of this offering, will allow us to meet our liquidity
requirements for at least the next two years.
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 of these members or consultants 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.
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, as well as other
existing drugs. For example, our oral heparin products will compete with
injectable heparin, injectable low molecular weight heparin and warfarin, an
oral anti-coagulant. These products are marketed throughout the world by very
large companies such as Aventis SA, Pharmacia & Upjohn, Inc. and E.I. DuPont de
Nemours & Co. Similarly, our salmon calcitonin product candidate, if developed
and marketed, would compete with a wide array of existing osteoporosis
therapies, including a nasal dosage form of salmon calcitonin, estrogen
replacement therapy, bisphosphonates and selective receptor modulators.
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. For
example, we are aware that AstraZeneca PLC has completed Phase II clinical
trials of a pro-drug form of melagantran, a direct thrombin inhibitor, which,
if successfully developed, would compete with our oral heparin products.
Similarly, we are aware that at least one competitor has notified the FDA that
it is developing a competing formulation of salmon calcitonin. We cannot assure
you that, if our products are marketed, they will be preferred to existing
drugs or that they will be preferred to or available before other products in
development.
10
<PAGE>
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, or GMP,
requirements; and
. product changes or modifications.
If we fail to comply or maintain compliance with such laws and
regulations, we may be fined or 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/or
. assess civil and criminal penalties against us.
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.
11
<PAGE>
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.
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 October 31, 1999, we have outstanding options to purchase up to
3,697,246 shares of common stock which are currently exercisable and additional
options to purchase up to 1,264,555 shares of common stock are exercisable over
the next several years. In addition, an aggregate of 25,000 shares of common
stock have been reserved for issuance under our Directors' Deferred
Compensation Plan, of which 3,687 shares are currently issuable. The holders of
these options or rights 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 or rights may adversely
affect the terms on which we may obtain additional financing.
We may be adversely affected by the "Year 2000" problem
The "Year 2000 computer problem" refers to the potential for system and
processing failures of date-related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. It
also refers to the possibility that programs may fail to recognize February 29,
2000 as a
12
<PAGE>
leap year date as a result of an exception to the calculation of leap years
that will occur in the year 2000. The Year 2000 computer problem could result
in miscalculations, data corruption, system failures or disruptions of
operation. Because we depend on our business systems and those of third-
parties, residual Year 2000 problems could cause a failure of these systems
that could adversely affect our business.
Even though our operations have not been materially affected by the Year
2000 issue to date, our systems and those of other companies on which our
systems and operations rely could still experience Year 2000 computer problems.
We have established a team to address our Year 2000 risk. This 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. In addition, 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.
13
<PAGE>
USE OF PROCEEDS
We estimate that the proceeds of this offering will be approximately
$153.0 million, based on an assumed public offering price of $65.50 per share
and after deducting underwriting discounts and estimated offering expenses. We
intend to use the net proceeds of this offering:
. to fund development of our preclinical stage programs;
. to fund the Phase III clinical program for our liquid oral heparin
formulation until a suitable marketing partner is found or until
completion; and
. for general corporate purposes.
Numerous factors, including the timing of entering into a collaboration
agreement with a marketing partner, 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 and intermediate-term investment-grade,
interest-bearing instruments.
14
<PAGE>
CAPITALIZATION
The table below describes our capitalization at October 31, 1999 on an
actual basis, on a pro forma basis to give effect to the offering of common
stock that we completed on November 2, 1999 and further adjusted to reflect
this offering and the application of the proceeds of this offering, which are
estimated to be $153.0 million based on an assumed public offering price of
$65.50 per share and after deducting underwriting discounts and estimated
offering expenses.
<TABLE>
<CAPTION>
October 31, 1999
----------------------------------
Pro Pro Forma
Actual Forma(1) As Adjusted(2)
-------- -------- --------------
(in thousands)
<S> <C> <C> <C>
Debt:
Note payable............................... $ 21,000 $ 21,000 $ 21,000
Stockholders' equity:
Preferred Stock, par value $.01 per share,
1,000,000 shares authorized; no shares
issued and outstanding, actual pro forma
and pro forma as adjusted................. -- -- --
Common Stock, par value $.01 per share,
40,000,000 shares authorized; 12,206,511
shares issued (12,163,011 outstanding)
actual; 14,506,511 shares issued
(14,463,011 outstanding) pro forma;
17,006,511 shares issued (16,963,011
outstanding) pro forma as adjusted(3)..... 122 145 170
Additional paid-in capital................. 99,364 122,841 275,852
Accumulated deficit........................ (97,688) (97,688) (97,688)
Net unrealized gain on marketable
securities................................ (5) (5) (5)
Less 43,500 shares of Common Stock held in
treasury, at cost......................... (193) (193) (193)
-------- -------- --------
Total stockholders' equity.............. $ 1,600 $ 25,100 $178,136
-------- -------- --------
Total capitalization........................ $ 22,600 $ 46,100 $199,136
======== ======== ========
</TABLE>
- ------------------
(1) Gives effect to the issuance of 2,300,000 shares of common stock in a
public offering completed on November 2, 1999 as if it had occurred on
October 31, 1999. The net proceeds of that offering were approximately
$23.5 million.
(2) Gives further effect to this offering, at an assumed offering price of
$65.50 per share, and the application of the proceeds of this offering,
estimated to be $153.0 million after deducting underwriting discounts and
estimated offering expenses.
(3) Does not include (i) 4,961,801 shares of common stock issuable upon the
exercise of options outstanding and 829,380 shares available for future
grant under our existing stock option plans and employee stock purchase
plan and (ii) 3,687 shares of common stock issuable under our Directors'
Deferred Compensation Stock Plan and 21,313 shares available for future
issuance under that plan.
15
<PAGE>
DILUTION
At October 31, 1999, we had a pro forma net tangible book value of $16.8
million, or $1.16 per share of our common stock. Pro forma net tangible book
value per share represents the amount of our total assets less intangible
assets, such as purchased technology, less total liabilities, divided by the
number of shares of our common stock outstanding after giving effect to our
public offering of 2,300,000 shares completed on November 2, 1999. Without
taking into account any changes in pro forma net tangible book value after
October 31, 1999, other than this offering, based on an assumed public offering
price of $65.50 per share and after deducting underwriting discounts and
estimated offering expenses, our pro forma net tangible book value at October
31, 1999 would have been $169.9 million, or $10.01 per share. This represents
an immediate dilution in pro forma net tangible book value of $55.49 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 $8.85 per share to
our existing stockholders. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share to be paid by a new
investor....................................................... $65.50
Pro forma net tangible book value per share before offering..... $1.16
Increase in net tangible book value per share attributable to
new investors.................................................. 8.85
-----
Pro forma net tangible book value per share after offering...... 10.01
------
Dilution per share to new investors............................. $55.49
======
</TABLE>
The computation above is based on the pro forma number of shares of our
common stock outstanding as of October 31, 1999, which does not include
4,961,801 shares of common stock issuable upon the exercise of outstanding
options and 829,380 shares available for future grant under our existing stock
option plan and employee stock purchase plan. In addition, an aggregate of
25,000 shares of common stock have been reserved for issuance under our
Directors' Deferred Compensation Plan, of which 3,687 shares are currently
issuable. To the extent that shares are issued under these plans in the future,
there will be further dilution to new investors.
16
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
The table below provides selected financial data for the five fiscal years
ended July 31, 1999, the three months ended October 31, 1998 and 1999, as of
July 31, 1995, 1996, 1997, 1998 and 1999 and as of October 31, 1999. We derived
the data for the five fiscal years ending July 31, 1999 and as of July 31,
1995, 1996, 1997, 1998 and 1999 from our financial statements and accompanying
notes, which were audited by independent accountants. We derived the data for
the three months ended October 31, 1998 and 1999 and as of October 31, 1999
from our unaudited financial statements. We prepared our unaudited financial
statements on the same basis as our audited financial statements and included
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial data. Operating results for the three
months ended October 31, 1999 are not necessarily indicative of the results
that may be expected for the full year. You should read this selected financial
data together with our financial statements and the notes to those financial
statements as well as the discussion under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months
Fiscal Year Ended July 31, Ended October 31,
-------------------------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 33 $ 3,131 $ 5,401 $15,868 $ 10,180 $ 3,579 $ 625
------- ------- ------- ------- -------- -------- -------
Costs and expenses:
Research and
development........... 5,802 6,605 7,724 15,190 22,850 4,299 8,745
Acquisition of in-
process research and
development........... -- -- -- -- 9,686 -- --
Loss in Ebbisham Ltd... -- -- 2,550 4,044 3,092 1,161 --
General and
administrative........ 2,404 3,337 3,416 5,344 6,051 1,360 1,258
------- ------- ------- ------- -------- -------- -------
Total costs and
expenses............. 8,206 9,942 13,690 24,578 41,679 6,820 10,003
------- ------- ------- ------- -------- -------- -------
Operating loss.......... (8,173) (6,811) (8,289) (8,710) (31,499) (3,241) (9,378)
Other income (expense).. 389 703 968 1,644 817 261 (505)
------- ------- ------- ------- -------- -------- -------
Net loss................ $(7,784) $(6,108) $(7,321) $(7,066) $(30,682) $( 2,980) $(9,883)
======= ======= ======= ======= ======== ======== =======
Net loss per share--
basic and diluted...... $ (1.03) $ (0.72) $ (0.77) $ (0.66) $ (2.63) $ (0.27) $ (0.81)
======= ======= ======= ======= ======== ======== =======
<CAPTION>
July 31, October 31, 1999
-------------------------------------------- ------------------
Pro
1995 1996 1997 1998 1999 Actual Forma(1)
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 5,620 $18,237 $33,690 $34,828 $ 17,805 $ 5,905 $29,405
Working capital......... 5,173 17,799 31,323 31,457 13,360 5,190 28,690
Total assets............ 7,549 20,039 36,897 53,690 38,476 26,181 49,681
Long-term liabilities... 55 45 35 10,598 22,050 23,088 23,088
Accumulated deficit..... (36,628) (42,736) (50,057) (57,123) (87,805) (97,688) (97,688)
Stockholders' equity.... 6,899 19,267 33,398 31,281 11,287 1,600 25,100
</TABLE>
- ------------------
(1) Gives effect to the issuance of 2,300,000 shares of common stock in a
public offering completed on November 2, 1999 as if it had occurred on
October 31, 1999. The net proceeds of that offering were approximately
$23.5 million.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
We are a biopharmaceutical company specializing in the oral delivery of
therapeutic macromolecules and other compounds that are not currently
deliverable by oral means. Since our inception in 1986, we have devoted
substantially all of our efforts and resources to research and development
conducted on our own behalf and through collaborations with corporate partners
and academic research institutions. We have no product sales to date. Our major
sources of 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 our operations.
Results of Operations
Three Months Ended October 31, 1999 Compared to Three Months Ended October 31,
1998
Contract research revenues were $0.6 million in the first quarter of
fiscal 2000, a decrease of $3.0 million, or 83%, compared to $3.6 million in
the same period of fiscal 1999. Contract research revenues in fiscal 2000 were
from the Novartis Pharma AG research collaboration and were consistent with
revenues received from Novartis in the first quarter of fiscal 1999. Contract
research revenues in fiscal 1999 also included $2.7 million from our former
heparin joint venture and from our collaboration with Eli Lilly & Co. The
research and development funding portion of the ongoing Lilly collaboration was
completed in the third quarter of fiscal 1999. The heparin joint venture was
discontinued in the fourth quarter of fiscal 1999. Revenue for the first
quarters of fiscal 2000 and 1999 were comprised of reimbursed research and
development expenses. Costs of contract research revenue approximate contract
research revenue and are included in research and development expenses.
Total operating expenses were $10.0 million in the first quarter of fiscal
2000, an increase of $3.2 million, or 47%, compared to the same period of
fiscal 1999. The details of this increase are as follows:
Research and development costs were $8.7 million in the first quarter of
fiscal 2000, an increase of $4.4 million, or 103%, compared to the same period
of fiscal 1999. The increase was primarily related to liquid oral heparin
clinical development and continuing Novartis development efforts. The largest
component of the increase in research and development expenses was expenses for
clinical research services related to the liquid oral heparin Phase III
clinical trials. In addition, we increased our scientific and development
personnel in the areas of parallel synthesis, solid dosage formulation, quality
control and regulatory affairs in order to accommodate increased efforts
related to oral heparin development and the Novartis collaboration.
General and administrative expenses were $1.3 million in the first quarter
of fiscal 2000, a decrease of $0.1 million, or 7%, compared to the same period
of fiscal 1999. The decline was due to lower sales and real estate taxes. For
the remainder of the fiscal year, general and administrative expenses are
expected to increase over prior fiscal year levels in order to support
increasing levels of research and development activities.
The loss in Ebbisham Ltd. (our former joint venture with Elan Corporation
plc) decreased to zero in the first quarter of fiscal 2000 from $1.2 million in
the same period of fiscal 1999 due to the discontinuation of the joint venture
in the fourth quarter of fiscal 1999.
As a result of the above, our operating loss was $9.4 million in the first
quarter of fiscal 2000, an increase of $6.2 million compared to $3.2 million
for the same period of fiscal 1999.
18
<PAGE>
Other income and expense decreased to approximately $0.5 million of net
expense in the first quarter of fiscal 2000 compared to $0.3 million of net
income in the first quarter of fiscal 1999. The change is primarily the result
of an increase in interest expense and decreased investment income. The
increase in interest expense is primarily attributable to non-cash interest
expense accrued on the $20.0 million note payable, which was recorded in
conjunction with our fiscal 1999 fourth quarter acquisition of Elan plc's
interest in the former heparin joint venture. Interest was earned on lower cash
and investment balances in the first fiscal quarter of 2000 compared to the
same period of fiscal 1999.
Based on the above, we sustained a net loss of $9.9 million in the first
quarter of fiscal 2000 compared to a net loss of $3.0 million in the same
period of fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998
Contract research revenues were $10.2 million in fiscal 1999, a decrease
of $5.7 million, or 36%, compared to fiscal 1998. The decrease was the result
of discontinuing our 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. We 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 our carriers, and a
number of toxicology studies. In addition, during fiscal 1999, we expanded our
laboratory and analytical capabilities in connection with our oral heparin
development program and our collaboration with Novartis. This resulted in an
increase in scientific personnel and associated laboratory supply costs. We
also experienced an increase in rental expense from a lease of laboratory and
administrative office space entered into in fiscal 1998. We expect that our
research and development spending will increase as we begin our liquid oral
heparin Phase III clinical trials.
The $9.7 million non-cash charge incurred in fiscal 1999 for acquired in-
process research and development was related to our acquisition of Elan's
ownership interest in Ebbisham, Ltd. 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 due to the lower level of joint development efforts with
Elan preceding the termination of the joint venture. 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
our new facility.
As a result of these factors, our 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.
Our 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 our senior convertible notes and the $20.0
million note payable.
Based on the above factors, we 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.
19
<PAGE>
Fiscal 1998 Compared to Fiscal 1997
Our contract research revenues were $15.9 million in fiscal 1998, an
increase of $10.5 million, compared to $5.4 million in fiscal 1997. The
increase was the result of our receiving research and development funding from
our 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:
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 due to increased personnel and laboratory supply costs relating to the
collaborations with Novartis, Lilly and the ongoing clinical work for heparin.
We also increased our funding of outside consultants and universities engaged
to conduct studies to help advance our scientific research efforts, perform
services related to the manufacturing of our carriers and consult on our
ongoing clinical studies with heparin. We 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 due 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
relating to an information technology project. We 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 relocating our operations, we
incurred a charge of $0.3 million, which represented the write-down of
leasehold improvements on our old facility.
As a result of these factors, our operating loss was $8.7 million in
fiscal 1998, an increase of $0.4 million, or 5%, compared to fiscal 1997.
Our other income and expense were $1.6 million in fiscal 1998, an increase
of $0.7 million, or 70%, compared to fiscal 1997. This increase was primarily
the result of increased returns on our larger investment portfolio. This
increase was partially offset by interest expense related to our $13.5 million
senior convertible notes issued in fiscal 1998.
Based on the above factors, we 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 October 31, 1999, we had working capital of $5.2 million. Total
cash, cash equivalents and marketable securities were $5.9 million, a decrease
of $11.9 million compared to July 31, 1999. The decrease was primarily due to
the increased rate of spending on the oral heparin Phase III clinical
development costs. We also repaid the outstanding balance of $2.6 million of
our senior convertible notes in September 1999.
Our operations over the last three years have been financed primarily with
$26.8 million in equity financing, $13.5 million in debt financing and $30.3
million in research and development funding and milestone payments. In
addition, on November 2, 1999, we issued 2,300,000 shares of common stock for
net proceeds of approximately $23.5 million. The proceeds from that offering
will be used to fund a portion of the Phase III clinical development for our
liquid oral heparin formulation, to fund research and development and for
general corporate purposes.
20
<PAGE>
In connection with the termination of the Elan joint venture, we 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 does not
require periodic cash interest payments. The $20.0 million principal amount,
along with accrued interest, can be paid in part or in full, at our election,
after a new drug application for oral heparin has been filed with the FDA.
Under certain circumstances, we have the option to require Elan to subscribe
for our common stock at then-current market prices.
During the first quarter of fiscal 2000, Novartis initiated and completed
a Phase I clinical study of a capsule form of salmon calcitonin which
incorporates our oral delivery technology. In February 2000, Novartis agreed to
execute its option to acquire an exclusive license to develop and commercialize
this product. As a result, Novartis will be required to make a predetermined
milestone payment to us and purchase $5.0 million of common stock at a
previously negotiated price, subject to our approval. Since the negotiated
price is below current market prices, we would not expect to approve the
purchase. The research and development phase of our Novartis collaboration,
which led to Novartis' decision to execute the license described above, expired
in December 1999, at which time its quarterly research and development funding
obligations ended.
Under our collaboration agreement, Novartis had an option to develop a
second compound using our technology which also expired in December 1999. A
decision to develop a product using a second compound may lead to a new
agreement.
In March 1998, Lilly executed license agreements for two proteins and we
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. We supplied Lilly with carriers for both
therapeutic proteins. These carriers are undergoing preclinical evaluations at
Lilly's facilities and our own. During fiscal 1999, Lilly suspended development
of one of its proteins pending further review by them of the injectable version
of the protein. We are awaiting further direction from Lilly with respect to
both compounds. We 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 ended July 31, 1999, we spent $12.3 million in
leasehold improvements and scientific equipment (approximately $3.7 million
during fiscal 1999 and $8.6 million during fiscal 1998). These purchases were
in connection with the build-out of our newly leased research and
administrative facility in Tarrytown, New York, and our acquisition of
laboratory equipment to support our 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 us $1.3 million for leasehold
improvements. With the completion of this facility, we expect capital
expenditure levels to decrease in fiscal 2000 to below $2.0 million.
We expect to incur a substantial increase in liquid oral heparin clinical
development expenses in fiscal 2000 as the product continues through its Phase
III clinical trials, the most expensive phase of the clinical development
process. As a result, we expect to continue to incur increasing operating
losses.
Following completion of this offering, we expect that cash, cash
equivalents and marketable securities on-hand will be adequate to meet our
liquidity requirements for at least the next two years. In the event that a
marketing partner for the oral heparin product is not found, or that this
offering is not successful, we will be required to seek alternative financing
and/or curtail our operations, including our Phase III development program.
Impact of the Future Adoption of Recently Issued Accounting Standards
We believe that future adoption of recently issued accounting standards
will not have a material impact on our financial statements.
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BUSINESS
Overview
Emisphere 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 pharmaceutical collaborators, of
oral formulations of selected therapeutic macromolecules.
Our lead product in development is a liquid oral heparin formulation.
Heparin is an anti-coagulant widely used for the prevention of deep vein
thrombosis and the treatment of myocardial infarction and unstable angina.
Currently, heparin must be administered intravenously or by injection. We
believe that the worldwide sales of heparin are over $2 billion annually.
Heparin is currently marketed in two principal forms, heparin UF and low
molecular weight heparin. Our liquid oral heparin formulation combines heparin
UF with our proprietary molecular carrier.
The lead indication that we are pursuing for our liquid oral heparin
formulation is the prevention of deep vein thrombosis, or DVT. We have
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 our 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 FDA in August 1999,
we designed a Phase III protocol and commenced Phase III trials in December
1999. In addition, we have produced a prototype tablet form of heparin and
expect to initiate a Phase I clinical study for that product during the first
half of calendar year 2000. We are also in the early stages of developing a
tablet form of low molecular weight heparin.
Our next most advanced product in development is an oral form of salmon
calcitonin. Salmon calcitonin is a synthetic version of a natural hormone that
inhibits bone resorption and is used in the treatment of osteoporosis, a
disease that causes bones to become more fragile and, as a result, more likely
to break. Salmon calcitonin is currently administered as an injection or nasal
spray. Osteoporosis affects more than 28 million people in the United States
and over 200 million people worldwide, approximately 80% of whom are women.
We have conducted collaborative research with Novartis on an oral
formulation of salmon calcitonin since 1997. In October 1999, Novartis
completed a Phase I clinical study in the United Kingdom of a capsule form of
salmon calcitonin utilizing our technology. The study results, released in
January 2000, indicated that Novartis had reached its targeted endpoint of
achieving therapeutic blood levels of salmon calcitonin using our solid dosage
formulation. We believe that these results represent the first time that a
protein macromolecule was successfully delivered in solid oral dosage form
without chemical modification of the molecule or damage to the biological
membrane. In February 2000, Novartis agreed to execute its option to acquire an
exclusive license to develop and commercialize oral salmon calcitonin.
In addition to our collaboration with Novartis, we have entered into
license agreements with Eli Lilly & Company with respect to two of Lilly's
therapeutic proteins in the area of endocrinology. Both candidates are
currently in preclinical development. In addition, we are engaged in
feasibility studies regarding the development of products combining our
carriers with therapeutic compounds selected by our collaborators.
We have 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
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membranes, including intestinal, nasal, buccal, sublingual, subcutaneous or
intraocular membranes, without altering the therapeutic benefits of these
molecules. We believe that our technology offers the pharmaceutical industry a
relatively inexpensive route to generating significant new product
opportunities. Beyond enabling the oral delivery of heparin and salmon
calcitonin in humans, this technology has demonstrated the oral delivery, in
animals, of a variety of other compounds, including insulin, human growth
hormone, human parathyroid hormone, erythropoietin, cromolyn and deferoxamine.
We believe 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.
Business Strategy
Our 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. Our strategy to achieve this objective
incorporates the following principal elements:
. Establish a partnership for the heparin family of products to:
- complete the development of and commercialize our liquid oral
heparin formulation;
- continue the development of solid dosage forms of heparin UF and
low molecular weight heparin; and
- explore additional indications for which heparin may be beneficial.
. Pursue new product opportunities by:
- furthering the development of compounds that we already have
demonstrated to be orally deliverable in animals;
- identifying additional therapeutic compounds (preferably already
approved for injectable use) that address large markets;
- developing products through Phase I or Phase II studies; 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
our 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 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
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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 constitute the largest product
segment of the pharmaceutical industry and we believe 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. We believe 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.
Our Platform Drug Delivery Technologies
The core of our delivery technologies is the design and synthesis of
compounds that maximize the transport of drugs across biological membranes. Our
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.
We believe that the supramolecular complexes formed when our 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.
We have 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. We believe that, through our thorough
understanding of the individual properties of our proprietary carrier
compounds, we can select and customize carriers to facilitate the oral delivery
of a broad range of individual therapeutic agents.
We believe that our 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;
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. lack of toxicity; and
. maintenance of the biological effects of the drug.
In addition, we believe that the supramolecular complexes formed by our
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 Our Platform Technologies
We believe that our oral delivery approach may have potential competitive
advantages, including:
Broad applicability: Our 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 our carriers
does not rely upon the addition of other agents that can have adverse
effects on the intestinal membranes or digestion process (for example,
penetration enhancers);
Versatility of formulation: We believe 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 our carrier material in commercial quantities are
readily available.
We believe that an efficient and reproduceable delivery system for
macromolecules represents a significant commercial opportunity. This 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 Candidates
Heparin. Our lead product candidate is a liquid oral heparin formulation
that combines heparin UF and one of our proprietary molecular carriers. We
commenced Phase III clinical trials of this product during December 1999 for
the prevention of deep vein thrombosis, or DVT, following total hip
replacement surgery. We expect to conduct our Phase III program at over 90
centers in the United States, the United Kingdom and Canada and expect to
enroll over 3,000 patients. The Phase III program is composed of two
sequential trials. We expect to complete both trials of the Phase III program
in 18 months.
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.
Currently, the use of heparin UF is restricted to the hospital setting.
Because low molecular weight heparin may be dosed less frequently, its
introduction has extended the use of injectable heparin into the home setting,
for up to 21 days. However, for many patients, 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. Warfarin is
not an ideal anti-coagulant in that it has more negative interactions with
other pharmaceuticals than most FDA approved drugs and requires constant
patient monitoring. We believe that the introduction of oral heparin would
open the home market to heparin UF by replacing warfarin and injectable low
molecular weight heparin use. We also believe that our oral heparin products
will ultimately be applicable for a wide range of anti-
coagulant/antithrombotic uses.
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The Phase II clinical study of our 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 our liquid oral heparin to a dose of
heparin administered subcutaneously. The study indicated that the orally
administered heparin utilizing our proprietary technology was well-tolerated
and comparable to heparin administered subcutaneously in preventing DVT.
In preparation of the investigational new drug application, or IND, for
our liquid oral heparin formulation submitted to the FDA, we 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 we 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, we 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, we (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. We believe 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. We are currently engaged in discussions with a number of
pharmaceutical companies regarding the commercialization of our oral heparin
products, but have 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.
During fiscal 1999, we improved the manufacturing process for our liquid
oral heparin carrier, increased the overall purity of the carrier and
significantly decreased the per dose production cost. Based on these
improvements, we and our contract manufacturers are in the process of
completing 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 our carrier. During fiscal 1999, we also optimized the
composition of our liquid oral heparin formulation and produced a quantity
sufficient to complete the Phase III trials.
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Salmon Calcitonin. Salmon calcitonin is a synthetic version of a natural
hormone that inhibits bone resorption and is used in the treatment of
osteoporosis, which is a disease that causes bones to become fragile and, as a
result, more likely to break. Salmon calcitonin is currently administered as an
injection or nasal spray. Osteoporosis affects more than 28 million people in
the United States and over 200 million people worldwide, approximately 80% of
whom are women. Annual worldwide sales of salmon calcitonin are estimated to be
in excess of $800 million.
We have conducted collaborative research with Novartis on an oral form of
salmon calcitonin since 1997. Under the terms of our collaboration agreement,
Novartis has made quarterly payments to us to fund research regarding the
application of our technology to salmon calcitonin. In October 1999, Novartis
completed a Phase I clinical study in the United Kingdom of a capsule form of
salmon calcitonin utilizing our technology. The study results, released in
January 2000, indicated that Novartis had reached its targeted endpoint of
achieving therapeutic blood levels of salmon calcitonin using our solid dosage
formulation. We believe that these results represent the first time that a
protein macromolecule was successfully delivered in solid oral dosage form
without chemical modification of the molecule or damage to the biological
membrane.
In February 2000, Novartis agreed to execute its option to acquire an
exclusive license to develop and commercialize oral salmon calcitonin. As a
result, Novartis will be required to make a predetermined milestone payment to
us and purchase $5.0 million of our common stock at a previously negotiated
price, subject to our approval. Since the negotiated price is below current
market prices, we would not expect to approve the purchase. 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. We will receive royalties on sales of any oral products that may
result from the collaboration. We cannot assure you that, despite the positive
results achieved in the Phase I study, Novartis will be successful in
continuing commercial development of oral salmon calcitonin.
Collaboration Agreements
We have 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.
Eli Lilly & Company. In February 1997, we entered into a research
collaboration and option agreement with Lilly to combine Lilly's therapeutic
protein and formulation capabilities with our carrier technologies. The Lilly
agreement provided for periodic payments to us to fund a research and
development program to study the use of our 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 our 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 we are 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
our 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. We have designed and supplied Lilly with carriers for both
therapeutic proteins. 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 its
therapeutic protein and suspended its
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development. As a result, we are awaiting further direction from Lilly on the
project. With respect to Lilly's other therapeutic protein under license from
us, Lilly is evaluating our carriers and we are awaiting a report from Lilly on
the results of its evaluation.
Novartis Pharma AG. We have conducted collaborative research with Novartis
on an oral formulation of salmon calcitonin since 1997. Our collaborative work
led to completion of a Phase I clinical study in October 1999. In February
2000, Novartis agreed to execute its option to acquire an exclusive license to
develop and commercialize this product. Under the collaboration agreement,
Novartis also had the option to develop a second compound using our technology,
which expired in December 1999. A decision to develop a product using a second
compound may lead to a new agreement.
We have received an aggregate of $15.1 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. We 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. We have 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 and salmon calcitonin, for which we have demonstrated oral
delivery in animal models using our carrier technologies. Some of these product
candidates are the subject of collaboration agreements. In other cases, we do
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
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 we have applied our
carriers are insulin, human growth hormone, human 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
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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 we believe an oral formulation would increase compliance. We have
demonstrated that our 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. We
have also demonstrated that the use of our carriers increases the amount of
insulin delivered across pulmonary membranes in rats.
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. Our 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.
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. We have
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. We have identified
delivery agents for an oral formulation of erythropoietin, have demonstrated
that the oral formulation results in absorption of erythropoietin in rodents
and have filed patents on oral delivery systems for erythropoietin.
Poorly Absorbed Organic Compounds and Vaccines
The majority of pharmaceutical products are small organic molecules.
However, pharmaceutical companies often identify biologically active compounds
that cannot be delivered orally due to poor absorption. Among the compounds and
macromolecules to which we have applied our carriers are cromolyn, deferoxamine
and various vaccines.
Cromolyn. Cromolyn is a mast cell stabilizer used in the treatment of
asthma and allergies. We have 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.
We have demonstrated oral delivery of therapeutic levels of deferoxamine in
non-human primates.
Vaccines. We have conducted experiments with a number of antigens to
determine the applicability of our carriers in the field of vaccines. The
result of dosing rodents orally with antigens combined with our 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 our carriers.
Patents
Our strategy is to apply for patent protection on all aspects of our
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 our business.
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We have patents or pending patent applications for carriers that we
currently use in conjunction with heparin, insulin, calcitonin, human
parathyroid hormone, human growth hormone, deferoxamine and sodium cromolyn. We
have been granted 44 patents on our drug delivery technologies in the United
States which will expire beginning in 2007, and have other patents issued or
applications pending in various countries around the world. Eleven U.S. patents
were issued by the U.S. Patent and Trademark Office during fiscal 1999. We have
45 patent applications relating to our drug delivery technologies pending in
the United States. In addition, we have pending or expect to file patent
applications corresponding to most of our U.S. patents and patent applications
in various countries around the world. We have applied to register EMISPHERE as
a trademark with the U.S. Patent and Trademark Office and have initiated an
administrative proceeding with that office to prevent the registration of a
similar mark by another applicant.
Although we have patents for some of our product candidates and have
applied for additional patents, there can be no assurance that patents applied
for will be granted, that patents granted to or acquired by us now or in the
future will be valid and enforceable and provide us with meaningful protection
from competition or that we will possess the financial resources necessary to
enforce any of our patents. There can also be no assurance that any products
that we (or a licensee) develop will not infringe upon any patent or other
intellectual property right of a third party.
We also rely upon trade secrets, know-how and continuing technological
advances to develop and maintain our competitive position. To maintain the
confidentiality of trade secrets and proprietary information, we maintain a
policy of requiring employees, scientific advisors, consultants and
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with us. These agreements are designed both
to enable us to protect our proprietary information by controlling the
disclosure and use of technology to which we have rights, and to provide for
our ownership of proprietary technology that we develop. There can be no
assurance, however, that these agreements will provide meaningful protection
for our trade secrets in the event of unauthorized use or disclosure of such
information.
Manufacturing
The primary raw materials used in making the carriers for our heparin
products, and the carriers under consideration for our other product
candidates, are readily available from multiple sources and in large
quantities. We have no internal capability for the production of any of our
carriers in batch sizes larger than approximately one kilogram. We currently
have arrangements with third parties to produce these carriers in accordance
with the FDA's good manufacturing practices, or GMP, regulations in batch sizes
of approximately 200 kilograms. Generally, commercial manufacturers can produce
batch sizes of up to 2,000 kilograms.
We are conducting feasibility studies for engineering and location of our
own manufacturing facility. We have identified numerous other commercial
manufacturers meeting the FDA's GMP regulations that have the capability of
producing our carriers. We 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 our production facility are
completed, we will be in a position to decide whether to make or buy the
carriers for future needs. A third-party manufacturer whose facilities comply
with the FDA's GMP regulations is currently producing our carrier and the
liquid oral heparin formulation for our Phase III clinical trials.
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
30
<PAGE>
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
we do, and represent significant competition for us.
Our competitors may succeed in developing competing technologies and
obtaining governmental approval for products before we do. There can be no
assurance that developments by others will not render our product candidates,
or the therapeutic compounds used in combination with our product candidates,
noncompetitive or obsolete. For example, we are aware that AstraZeneca PLC has
completed Phase II clinical trials of a pro-drug form of melagantran, a direct
thrombin inhibitor, which, if successfully developed, would compete with our
oral heparin products.
We believe that our 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
Aventis SA, 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 anti-
coagulant/antithrombotic. However, for many important indications it is not
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, we believe that our oral heparin products will ultimately be the
preferred drug for a wide range of anti-coagulant/antithrombotic uses outside
of the hospital and that an oral alternative may significantly expand the
overall heparin market, currently constrained by injectable-only
administration.
Any oral form of salmon calcitonin developed utilizing our technology also
will compete with other formulations of salmon calcitonin as well as
alternative therapies for osteoporosis. For example, a nasal dosage form of
salmon calcitonin already exists and we are aware of an IND filed for an oral
formulation. Salmon calcitonin will also compete with other osteoporosis
therapies, including estrogen replacement therapy, bisphosphonates, selective
estrogen receptor modulators and several new biologics that are under
development.
Government Regulation
Our 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 that we develop.
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 Application, or
IND, the conduct of clinical trials and the filing with the FDA of either a New
Drug Application, or NDA, for drugs or a Product License Application, or PLA,
for biologics.
31
<PAGE>
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 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.
We are 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 our research and development work.
Although we believe we are in compliance with these laws and regulations in all
material respects, there can be no assurance that we will not be required to
incur significant costs to comply with environmental and other laws or
regulations in the future.
Employees
As of January 31, 2000, we had 91 employees, 70 engaged in scientific
research and technical functions and 21 performing administrative and clerical
functions. Of the 91 employees, 30 hold Ph.D. or M.D. degrees. We believe that
our relationships with our employees are good.
32
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive
officers and directors:
<TABLE>
<CAPTION>
Name Age Position
------------------------------------------ --- ----------------------------
<C> <C> <S>
Michael M. Goldberg, M.D.................. 41 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........................... 41 Senior Vice President,
Business Development
Barry B. Kanarek, M.D., Ph.D.............. 53 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)............... 65 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 our Chairman of the Board of
Directors since November 1991 and as Chief Executive Officer and a director
since August 1990. In addition, Dr. Goldberg served as President from August
1990 to October 1995. Dr. Goldberg received a B.S. 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
our employment agreement with him, Dr. Goldberg is to serve as our Chairman and
Chief Executive Officer and is to be nominated to serve as a member of the
Board of Directors.
Robert A. Baughman, Jr., Pharm.D., Ph.D. joined us in September 1991. He
became Senior Vice President in September 1993 and Director of Development in
June 1994. Previously he was our Vice President and Director of Research and
Development. 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 joined us in 1993. He became Senior Vice President of
Business Development in April 1997 and Vice President of Business Development
in October 1995. Previously he was our Director of Business Development. Mr.
Bender received a B.S. 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 us in May 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 where he
served most recently as Vice President of Medical Affairs and as acting head of
Medical Operations. He also sat on the U.S. site Operating Committee, co-
chaired the Product Strategy committee and was 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.
33
<PAGE>
Charles H. Abdalian, Jr. joined us in April 1999. He was Executive Vice
President and Chief Financial Officer of ClinPath Associates, Inc. in 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 before 1994. Mr. Abdalian holds an MBA from the Wharton School of the
University of Pennsylvania.
Joseph D. Poveromo has been our Controller and Chief Accounting Officer
since July 1994. He has been with us since 1993 and was previously Controller
of a private pet food company. He also held senior accounting positions with
Marshall Granger & Company and Rayfield & Licata. Mr. Poveromo received a
B.B.A. in public accounting from Pace University.
Steven Dinh, Ph.D. joined us in April 1999. He was previously Vice
President and Chief Scientific Officer with Lavipharm Laboratories. Before
joining us he held various research positions in transdermal product
development and basic pharmaceutics research with Novartis Pharmaceuticals
Corp., CIBA-Geigy Corporation and with E. I. DuPont de Nemours & Co. Dr. Dinh
holds a Sc.D. in Chemical Engineering from the Massachusetts Institute of
Technology.
John E. Smart, Ph.D. joined us 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 our Vice President, Operations, since April
1998. Previously, he was 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. He is also a first cousin
of Michael M. Goldberg, M.D., our Chairman and Chief Executive Officer.
Jere E. Goyan, Ph.D. has been a director of our company since 1992. Until
he retired in 1999, he was President, Chief Operating Officer, and a director
of Alteon, Inc. He started at Alteon as Senior Vice President Research and
Development in January 1993. Before that, he was a Professor of Pharmacy and
Pharmaceutical Chemistry and also Dean of the School of Pharmacy at the
University of California. He has also served in various other academic,
administrative and advisory positions, including Commissioner of the FDA. He
currently is a director of the biopharmaceutical companies Atrix Laboratories
Inc., SciClone Pharmaceuticals, Penwest Pharmaceuticals Co. and Boehringer
Ingelheim.
Mark I. Greene, M.D., Ph.D. has been a director of our 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 is a
director of Ribi ImmunoChem Research, Inc., a biopharmaceutical company.
Peter Barton Hutt, Esq. has been a director of our company since 1992. He
has been a partner at the law firm of Covington & Burling in Washington, D.C.
for over five years. He specializes in food and drug law. He was formerly Chief
Counsel of the FDA.
Howard M. Pack has been a director of our company since our inception in
1986. He was our Executive Vice President of Finance until he retired in
October 1988.
Joseph R. Robinson, Ph.D. has been a director of our company since 1997.
For over five years he has been Professor of Pharmacy and Ophthalmology at the
University of Wisconsin. He currently is a director of Cima Laboratories, Inc.
Robert J. Levenson has been a director of our company since 1998. For over
five years he has been Executive Vice President of First Data Corporation.
Before that he was Senior Executive Vice President and
34
<PAGE>
Chief Operating Officer of Medco Containment Services, Inc. and Group President
of Automatic Data Processing, Inc. He currently is a director of First Data
Corporation, Superior Telecom, Inc. and Vestcom International, Inc.
Scientific Advisors
Our scientific advisors consult with us on developments relating to
current and future forms of drug delivery technology, chemistry, gastro-
intestinal physiology and protein structure. As a group, our scientific
advisors possess substantial experience in biomaterials, controlled release and
polymeric delivery systems, proteins, pharmaceutics, analytical techniques and
immunology. They also consult with us on aspects of drug delivery product
planning and feasibility studies and assist our scientists in establishing
research priorities, provide guidance for our clinical evaluation programs,
advise our scientists with regard to new developments and alert us to potential
partners. Also, we have funded various research projects and collaborations
with a number of our scientific advisors and we intend to continue to expand
our scientific collaborations with current and future scientific advisors.
None of the scientific advisors are our employees. Scientific advisors
devote only a small portion of their time to our affairs and have other
commitments and obligations to other institutions which may compete with their
obligations to us. We require each of our scientific advisors to execute a
confidentiality agreement when they commence their relationship with us. The
agreements generally require that all confidential information made known to
them during the term of their relationship with us shall be our exclusive
property, kept confidential and not disclosed to anyone 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.
The names, positions and areas of expertise of our scientific advisors
follow:
<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. Anti-coagulants and
Robinette Professor of Cardiovascular antithrombotics and clinical
Medicine, Director, Center for research
Experimental Therapeutics and
Director, Clinical Research Center
University of Pennsylvania
Elazer Edelman, M.D., Ph.D. Indicators for anti-
Director coagulant/antithrombotic therapy
Harvard-MIT Biomedical Engineering
Center
Robert Linhardt, Ph.D. Structure, activity, analysis and
Professor synthesis of complex
College of Pharmacy carbohydrates
University of Iowa
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Name and Position Area of Expertise
----------------- -----------------
<C> <S>
Sam Money, M.D. Indicators for nonclinical
Head of Vascular Surgery antithrombotic modeling
Ochsner Clinic
Russell Hull, M.D. Anti-coagulants and
Professor of Medicine antithrombotics and clinical
University of Calgary research, clinical trial design
Joshua Korzenik, M.D. Gastroenterology and clinical
Assistant Professor of research
Gastroenterology
Washington University School of Medicine
Victor J. Marder, M.D. Anti-coagulants and
Director of Vascular Medicine antithrombotics and clinical
University of California at Los Angeles research
</TABLE>
36
<PAGE>
PRINCIPAL STOCKHOLDERS
Except as noted, the table below sets forth as of January 31, 2000, the
beneficial ownership of our common stock by (i) each person or group known to
us to be the beneficial owner of more than 5% of our outstanding common stock,
(ii) each of our directors, (iii) our Chief Executive Officer and each of our
four other most highly compensated executive officers and (iv) all of our
directors and executive officers as a group. Except as otherwise noted, the
named beneficial owner has sole voting and investment power over the shares
listed.
<TABLE>
<CAPTION>
Amount and Nature of Percent of Class
Name and Address of Beneficial Owner Beneficial Beneficially Owned
(1) Ownership (2) After Offering
- ------------------------------------ -------------------- ------------------
<S> <C> <C>
SAFECO Corporation................... 987,635(3) 5.8%
SAFECO Plaza
Seattle, Washington 98185
Michael M. Goldberg, M.D. ........... 1,406,805(4) 7.7%
Robert A. Baughman, Jr., Pharm.D.,
Ph.D. .............................. 190,273 1.1%
Howard M. Pack....................... 174,363 1.0%
Lewis H. Bender ..................... 111,326 *
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. ........... 53,000 *
Robert J. Levenson................... 15,000(5) *
Barry B. Kanarek, M.D., Ph.D. ....... 28,029 *
Charles H. Abdalian, Jr. ............ 20,708 *
All directors and executive officers
as a group (11 persons)............. 2,244,504(4)(5) 11.8%
</TABLE>
- ------------------
* Less than 1%
(1) Unless otherwise specified, the address of each beneficial owner is c/o
Emisphere Technologies, Inc., 765 Old Saw Mill River Road, Tarrytown, New
York 10591.
(2) Includes for each of the following persons the number of shares with
respect to which the person has the right, exercisable within 60 days, to
acquire beneficial ownership upon exercise of outstanding stock options:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
Dr. Goldberg........................................... 1,353,353
Dr. Baughman........................................... 184,378
Mr. Pack............................................... 84,000
Mr. Bender............................................. 105,020
Dr. Goyan.............................................. 84,000
Mr. Hutt............................................... 84,000
Dr. Greene............................................. 77,000
Dr. Robinson........................................... 53,000
Mr. Levenson........................................... 7,000
Dr. Kanarek............................................ 25,000
Mr. Abdalian........................................... 20,000
All directors and executive officers as a group........ 2,076,751
</TABLE>
(3) Includes 592,935 shares of common stock held by SAFECO Common Stock Trust
and 300,700 shares of common stock held by SAFECO Asset Management Company.
SAFECO Common Stock Trust is an investment company registered under the
Investment Company Act of 1940, to which SAFECO Asset Management Co., a
subsidiary of SAFECO Corporation, provides investment advice.
(4) Does not include 130,000 shares which members of Dr. Goldberg's family have
the right to acquire upon exercise of outstanding stock options and 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 Mr. Levenson disclaims beneficial
ownership.
37
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, Chase
Securities Inc., Deutsche Bank Securities Inc., Warburg Dillon Read LLC and
Adams, Harkness & Hill, Inc. have severally agreed to purchase from us all of
the shares of our common stock offered by this prospectus. The number of shares
of common stock that each underwriter has agreed to purchase is listed opposite
its name below:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Chase Securities Inc............................................
Deutsche Bank Securities Inc....................................
Warburg Dillon Read LLC.........................................
Adams, Harkness & Hill, Inc.....................................
---------
Total......................................................... 2,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters 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
underwriters have committed to purchase all shares of common stock if any of
the shares are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to selected dealers at such price less a concession not in
excess of $ per share. The underwriters 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 underwriters.
We have granted to the underwriters an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to 375,000 additional
shares of common stock at the public offering price, less the underwriting
discount, set forth on the cover page of this prospectus. The underwriters may
exercise the option in whole or in part, and we will be obligated, pursuant to
the option, to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise the option only to cover over-
allotments made in connection with the sale of common stock offered by this
prospectus.
The following table summarizes the compensation that we will pay to the
underwriters 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 underwriters and subject to prior sale and to withdrawal, cancellation
or modification of the offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters 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 continuing through the date 90 days after the
date of this prospectus without the prior written consent of the underwriters,
except, in our case, pursuant to our employee benefit plans, qualified stock
plans and other employee compensation plans existing on the date of this
prospectus and pursuant to currently outstanding options and rights.
38
<PAGE>
The underwriters 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 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. If commenced, this stabilizing may be discontinued at any time.
In connection with this offering, the underwriters 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, the 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 $480,000.
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 for us. Morgan, Lewis & Bockius LLP, New York, New York will pass upon
legal matters related to this offering for the underwriters.
EXPERTS
PricewaterhouseCoopers LLP has audited the audited financial statements
included and incorporated by reference in this prospectus. The companies and
periods covered by these audits are indicated in the individual reports of
PricewaterhouseCoopers LLP included with those financial statements. We have
included and incorporated by reference these audited financial statements in
this prospectus in reliance on the reports of PricewaterhouseCoopers LLP given
on their authority as experts in accounting and auditing.
39
<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, 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:
(1) Our Annual Report on Form 10-K for the fiscal year ended July 31, 1999
as amended by our Form 10-K/A for the fiscal year ended July 31, 1999;
(2) Our Quarterly Report on Form 10-Q for the fiscal quarter ended October
31, 1999;
(3) Our Current Report on Form 8-K filed on February 17, 2000;
(4) The description of our preferred stock purchase rights contained in our
Registration Statement on Form 8-A, dated March 5, 1996; and
(5) 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 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 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 shall be deemed to be modified or
superseded for the purposes of this prospectus to the extent that a statement
contained in this prospectus 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.
40
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
Index
<TABLE>
<CAPTION>
Emisphere Technologies, Inc. Page(s)
- ---------------------------- -------
<S> <C>
Unaudited Financial Statements:
Condensed Balance Sheets as of October 31, 1999 and Pro-Forma Balance
Sheet as of October 31, 1999........................................ F-2
Condensed Statements of Operations for the three months ended October
31, 1999 and 1998................................................... F-3
Condensed Statements of Cash Flows for the three months ended October
31, 1999 and 1998................................................... F-4
Notes to Unaudited Financial Statements.............................. F-5
Report of Independent Accountants...................................... F-7
Audited Financial Statements:
Balance Sheets as of July 31, 1999 and 1998.......................... F-8
Statements of Operations for the fiscal years ended July 31, 1999,
1998 and 1997....................................................... F-9
Statements of Cash Flows for the fiscal years ended July 31, 1999,
1998 and 1997....................................................... F-10
Statements of Stockholders' Equity for the fiscal years ended July
31, 1999, 1998 and 1997............................................. F-11
Notes to Audited Financial Statements................................ F-12
<CAPTION>
Ebbisham Limited
- ----------------
<S> <C>
Report of Independent Accountants...................................... F-26
Audited Financial Statements:
Balance Sheet as of July 31, 1998.................................... F-27
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-28
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-29
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-30
Notes to Financial Statements........................................ F-31
</TABLE>
F-1
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
October 31, 1999 and Pro Forma as of October 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
October 31,
October 31, 1999
1999 (Note 6)
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 418,089 $ 23,918,089
Marketable securities............................ 5,487,005 5,487,005
Prepaid expenses and other current assets........ 777,814 777,814
------------ ------------
Total current assets........................... 6,682,908 30,182,908
Equipment and leasehold improvements, at cost, net
of accumulated depreciation and amortization...... 11,182,837 11,182,837
Purchased technology, net of accumulated
amortization...................................... 8,254,710 8,254,710
Other assets....................................... 60,164 60,164
------------ ------------
Total assets................................... $ 26,180,619 $ 49,680,619
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses............ $ 1,492,663 $ 1,492,663
------------ ------------
Total current liabilities...................... 1,492,663 1,492,663
Note payable....................................... 21,000,000 21,000,000
Deferred lease liability........................... 2,087,662 2,087,662
------------ ------------
Total liabilities.............................. 24,580,325 24,580,325
------------ ------------
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 12,206,511 shares
(12,163,011 outstanding) on October 31, 1999 and
issued 14,506,511 shares (14,463,011
outstanding) pro forma October 31, 1999......... 122,065 145,065
Additional paid-in capital....................... 99,363,783 122,840,783
Accumulated deficit.............................. (97,687,572) (97,687,572)
Accumulated other comprehensive (loss)........... (5,169) (5,169)
------------ ------------
1,793,107 25,293,107
Less, common stock held in treasury, at cost;
43,500 shares................................... (192,813) (192,813)
------------ ------------
Total stockholders' equity..................... 1,600,294 25,100,294
------------ ------------
Total liabilities and stockholders' equity..... $ 26,180,619 $ 49,680,619
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended October 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Contract research revenues.......................... $ 625,000 $ 3,579,061
----------- -----------
Costs and expenses:
Research and development.......................... 8,147,985 3,938,287
General and administrative expenses............... 1,258,412 1,360,193
Depreciation and amortization..................... 596,578 361,066
Loss in Ebbisham Ltd. ............................ -- 1,160,768
----------- -----------
10,002,975 6,820,314
----------- -----------
Operating loss.................................. (9,377,975) (3,241,253)
----------- -----------
Other income and expense:
Other income...................................... 274,158 497,157
Interest expense.................................. (778,903) (236,250)
----------- -----------
(504,745) 260,907
----------- -----------
Net loss........................................ $(9,882,720) $(2,980,346)
=========== ===========
Net loss per share, basic and diluted............... $ (0.81) $ (0.27)
=========== ===========
Weighted average shares outstanding, basic and
diluted............................................ 12,147,000 11,005,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended October 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(9,882,720) $(2,980,346)
----------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Non-cash interest expense........................ 707,836 --
Depreciation and amortization.................... 455,873 361,066
Amortization of purchased technology............. 140,705 --
Increase in deferred lease liability............. 37,620 1,226,433
Amortization of deferred financing cost.......... 21,015 67,500
Amortization of discount on marketable
securities...................................... 94 20,773
Loss in Ebbisham Ltd. ........................... -- 1,160,768
Changes in assets and liabilities.................. (789,968) (1,669,159)
----------- -----------
Total adjustments................................ 573,175 1,167,381
----------- -----------
Net cash (used in) operating activities.......... (9,309,545) (1,812,965)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of marketable securities....... 850,000 1,000,000
Capital expenditures............................... (137,942) (1,763,889)
Purchases of marketable securities................. -- (855,023)
----------- -----------
Net cash provided by (used in) investing
activities...................................... 712,058 (1,618,912)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of options and employee
stock purchases................................... 202,053 153,558
Redemption of senior convertible notes............. (2,647,603) --
----------- -----------
Net cash (used in) provided by financing
activities...................................... (2,445,550) 153,558
----------- -----------
Net (decrease) in cash and cash equivalents...... (11,043,037) (3,278,319)
Cash and cash equivalents, beginning of period....... 11,461,126 21,358,308
----------- -----------
Cash and cash equivalents, end of period......... $ 418,089 $18,079,989
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
The accompanying unaudited condensed financial statements of Emisphere
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all information and disclosures necessary for a
presentation of the Company's financial position, results of operations, and
cash flows in conformity with generally accepted accounting principles.
In the opinion of management, the accompanying Condensed Statements of
Operations for the three months ended October 31, 1999 and 1998, Condensed
Statements of Cash Flows for the three months ended October 31, 1999 and 1998,
and the Condensed Balance Sheets as of October 31, 1999 reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the Company's financial position, results of operations, and
cash flows for such periods and as of such date. These interim financial
statements should be read in conjunction with the Company's financial
statements and notes thereto included herein for the fiscal year ended July 31,
1999.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
The results of operations for any interim period are not necessarily
indicative of the results for the full year.
The Company expects to incur a substantial increase in liquid oral heparin
clinical development expenses during the remainder of fiscal 2000 as the
product enters into Phase III clinical trials, the most expensive phase of the
clinical development process. 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 additional 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 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 third quarter of fiscal
2001.
2. 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 4,144,479 and 316,588 shares for the three
months ended October 31, 1999 and 1998, respectively, relating to outstanding
options (after application of the Treasury Stock Method).
F-5
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
3. Comprehensive Income
Comprehensive loss of the Company includes net loss adjusted for the
change in net unrealized gain or loss on marketable securities. The net effect
of income taxes on comprehensive loss is immaterial. For the three months ended
October 31, 1999 and 1998, the components of comprehensive loss were:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net loss............................................ $(9,882,720) $(2,980,346)
Change in net unrealized (loss) gain on marketable
securities......................................... (6,415) 102,849
----------- -----------
Total comprehensive loss.......................... $(9,889,135) $(2,877,497)
=========== ===========
</TABLE>
4. Senior Convertible Notes Payable
The remaining balance of approximately $2.6 million, along with interest
thereon, was repaid on September 15, 1999.
5. Ebbisham Ltd.
Ebbisham Ltd., the Company's former oral heparin joint venture with Elan
Corporation plc, was terminated in the fourth quarter of fiscal 1999.
Thereafter, the Company assumed sole responsibility for clinical development
and funding of oral heparin. Previously, the Company accounted for its
investment in Ebbisham in accordance with the equity method of accounting.
6. Subsequent Event and Pro Forma Balance Sheet
On November 2, 1999, the Company issued 2.3 million shares of common stock
in a public offering. The net proceeds were approximately $23.5 million. The
proceeds from the offering will be used to fund a portion of the Phase III
clinical development of the Company's oral heparin formulation, to fund
research and development and for general corporate purposes.
The pro forma column of the balance sheet has been prepared to show the
effect that this transaction would have had on the balance sheet as if it had
occurred on October 31, 1999.
7. Subsequent Event--Amendments to Stock Plans
On January 18, 2000, the stockholders approved amendments to the Company's
1991 Stock Option Plan and the 1995 Non-Qualified Stock Option Plan, increasing
the number of shares available for grant by 500,000 and 200,000 respectively.
8. Subsequent Event--Novartis License
In connection with the research collaboration between the Company and
Novartis Pharma AG ("Novartis"), in February 2000, Novartis agreed to execute
its option to acquire an exclusive license to develop and commercialize oral
salmon calcitonin. As a result, Novartis is required to pay the Company a
milestone payment.
F-6
<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, except Note 15 as to
which the date is November 2, 1999
F-7
<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-8
<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-9
<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-10
<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-11
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
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 additional 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 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.
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 exceeds the expected undiscounted cash flows related to that
asset. The amount of the
F-12
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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-13
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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 $4,295 $(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 $4,295 $(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-14
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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
F-15
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
$583,767 were 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 $1,079,000, $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
research and experimental tax credit carry-forwards expire in various years
from 2001 to 2013.
F-16
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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-17
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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-18
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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-19
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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-20
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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 for stock-based compensation as prescribed by SFAS No. 123. Since
option grants
F-21
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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. 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 owned subsidiary of the Company, was formed in September 1996 to develop
and market heparin products using technologies contributed by Elan and the
Company. Elan 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.
F-22
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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 $8.4 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-23
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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>
Fiscal Period from
Period from Year Ended September 26, 1996
August 1, 1998 to July 31, (inception) 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
F-24
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
collaborations 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.
15. Subsequent Event
On November 2, 1999, the Company issued 2,300,000 million shares of common
stock for net proceeds of approximately $23.5 million.
F-25
<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-26
<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-27
<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-28
<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>
The accompanying notes are an integral part of the financial statements.
F-29
<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>
The accompanying notes are an integral part of the financial statements.
F-30
<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-31
<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
F-32
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
subsidiary of Emisphere, will be accounted for by Emisphere in accordance with
the purchase method of accounting. The 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-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,500,000 Shares
[LOGO] EMISPHERE TECHNOLOGIES, INC.
Common Stock
------------------
PROSPECTUS
------------------
Chase H&Q
Deutsche Banc Alex. Brown
Warburg Dillon Read LLC
Adams, Harkness & Hill, Inc.
------------------
, 2000
------------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus 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 our common stock or possession or distribution
of this prospectus in any such jurisdiction. Persons who come into possession
of this prospectus 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 applicable to that jurisdiction.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the offering described in this Registration Statement. The Company has agreed
to pay all of the costs and expenses of this offering.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 31,264
National Association of Securities Dealers, Inc. filing fee..... 12,343
Nasdaq National Market listing fee.............................. 17,500
Printing and engraving costs.................................... 185,000
Legal fees and expenses......................................... 125,000
Accounting fees and expenses.................................... 105,000
Miscellaneous................................................... 3,893
--------
Total......................................................... $480,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the General Corporation Law of the State of Delaware
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was
unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine that despite the adjudication of liability, such person
is fairly and reasonably entitled to be indemnified for such expenses which the
court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue, or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith, that
indemnification provided for by Section 145 shall not be deemed exclusive of
any other rights to which the indemnified party may be entitled; and that the
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under such Section 145.
Section 102(b)(7) of the General Corporation Law provides that a
corporation in its original certificate of incorporation or an amendment
thereto validly approved by stockholders may eliminate or limit personal
liability of members of its board of directors or governing body for breach of
a director's fiduciary duty. However, no such provision may eliminate or limit
the liability of a director for breaching his duty of
II-1
<PAGE>
loyalty, failing to act in good faith, engaging in intentional misconduct or
knowingly violating a law, paying a dividend or approving a stock repurchase
which was illegal, or obtaining an improper personal benefit. A provision of
this type has no effect on the availability of equitable remedies, such as
injunction or rescission, for breach of fiduciary duty. The Company's Restated
Certificate of Incorporation contains such a provision.
The Company's Certificate of Incorporation and By-laws provide that the
Company shall indemnify officers, directors, employees and agents of the
Company, to the full extent permitted by and in the manner permissible under
the laws of the State of Delaware. The Certificate of Incorporation and By-Laws
also permit the Board of Directors to authorize the Company to purchase and
maintain insurance against any liability asserted against any director,
officer, employee or agent of the Company arising out of his capacity as such.
The Company has obtained such directors' and officers' insurance insuring,
subject to certain conditions, its directors and officers against certain
liabilities.
The Underwriting Agreement provides for indemnification by the
Underwriters of the Company, its directors and officers, and persons who
control the Company within the meaning of Section 15 of the Securities Act for
certain liabilities.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
4.1* Restated Certificate of Incorporation of the Company dated June 13,
1997, as amended by the Certificate of Amendment dated January 25, 1999
(incorporated by reference to the registrant's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 1999).
4.2* By-laws of the Company, as amended December 7, 1998 (incorporated by
reference to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 1999).
4.3* Rights Agreement, dated as of February 23, 1996, by and between the
Company and Continental Stock Transfer & Trust Company (incorporated by
reference to the registrant's Current Report on Form 8-K dated March 5,
1996).
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
23.1* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in
Exhibit 5.1).
23.2** Consent of PricewaterhouseCoopers LLP (regarding the registrant).
23.3** Consent of PricewaterhouseCoopers LLP (regarding Ebbisham Limited).
24.1* Power of Attorney (Included on Page II-4).
</TABLE>
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* Previously filed.
** Replaces previously filed exhibit.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Securities Act") each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this amendment to its
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City and State of New York on the 22nd day of February,
2000.
Emisphere Technologies, Inc.
By: /s/ Charles H. Abdalian, Jr.
----------------------------------
Charles H. Abdalian, Jr.
Vice President, Chief
FinancialOfficer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on February 22, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
* Chairman of the Board and
___________________________________________ Chief Executive Officer
Michael M. Goldberg, M.D. (Principal Executive
Officer)
/s/ Charles H. Abdalian, Jr. Vice President, Chief
___________________________________________ Financial Officer and
Charles H. Abdalian, Jr. Secretary
* Controller and Chief
___________________________________________ Accounting Officer
Joseph D. Poveromo (Principal Financial and
Accounting Officer)
* Director
___________________________________________
Peter Barton Hutt, ESQ.
* Director
___________________________________________
Jere E. Goyan, PH.D
* Director
___________________________________________
Mark I. Greene, M.D., PH.D.
* Director
___________________________________________
Howard M. Pack
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
* Director
___________________________________________
Joseph R. Robinson, PH.D.
* Director
___________________________________________
Robert J. Levenson
</TABLE>
/s/ Charles H. Abdalian Jr.
*By:
----------------------------------
Charles H. Abdalian Jr.
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.1* Form of Underwriting Agreement.
4.1* Restated Certificate of Incorporation of the Company dated June
13, 1997, as amended by the Certificate of Amendment dated January
25, 1999 (incorporated by reference to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended January 31,
1999).
4.2* By-laws of the Company, as amended December 7, 1998 (incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended January 31, 1999).
4.3* Rights Agreement, dated as of February 23, 1996, by and between
Emisphere Technologies, Inc. and Continental Stock Transfer &
Trust Company (incorporated by reference to the registrant's
Current Report on Form 8-K dated March 5, 1996).
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
23.1* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in
Exhibit 5.1).
23.2** Consent of PricewaterhouseCoopers LLP (regarding the registrant).
23.3** Consent of PricewaterhouseCoopers LLP (regarding Ebbisham
Limited).
24.1* Power of Attorney (Included on signature page).
</TABLE>
- ------------------
* Previously filed.
** Replaces previously filed exhibit.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use and incorporation by reference in this
registration statement on Form S-3 of our report dated, September 30, 1999,
except for Note 15 as to which the date is November 2, 1999, related to the
financial statements which are included herein and which appear in Emisphere
Technologies, Inc.'s Annual Report, as amended, on Form 10-K/A for the year
ended July 31, 1999. We also consent to the references to our firm under the
captions "Summary Financial Data" and "Experts" in such registration statement.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use and incorporation by reference in this
registration statement on Form S-3 of our report dated, September 10, 1999,
relating to the financial statements of Ebbisham Limited which are included
herein and which appear in Emisphere Technologies, Inc.'s Annual Report, as
amended, on Form 10-K/A for the year ended July 31, 1999. We also consent to
the reference to our firm under the caption "Experts" in such registration
statement.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2000
