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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10615
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EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 13-3306985
<S> <C>
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
765 Old Saw Mill River Road 10591
Tarrytown, New York (Zip Code)
(Address of principal executive offices)
</TABLE>
(914) 347-2220
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock--$.01 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of October 16, 2000, the aggregate market value of registrant's common
stock held by non-affiliates was approximately $403,800,000, based on a closing
sale price of $23.25 per share and 17,641,700 shares of registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Business" (Item 1) and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" (Item
7), the notes to our audited financial statements (Item 8) and elsewhere in
this Annual Report on Form 10-K, as well as statements made from to time by our
representatives may 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 products; and the sufficiency of our
available capital resources to meet our funding needs. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results or achievements to be materially different
from any future results or achievements expressed or implied by such forward-
looking statements. Such factors include the factors described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors" and the other factors discussed in connection with
any forward-looking statements.
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Part I
ITEM 1. BUSINESS
Overview
Emisphere Technologies, Inc. is a biopharmaceutical company that has taken a
leadership position in solving one of the most elusive and largest technical
hurdles in the pharmaceutical industry--the oral delivery of medicines which,
for a variety of reasons, cannot be offered to patients in an oral form. We
have pioneered the oral delivery of otherwise injectable drugs, including
proteins, peptides, polysaccharides and other compounds not currently
deliverable by oral means. These drugs present challenges for oral delivery
because they are often large molecules (macromolecules) which are inactivated
in the gastrointestinal tract, have limited ability to cross cell membranes and
generally cannot be delivered orally.
Sales of therapeutic protein medicines is estimated to be over $15.0 billion
in 1999. Most of these drugs are currently delivered by injection. Injections
are undesirable for numerous reasons including patient discomfort,
inconvenience and risk of infection. Poor patient acceptance of, and compliance
with, injectable therapies can lead to increased incidence of medical
complications and higher health-care costs. While many medications are taken
orally, all proteins and other large or highly charged molecules are not
administered this way because they degrade in the stomach or intestine before
they can be absorbed into the bloodstream. We believe that our oral drug
delivery technology provides an important competitive advantage in the delivery
of macromolecules compared with the current alternatives.
Oral delivery is the preferred delivery modality as compared to other routes
of drug administration including injection. Patient acceptance of and adherence
to a dosing regimen is higher among orally deliverable medications when
compared to injectables. To date, alternatives to injection including,
respiratory, nasal and transdermal delivery have been considered commercially
unattractive due to low natural bioavailability--the amount of drug absorbed
from the delivery site into the bloodstream.
Currently, we have several product candidates in preclinical and clinical
development across a broad range of therapeutic areas including,
cardiovascular, osteoporosis, growth disorders, obesity, diabetes,
allergies/asthma and infectious diseases. Our most advanced program is a
heparin oral solution which began Phase III clinical trials in late 1999, and
which is currently being self-developed. There are three product candidates
using our unique carrier technology in clinical trials.
The Company
We were originally founded as Clinical Technologies Associates, Inc. in 1985
by a group of physicians and scientists at New York University and the City
University of New York. The original technology was focused on amino-acid
microspheres for the oral delivery of both proteins and non-protein drugs.
Under the Clinical Technologies Associates, Inc. moniker, we went public in
1989. In the early 1990's, our strategic focus was narrowed and our efforts
were redirected exclusively to developing our oral drug delivery technology. In
1992, we changed our name to Emisphere Technologies, Inc.
In 1994, we discovered our delivery agent for heparin, a well known and
highly prescribed anticoagulant/antithrombotic agent that is currently
administered only as an injection. In 1996, we formed a joint venture with Elan
Pharmaceuticals, plc for the development of oral heparin. In 1997, we
discovered an improved delivery agent which pre-clinical testing has shown to
be more potent.
In February 1997, we formed a strategic alliance with Eli Lilly & Company
for the development of oral formulations of Lilly's Forteo (recombinant
parathyroid hormone) and Humatrope (recombinant human growth hormone) brand
name drugs. In March 1998, Lilly executed license agreements for both proteins
and we received a $4.0 million milestone payment. In December of 1997, we
entered into a collaboration agreement with Novartis Pharma AG to develop oral
formulations of salmon calcitonin and a second, yet to be selected, compound.
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In 1999, we initiated a strategic shift that builds upon the strength of our
technology. As a result, our emphasis shifted from fundamental research and
technology licensing to product development and we turned our emphasis toward
identifying additional therapeutic compounds that have already been approved
for injectable or other use and that address large markets. Our goal is to
develop these products through Phase I trials and then establish relationships
with partners to complete development and commercialization of the oral
formulation of the drug.
In July 1999, we reacquired all product, marketing and technology rights for
our heparin products from Elan Corporation, plc, which had been our joint
venture partner since 1996. We believe complete ownership and control of our
product in development allows for more rapid clinical development and
commercialization. In June 2000, DuPont Pharmaceuticals announced a non-bindng
letter of intent with us for the development and marketing of oral heparin.
In the past year, our partnering pace has quickened. In February 2000,
Novartis executed a license agreement with us which expands our existing
collaborations to include the development of an oral form of salmon calcitonin
(used in the treatment of osteoporosis). In March 2000, Novartis also extended
its collaboration with us for the application of our carrier delivery
technology to a second, as yet unselected, compound. Also in March, Regeneron
Pharmaceuticals, Inc. established a collaboration agreement with us for the
development of an oral form of Axokine (under development for use in the
treatment of obesity).
In June 2000, we executed a follow-on agreement with Lilly to develop an
oral formulation of Forteo, under development for the treatment of
osteoporosis, and Humatrope, currently indicated for growth disorders.
Emisphere and Lilly originally formed a collaboration in 1997 and will
collaborate further to bring oral forms of Forteo and Humatrope into clinical
testing.
Business Strategy
Our objective is to be the leader in developing orally administered
formulations of therapeutic macromolecules and other compounds currently
available only by injection. Our business strategy includes:
. commercializing product candidates currently under development, including
our family of heparin products;
. pursuing new product opportunities by:
--further developing compounds that we already have demonstrated in
animals to be orally deliverable utilizing our technology;
--identifying additional therapeutic compounds (preferably already
approved for use) that address large markets;
--developing products through Phase I or Phase II studies;
--establishing relationships with partners to complete the development
of, and commercialize, these products; and
. entering into strategic alliances with pharmaceutical partners who have
marketed products or compounds in development that would benefit from our
oral delivery technology.
Though we intend to continue to collaborate with leading pharmaceutical and
biotechnology companies, we believe our current financial position is strong
enough to allow us to develop our own product candidates for out-licensing at a
more developed stage (for example, oral insulin), thus allowing us to retain a
larger share of the ultimate profits.
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The Drug Delivery Industry
The Drug Delivery industry develops technologies for the improved
administration of therapeutic compounds. These technologies have focused
primarily on safety, efficacy, ease of patient use and patient compliance. In
addition, alternative drug delivery technologies can be utilized to expand
markets for existing products, as well as to develop new products.
Pharmaceutical and biotechnology companies are looking to drug delivery as a
way to gain competitive advantage by improving the safety, efficacy,
convenience and patient compliance of their product candidates.
Drug delivery technologies can provide pharmaceutical companies with an
avenue for developing new products, as well as extending existing drug
franchises. Drug delivery companies can also apply their technologies to off-
patent products to develop on their own.
We believe focusing on drug delivery of existing drugs to be less risky than
attempting to discover new drugs, because the product development risk is
lower. On average, it takes 15 years in the U.S. for an experimental drug to
progress from the laboratory to approval for use in U.S. patients, with an
average cost of approximately $500 million. Typically, only one in 5,000
compounds entering preclinical testing advances into human testing. Only one in
five tested in humans is approved.
By contrast, drug delivery targets drugs that already have large established
markets for which there is an established medical need. Doctors therefore are
familiar with the compounds and are accustomed to prescribing them. The product
candidates we typically target have been through the regulatory process
demonstrating safety and efficacy and are already on the market. Our clinical
trials need only to show our carrier technology delivers the drug without
harming the patient or changing the clinical attributes of the drug. Our
clinical trials pose a lower risk of product failure. Our estimated cost of
developing a carrier through first human studies is less than $5.0 million, and
it typically takes less than two years.
In addition, focusing on drug delivery compared to drug discovery allows us
to form a number of collaborations to deliver a wide variety of medicines
without limiting rights to utilize our proprietary technology with additional
drug product opportunities.
Delivery of Macromolecule Medicines
The size of most macromolecules makes penetration of the skin inefficient or
ineffective. Passive transdermal delivery using "patch" technology for
macromolecules has not been successful to date since the skin is naturally
impermeable to macromolecules. We are currently not aware of any macromolecule
drugs which have been approved for marketing in the United States utilizing
patch technology. Some peptides and proteins can be transported across the skin
barrier into the bloodstream using high-pressure "needle-less" injection
devices. The devices, which inject proteins like human growth hormone through
the skin into the body, have been available for many years. However, we believe
these devices have not been well accepted due to patient discomfort and
relatively high cost.
The nasal route of drug administration has been limited by low and variable
bioavailability for proteins and peptides. As a result, penetration enhancers
are often used with nasal delivery to achieve higher bioavailability. These
enhancers may cause local irritation to the nasal tissue and result in safety
concerns with long-term use. We believe a limited number of peptides have been
approved for marketing in the United States utilizing nasal delivery. We
believe these same obstacles will affect sublingual drug delivery, which relies
on the penetration of similar tissue under the tongue.
Pulmonary delivery of systemic drugs is emerging as a delivery route for
large molecules. The lungs are highly absorptive, providing a potential route
for difficult to deliver drugs. While local delivery to the lungs of
respiratory drugs is common, systemic delivery of macromolecule drugs requires
new formulations and delivery technologies to achieve efficient, reproducible
dosing. Long-term safety for certain compounds, such as insulin,
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is yet to be established. In addition, while pulmonary devices may be amenable
to a limited number of compounds, we believe that the total efficiency of
pulmonary systems is generally not high enough to become commercially feasible
for systemic delivery of most macromolecule drugs.
The principal practical and efficient route of macromolecules
administration, particularly recombinant proteins, has, therefore, been
injections. Drug injections that require administration in hospitals or
doctors' offices can be expensive and inconvenient to patients. Many patients
find self-injectable therapies unpleasant. As a result, injectable therapies
for many chronic and subchronic diseases meet with varying degrees of patient
acceptance and compliance with prescribed dosing regimens. Poor acceptance and
compliance can lead to increased incidence of medical complications and
potentially higher health-care costs. In addition, some elderly, infirm or
pediatric patients cannot administer their own injections and require
assistance, thereby increasing both inconvenience to these patients and the
cost of therapy.
Emisphere's Oral Drug Delivery Technology
Our proprietary oral drug delivery agents represent a broad-based technology
platform. Our carriers, which mimic the body's transport process, allow
macromolecules to cross membranes and yet remain therapeutically active. Our
oral drug delivery technology is based upon proprietary, synthetic chemical
compounds that serve as carriers which facilitate the transport of therapeutic
macromolecules and other compounds, across biological membranes, such as in the
small intestine. Under physiological conditions, drug molecules naturally exist
in many different shapes, or "conformations." Some of these conformations can
be transported across the cell membranes. Once the drug crosses the membrane,
the carrier dissociates from the drug and the drug reestablishes its natural
distribution of conformations, ensuring that the delivered drug molecules are
in their therapeutically active state.
Our system maintains the biological effects of the drug through oral
delivery by overcoming four potential obstacles.
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<C> <S>
Obstacle One: The high acid content and digestive enzymes of the
digestive tract can degrade some drugs well before
they can be absorbed into the bloodstream.
Emisphere's Solution: Our system stabilizes the macromolecule in a
conformation with lower rates of degradation. Solid
dosage forms that do not dissolve in the stomach can
be developed and further reduce degradation. Finally,
the rapid rate of transit through the biological
membrane limits the opportunity for losses due to the
digestive enzymes.
Obstacle Two: Many macromolecules and polar compounds are poorly
absorbed through certain membranes.
Emisphere's Solution: Our delivery agents interact with the drug molecule to
create an entity with significantly higher absorption
properties.
Obstacle Three: With production costs of many macromolecules high, the
efficiency of delivery cannot be low.
Emisphere's Solution: Many techniques have been developed in the past 10
years that have significantly lowered the production
costs of many macromolecules. Our system's delivery
efficiencies are creating products with acceptable
profit margins to the pharmaceutical industry.
Obstacle Four: Variability of dosing, in which, for example, one
patient receives 60% of a dose and another patient
10%, has been a challenge to the successful
development of oral delivery.
</TABLE>
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<TABLE>
<C> <S>
Emisphere's Solution: In thousands of human dosings and thousands of animal
experiments, our system's inter-subject and inter-
patient variability has been relatively similar to the
injectable product.
</TABLE>
The development of an efficient, safe and reproducible delivery system for
macromolecules represents a significant commercial opportunity for us. Given
the advantages of oral delivery over injectable forms, we believe that oral
administration would represent the preferred means of delivery for most
biopharmaceuticals. This would significantly expand the potential market for
many biotechnology drugs.
Key Characteristics of Emisphere's 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 or enzyme inhibitors);
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.
Advances to the Platform Technology Made in Fiscal 2000
During the 2000 fiscal year, we initiated and completed clinical testing of
a solid dosage form of heparin. This test was a Phase I safety and tolerability
study in healthy subjects. Preliminary clinical data indicated that our
technology could cause adequate oral delivery from a capsule dosage form. We
also demonstrated that our solid dosage form of heparin does not require
heparin amounts greater than those contained in our solution dosage form.
We internally developed the solid heparin formulation in our preformulation,
solid dosage form and pharmaceutical analysis laboratories. The development of
a solid dosage form opens the way for further extending the platform technology
to controlled release and site-specific dosage forms.
Perhaps the most important data coming from our formulation effort is that
successful oral macromolecule delivery may be achieved with lower amounts of
our delivery agents and drugs in tablets or capsules than required for the
corresponding liquids. This finding translates into a greater margin of safety
and lower manufacturing costs.
We have made a substantial investment in research and development to
maintain our technological leadership position in oral drug delivery. This
includes development of an improved carrier, known as Sodium N[10 (2-
hydroxybenzoyl)amino] decanote, or "SNAD," for heparin and low molecular weight
heparin. SNAD is significantly more potent, with a comparable safety profile
when compared to Sodium N[8(2-hydroxybenzoyl)amino] caprylate, or "SNAC," our
delivery agent currently in Phase III development. SNAD is intended to be our
solid dosage form carrier.
Carrier Library
We have designed and synthesized a library of over 1,400 carriers and
evaluated them for their ability to facilitate the delivery of therapeutic
macromolecules and other compounds across biological membranes
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without altering the activity of these molecules. 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 of a variety of other compounds--among them insulin, human growth
hormone, human parathyroid hormone, erythropoietin, cromolyn and deferoxamine--
in animals.
Product Candidates Currently in Development
The following table sets forth, for both Emisphere's partner development
programs and Emisphere's programs available for partnering, the drugs currently
in development, the indication(s) for each particular drug, its present stage
of clinical development and, with respect to Emisphere's partner development
programs, the identity of Emisphere's corporate partner for such drug.
<TABLE>
<CAPTION>
Development
Therapeutic Areas Product Candidate Status* Partner
----------------- ----------------- ----------- -------
<S> <C> <C> <C>
Cardiovascular Heparin Solution Phase III Self developed
Heparin Solid Dose Phase I DuPont Pharmaceuticals**
LMWH Solid Dose Preclinical DuPont Pharmaceuticals**
Osteoporosis Salmon Calcitonin Solid Phase I Novartis Pharma AG
Dose
Recombinant Parathyroid Preclinical Eli Lilly & Co.
Hormone (Forteo) Solid
Dose
Growth Disorders Recombinant Growth Preclinical Eli Lilly & Co.
Hormone
(Humatrope) Solid Dose
Obesity Axokine Preclinical Regeneron
Pharmaceuticals
Diabetes Oral Insulin Preclinical Self developed
Pulmonary Insulin Preclinical Undisclosed
Asthma/Allergies Sodium Cromolyn Preclinical Self developed
Infectious Undisclosed Preclinical Not released
Diseases
</TABLE>
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* Development Status Explanations:
. Preclinical--Investigate safety of product candidate in a controlled
laboratory environment; establish activity in standard animal model.
. Phase I--Investigate safety and proper dose ranges of a product
candidate in a small number of normal human subjects.
. Phase II--Investigate side effect profiles and efficacy of a product
candidate in a small number of patients who have the disease or
condition under study.
. Phase III--Investigate safety and efficacy of a product candidate in a
large number of patients (of adequate sampling size to allow statistical
inferences) who have the disease or condition under study, with adequate
sampling size to make statistical inferences.
** Subject to non-binding letter of intent.
Cardiovascular
Oral Heparin
Unfractionated heparin and low molecular weight heparin, a fractionated
version of heparin, are widely used anti-coagulants. They are primarily used
for treating and preventing deep vein thrombosis, 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
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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 produces multiple physiological responses and that low molecular weight
heparins lose some of those potential beneficial properties.
Currently, the use of heparin is essentially limited 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 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.
Heparin is, often considered the anticoagulant of choice for the prevention
and treatment of cardiovascular conditions, such as deep vein thrombosis or
blood clots and pulmonary embolism in high-risk, hospitalized patients. It is
favored over warfarin because heparin is more effective, produces a rapid onset
of anticoagulation activity, and has a shorter physiological half-life. The
major disadvantage of heparin therapy is the requirement for administration by
injection, because current formulations are ineffective when dosed orally. Our
goal is to extend usage of heparin in the deep vein thrombosis prevention
market to the home setting.
The use of parenterol heparin is typically restricted to in-hospital use.
Low molecular weight heparins are also available only by injection and are
typically dosed from between 7 to 14 days on an outpatient basis. Emisphere is
developing a family of proprietary oral heparin formulations--solution, solid,
as well as solid dosage forms of low molecular weight heparin. Worldwide
heparin sales, including the low molecular weight heparins are estimated to be
over $2.0 billion, with a 15% annual growth rate. Currently, the majority of
prescriptions for heparin are to treat venous (vein related) indications for a
period of one to two weeks. Emisphere believes that its oral formulation of
heparin and follow-on oral forms of low molecular weight heparin will
substantially penetrate and expand existing markets and create large new
markets for the heparins, as well as spurring the development of oral heparin
for new clinical uses in inflammation and cancer.
During fiscal 2000, we commenced Phase III development of our heparin
solution formulation. Because of the extensive number of previous trials
conducted, we believe our PROTECT (PRophylaxis with Oral SNAC/heparin against
ThromboEmbolic Complications following Total hip replacement surgery) is a
lower risk--higher reward trial design approach than typical Phase III trials.
The objective of this international trial is to demonstrate the safety and
superior efficacy of Emisphere's oral heparin solution compared to injectable
enoxaparin in the prevention of venous thrombo-embolic events following hip
replacement surgery.
In fiscal 2000, we also signed a non-binding letter of intent with DuPont
Pharmaceuticals for the commercialization of the solid oral heparin family of
products. We will keep the heparin solution formulation and will finish the
ongoing Phase III trials. We will seek to commercialize liquid oral heparin on
our own, but intend to seek out a contract sales organization to market the
solution.
We expect that the predominant dosage form will ultimately be the solid, and
also believe that there will remain a significant niche opportunity for the
liquid product such that we will be able to retain value from the product. Some
potential uses include, elderly and very young patients who may choose or
prefer the liquid dosage form to the solid form. Additionally, severely ill
patients such as stroke patients, may also benefit from a solution product.
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Initial Indications and Market
Currently, the most common indications for heparin therapy are the
prevention of venous stasis (clots) following surgery (especially orthopedic,
pelvic, abdominal, trauma, angioplasty or heart surgery) for procedures lasting
longer than 30 minutes, as well as for the treatment of deep vein thrombosis.
In the United States, it is estimated that there are more than 3 million such
surgical procedures performed each year and more than 250,000 reported cases of
deep vein thrombosis. Preventative therapy is recommended typically for at
least 10 to 14 days post-surgery, with recent literature supporting 4 to 5
weeks of treatment as the optimal duration. Current treatment of deep vein
thrombosis consists of approximately 1 to 2 weeks of injectable low molecular
weight heparin treatment, followed by 90 to 180 days of warfarin. Certain
studies indicate that longer heparin dosing would be preferred.
Phase III Clinical Development Plan
We commenced a Phase III clinical trial of our heparin oral solution in
December 1999 for the prevention of deep vein thrombosis following total hip
replacement surgery. The objective of the study is to demonstrate the safety
and superior efficacy of oral heparin dosed for 30 days post operatively
compared to injectable enoxaparin (Lovenox) for ten days (the standard of
practice) in the prevention of deep vein thrombosis following total hip
replacement surgery. The trial is a randomized three-arm study and will take
place in over 100 centers in the United States, Canada, Europe and Australia.
The study will include approximately 3,000 patients. The primary efficacy
endpoint is the occurrence of deep vein thrombosis during the treatment phase.
Oral Heparin Products
We are focused on developing a family of oral heparin products. While our
heparin oral solution formulation is furthest along the road to
commercialization, other formulations are currently in development. A heparin
solid dosage form began Phase I clinical trials in March 2000, and a solid form
of low molecular weight heparin is also in development. We are continuing pre-
clinical development of our improved SNAD delivery agent for heparin and low
molecular weight heparin. We conducted two studies that demonstrated the
successful treatment of deep vein thrombosis in animal models using oral
SNAC/heparin and oral SNAD/low molecular weight heparin.
Additional Indications and Markets
We believe there are a number of additional cardiovascular indications which
could be treated more effectively by dosing heparin for a period longer than
the current standard of practice. Such a dosing regimen is possible with an
oral formulation of unfractionated heparin or low molecular weight heparin.
These indications include: unstable angina, atrial fibrillation, acute
myocardial infarction, coronary angioplasty, stent placement, coronary artery
bypass graft, pulmonary embolism and stroke. A large and growing body of non-
clinical and clinical data also indicates that heparin has potent anti-
inflammatory and anti-cancer properties. Recently available data supports
further study of heparin as a treatment for inflammatory bowel disease,
rheumatoid arthritis, asthma, psoriasis, cancer, transplant rejection and
proteinurias.
Heparin Product Manufacturing
We have developed a novel propriety process to produce the delivery agent at
large scale under the FDA's good manufacturing practices, or "GMP." SNAC has
been produced in 200 kg batch sizes. Heparin is a commodity product that can be
obtained from multiple suppliers. Several liquid fill/finish vendors have been
identified and a number are qualified to produce the heparin oral solution
product. The component materials and liquid product have shown good long-term
stability. Registration batches for marketing approval at the two hundred liter
scale have been produced.
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Osteoporosis
Osteoporosis is a disease characterized by low bone mass and structural
deterioration of bone tissue, leading to bone fragility and an increased
susceptibility to fractures. It is a common condition among the elderly--both
men and women. The disease is estimated to affect 1 in 4 women above age 65, 1
in 2 women above age 80 and 1 in 10 men above age 80. The most common
consequence of osteoporosis is greatly increased risk of broken bones,
especially in the hip region. Osteoporosis is estimated to be responsible for
more than 1.5 million hip, vertebral, wrist and other fractures annually. The
disease is relatively expensive to treat. The estimated cost of osteoporosis on
the health care system amounts to over $13.8 billion per year. It is estimated
that by the year 2020, the cost of hip fractures, which account for the highest
percentage of fractures, will increase six-fold in the United States. In the
U.S. market, osteoporosis therapeutics revenues grew from $2.4 billion in 1998
to $3.0 billion in 1999. This growth is expected to continue through 2006.
Several medicines are available to either slow the onset of, or reverse, bone
loss. New therapies currently under development should further boost market
expansion once they reach the market and will foster greater patient compliance
and ultimately improve the market penetration rate. We are developing with our
collaborators, Novartis and Lilly, two promising medicines for the treatment
and prevention of osteoporosis.
Salmon Calcitonin
Treatment with salmon calcitonin has been shown to maintain bone mineral
density in the spine and reduce the risk of new vertebral fractures in post-
menopausal women with osteoporosis. It is also used in the treatment of Paget's
disease, hypercalcemia of cancer and bone pain. Salmon calcitonin is more
potent than human calcitonin and is currently available as an injection or
nasal spray. Calcitonin has been shown to be effective in slowing bone loss and
increasing bone density in the spine. Calcitonin's major advantages are its
lack of serious side effects, excellent long term safety profile and ease of
administration. Annual worldwide sales of salmon calcitonin are estimated to be
in excess of $600 million. There are also some studies that suggest an
analgesic effect. As a result, the nasal spray has been used in the treatment
of acute vertebral fracture syndrome because of its positive effect on both
increasing bone density and decreasing pain.
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. 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 made a $2 million milestone payment to us. Under the terms of
the agreement Novartis may be required to make milestone payments and an equity
investment. We will also receive royalties on sales of any oral products that
may result from the collaboration.
Recombinant Parathyroid Hormone (PTH)
Recombinant Parathyroid Hormone, or PTH, is a bone anabolic/formation
compound currently being developed by Lilly as a treatment for osteoporosis.
Rather than work to reduce bone loss, PTH appears to rapidly stimulate new bone
formation. In Phase III, Lilly's daily injectable PTH (called Forteo) reduces
spine fractures by more than 65% and non-traumatic, non-spine fractures by 54%
in women with osteoporosis within one to two years. PTH would be targeted
toward patients ages 65 and older with advanced cases of osteoporosis.
Based upon the pre-clinical results, Emisphere expects that an oral form of
PTH would perform similarly to calcitonin in human studies. During fiscal 2000,
Lilly renewed its commitment to the injectable and oral
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PTH programs. Lilly is expected to file a new drug application for the
injectable version of PTH by the end of calendar 2000. We also renewed our
collaboration agreement with Lilly with the objective of taking an oral
version of PTH into clinical trials.
Growth Disorders
Many children and adults suffer from growth hormone deficiency. Growth
hormone is necessary to simulate growth in children by promoting the growth of
muscle and bone, and in adults for maintaining the quality of muscle and bone
as the body ages.
Recombinant human growth hormone (hGH) has been available for many years.
hGH deficient children who respond well to treatment will be taller adults
than they would have been if not treated. hGH is currently available only by
injection either into a muscle or under the skin, which can be particularly
difficult for children. hGH therapy requires a long-term commitment by the
child patient and his or her family in order to achieve the best response. The
prescribed dose ranges between three and seven injections per week. Treatment
continues for several years until the child has completed puberty or has
stopped responding.
The overall psychological effects of hGH therapy are encouraging. The
potential for an increased growth rate, more mature appearance and the hope
for an adult height within the normal range are viewed as positive by both
parents and children. hGH is approved for pediatric growth hormone deficiency,
adult growth hormone deficiency, pre-kidney transplantation, and short stature
due to chronic kidney disease and Turner's syndrome. The hGH worldwide market
is estimated to be over $1.5 billion.
Recombinant Human Growth Hormone (hGH)
We have identified potential lead carriers for hGH. As part of our renewed
agreement with Lilly, we will collaborate to bring an oral form of Humatrope,
a Lilly product currently marketed and indicated for certain growth disorders,
into clinical testing. An oral version of Lilly's injectable hGH (Humatrope)
is in pre-clinical development.
We believe that an oral product would be the preferred method of delivery
for both children and adults.
Obesity
Obesity is a major health problem in all developed countries. The
prevalence of obesity in the United States has increased substantially during
the past decade. According to the 1997 National Task Force on the Prevention
and Treatment of Obesity, 1 in 3 American adults is now considered overweight.
A 1998 National Institutes of Health report confirmed that obesity
significantly increases a number of health risks, including Type II diabetes.
Obesity-related conditions such as stroke and myocardial infarction are
estimated to contribute to 300,000 deaths yearly, ranking second only to
smoking as a cause of preventable death. Expenses and loss of income caused by
obesity have been estimated to reach $68 billion annually. Current treatment
of obesity consists of diet, exercise and other life-style changes, and a
limited number of drugs. We believe that the fact that the population overall
is rapidly becoming more obese indicates that treatment of obesity is
difficult and characterized by very high recidivism.
Axokine
Regeneron Pharmaceuticals, Inc. is developing subcutaneous Axokine for the
treatment of obesity. In the spring of 1999, Regeneron completed a Phase I
trial to study the safety of Axokine in severely obese patients. A double-
blind, placebo-controlled Phase II trial began in the spring of 2000.
During fiscal year 2000, we established a research and development
collaboration with Regeneron for the oral delivery of its protein product
candidate, Axokine. The collaboration was formed after our oral delivery
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technology successfully produced significant blood levels of Axokine in
Regeneron's preclinical animal models. This agreement adds an important
biotechnology company to our existing group of partners and we believe
demonstrates that our oral delivery technology is gaining momentum as the
platform technology of choice for the oral delivery of therapeutic
macromolecules. The oral Axokine project is currently in the carrier selection
and optimization stage of the collaboration.
Diabetes
Currently, approximately 135 million people in the world are afflicted by
diabetes, with approximately 16 million in the United States. Nearly one-third
of individuals in the United States with diabetes are unaware that they have
this chronic disease. In the United states, diabetes is estimated to be the
seventh largest cause of death, and it accounts for approximately $98 billion,
or 5.8%, of total healthcare costs. There are two principal types of diabetes:
. Type I. An autoimmune disease in which the body does not produce any
insulin, most often occurring in children and young adults. People with
Type I diabetes must take daily insulin injections to stay alive. Type I
diabetes accounts for approximately 5-10% of total diabetes cases.
. Type II. A metabolic disorder resulting from the body's inability to make
enough, or properly use, insulin. It is the most common form of the
disease. Type II diabetes accounts for approximately 90-95% of diabetes
cases. The incidence of Type II diabetes is rising rapidly as a result of
an aging population, greater prevalence of obesity, and a more sedentary
lifestyle.
Most recent estimates indicate the worldwide total insulin market is
approximately $2.6 billion, which does not include an additional $900 million
spent on injection systems, needles, and other supplies. Approximately one-
third of all Type II diabetics also use insulin to control the disease,
accounting for approximately 50% of total insulin use. Many Type II diabetics
could benefit from the use of insulin, although many choose not to, or their
physician does not recommend it. Currently, insulin is given through injection,
significantly limiting its use in Type II diabetics. We believe that the
anxiety and pain of needles likely causes patients and physicians to use
insulin less than if a more attractive delivery option were available.
Oral Insulin
We are in the process of developing an oral insulin formulation. Animal
studies evaluating our research-level oral insulin formulation have
demonstrated a bioavailability of 28%. We expect this project to enter human
trials during the next 18 months.
Oral insulin therapy would offer benefits to diabetes patients and to those
taking insulin injections who do not fully comply with their prescribed
injection regimens. In addition to improving patient compliance, oral insulin
can be delivered more effectively because oral delivery bypasses the general
circulatory system and delivers insulin directly to the liver where it is
needed, making oral insulin the ideal delivery option.
Allergies and Asthma
An allergy is an immune response by the body to certain stimuli in the
environment. One of the most common forms of allergy is hay fever, which is
estimated to affect as many as 35.9 million people in the United States. Asthma
is a chronic inflammatory disorder of the body's airways caused by allergens
and viral respiratory infections leading to bronchial hyperresponsiveness and
obstruction of airways. More than 17 million Americans are currently estimated
to have asthma.
Sodium Cromolyn
Sodium cromolyn mitigates allergic reactions by the inhibition of chemical
mediator release from the mast cells. Sodium cromolyn is marketed as an
inhalation capsule, aerosol and solution, eye solution and nasal spray for the
treatment of asthma and allergies. Annual sales of sodium cromolyn are
estimated to be approximately $300 million in the United States.
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Sodium cromolyn currently is not available orally due to its low
bioavailability. Sodium cromolyn is safer than the most common medications used
to control allergies and inflammation, principally antihistamines and
corticosteroids. As an asthma treatment, sodium cromolyn can decrease airway
hyperresponsiveness in patients and has virtually no systemic toxicity.
We are in the process of developing an oral form of sodium cromolyn that
will be indicated for the treatment of allergies and asthma. Development
efforts to date have demonstrated oral delivery in animal models.
Collaborative Agreements
We are a party to collaborative agreements with corporate partners to
provide research and development services relating to the partners' products.
These agreements are in the form of research collaboration and licensing
agreements. In connection with these agreements, we have granted licenses or
the rights to obtain licenses to our oral drug delivery technology. In return,
we will receive certain payments upon the achievement of milestones and will
receive royalties on sales of products developed. Under these agreements, we
will also be reimbursed for development costs. We also have the right to
manufacture and supply our delivery agents developed under these agreements to
our corporate partners.
All of our collaborative agreements are cancelable by the corporate partners
without significant financial penalty to them.
Eli Lilly and Company. In June 2000, Eli Lilly executed a follow-on
development agreement to their 1997 multi-year research and option agreement
with us to develop oral formulations of Forteo (recombinant parathyroid
hormone) and Humatrope (human growth hormone (hGH)) utilizing our proprietary
drug delivery technology. Under the new agreement, we will collaborate to bring
oral forms of Forteo and Humatrope into clinical testing. The new agreement
also provides for supplemental research and development funding. In addition,
we received a $2.0 million milestone payment under the terms of the previous
agreement.
In fiscal 1998, Lilly entered into two license agreements to use our
technologies in connection with Forteo and Humatrope and we received a $4.0
million milestone payment. Through July 31, 2000, we have recognized contract
research revenues of $10.2 million ($2.2 million, $1.4 million, and $6.6
million in 2000, 1999 and 1998, respectively).
Regeneron Pharmaceuticals Inc. During fiscal 2000, we entered into a
research collaboration with Regeneron Pharmaceuticals, Inc. to investigate the
applicability of our technology to the development of an oral form of
Regeneron's protein compound candidate for the treatment of obesity, Axokine.
Novartis Pharma AG. In connection with our 1997 research collaboration with
Novartis Pharma AG, in fiscal 2000 Novartis agreed to execute its option to
acquire an exclusive license to develop and commercialize oral salmon
calcitonin. In addition, during fiscal 2000, Novartis agreed to extend its
collaboration with us to investigate the oral delivery of a second Novartis
compound.
In conjunction with the above agreements, Novartis made a $2.5 million cash
payment to us during fiscal 2000. Through July 31, 2000, we have recognized
contract research revenues of $8.6 million ($3.5 million, $2.9 million, and
$2.2 million in 2000, 1999 and 1998, respectively).
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. Emisphere will
continue to pursue additional feasibility studies to determine the potential
for further collaborative development programs.
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Patents
Our patent strategy is aggressively designed and multi-tiered in order to
maximize our potential patent portfolio, proprietary rights and any future
licensing opportunities we might pursue. First, we seek patent protection on
all aspects of our proprietary chemical and pharmaceutical delivery
technologies. This involves seeking patent protection for not only the carrier
compounds themselves, but also for the combination of our compounds with a
pharmaceutical or chemical agent and for their generic structure that encompass
our carriers. Finally, we seek to patent the process utilized in manufacturing
our carriers, the uses of our carriers, as well as improvements on the core
technology which are important to the success of our business. Second, we
concentrate our efforts in the key geographic markets of the United States,
Canada, Europe, Japan, Australia and Mexico, and file in additional countries
on a case-by-case basis. For example, with regard to our SNAC heparin
formulation, we have patents issued on the compound itself and its chemical
composition, as well as its generic structure. We also have pending patent
applications relating to its manufacturing process, liquid formulations and
solid dosage forms.
Accordingly, we also 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. To date, we have been issued 54 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. Of our 54 U.S. patents, 18 were issued by the U.S. Patent and Trademark
Office during fiscal 2000. We have 48 patent applications relating to our drug
delivery technologies pending in the United States. Internationally, a total of
129 patents have been granted or are pending in 25 countries, including Canada,
Europe, Japan, Australia and Mexico. Additionally, we have registered EMISPHERE
as a trademark with the U.S. Patent and Trademark Office for research and
development services in drug delivery.
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 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 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. 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 drug delivery technologies or new drug research
and testing, as well as with entities developing new drugs that may be orally
active. Our product candidates also compete against alternative therapies for
each of the medical conditions our products address, independent of the means
of delivery. Many of our competitors 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. We cannot assure you
that developments by other drug delivery innovators will not
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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 are also aware that
Inhale Therapeutic Systems, Inc. has begun Phase I Trials to investigate the
tolerability and bioavailability of its pulmonary delivered from of salmon
calcitonin for the treatment of osteoporosis. In addition, a nasal dosage form
of salmon calcitonin already exists and we are aware of an Investigational New
Drug Application, or "IND" filed for an oral formulation.
We believe that our orally delivered products will be preferred by doctors
and patients over the injectable form. Nevertheless, our oral formulations will
continue to compete against well established injectable versions of the same
drugs. For example, oral heparin will continue to compete with other forms of
generic heparin and low molecular weight heparin. 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, warfarin is currently prescribed as an anti-
coagulant/antithrombotic. Warfarin is a generic drug marketed under the trade
name "Coumadin" by E.I. DuPont de Nemours & Co. In addition, we are also aware
that Leptin, a potential competitor to Regeneron's Axokine, is currently being
evaluated in human clinical trials for the treatment of obesity. Salmon
calcitonin also competes with other osteoporosis therapies aside from Inhale's
pulmonary product candidate, 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 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.
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
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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 post-approval 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 October 16, 2000, we had 125 employees, 102 engaged in scientific
research and technical functions and 23 performing administrative and clerical
functions. Of the 125 employees, 43 hold Ph.D. or M.D. degrees. We believe that
our relationships with our employees are good.
ITEM 2. PROPERTIES
We currently lease approximately 67,000 square feet of office space at 765
Old Saw Mill River Road, Tarrytown, New York for use as executive offices and
laboratories. Our current lease expires in September 2007 with a ten year
extension at then-current rates at our option.
In order to accommodate our expansion, we are building out approximately
41,000 square feet of additional office and laboratory space.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any litigation that is expected to have a material
effect on our operations or business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the Nasdaq National Market under the symbol
EMIS.
The following table sets forth the range of high and low bid prices for our
Common Stock for the periods indicated, as reported by Nasdaq.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31, High Low
-------------------------- ---- ----
<S> <C> <C>
1999
First quarter........................................... $10 1/4 $ 5
Second quarter.......................................... 19 1/8 7 1/8
Third quarter........................................... 18 3/8 7 1/2
Fourth quarter.......................................... 10 1/2 6 1/2
2000
First quarter........................................... $17 7/8 $ 7 13/16
Second quarter.......................................... 39 3/4 13 1/8
Third quarter........................................... 80 1/16 25 5/8
Fourth quarter.......................................... 57 15/16 26 9/16
2001
First quarter (through October 16, 2000)................ $34 3/4 $20 1/16
</TABLE>
As of October 16, 2000 there were approximately 285 stockholders of record
and 17,641,700 shares of Common Stock outstanding. The closing price of our
Common Stock on October 16, 2000 was $23.25.
We have never paid cash dividends and do not intend to pay cash dividends in
the foreseeable future. We intend to retain earnings, if any, to finance the
growth of our business.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended July 31, 2000
have been derived from the financial statements of Emisphere and notes thereto,
which have been audited by Emisphere's independent accountants. We did not
declare or pay any dividends during the five years ended July 31, 2000.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31,
-------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue..................... $ 5,889 $ 10,180 $ 15,868 $ 5,401 $ 3,131
--------- -------- -------- -------- --------
Costs and expenses:
Research and development.. 27,448 21,217 14,236 7,282 6,034
General and
administrative........... 5,878 6,051 5,344 3,416 3,337
Depreciation and
Amortization............. 2,434 1,633 954 442 571
Acquisition of in-process
research and
development.............. -- 9,686 -- -- --
Loss in Ebbisham Ltd. .... -- 3,092 4,044 2,550 --
--------- -------- -------- -------- --------
Total costs and
expenses............... 35,760 41,679 24,578 13,690 9,942
--------- -------- -------- -------- --------
Operating loss.............. (29,871) (31,499) (8,710) (8,289) (6,811)
Other income and expense.... 2,974 817 1,644 968 703
--------- -------- -------- -------- --------
Net loss.................... $ (26,897) $(30,682) $ (7,066) $ (7,321) $ (6,108)
--------- -------- -------- -------- --------
Net loss per share--Basic
and diluted................ $ (1.79) $ (2.63) $ (0.66) $ (0.77) $ (0.72)
========= ======== ======== ======== ========
<CAPTION>
July 31,
-------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
investments................ $ 207,793 $ 17,805 $ 34,828 $ 33,690 $ 18,237
Total assets................ 229,557 38,476 53,690 36,897 20,039
Long-term liabilities....... 25,558 22,308 10,598 35 45
Accumulated deficit......... (114,702) (87,805) (57,123) (50,057) (42,736)
Stockholders' equity........ 199,551 11,287 31,281 33,398 19,267
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Emisphere Technologies, Inc. is a biopharmaceutical company specializing in
the oral delivery of therapeutic macromolecules and other compounds that are
not currently deliverable by oral means. Since 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 had no product
sales to date. The timing of future product sales depends on many factors,
including the progress of our products in development through clinical trials,
regulatory approval, commercialization and market acceptance. These and other
factors that may impact future results are described under "Risk Factors"
below.
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Results of Operations
Fiscal 2000 Compared to Fiscal 1999
Contract research revenues were $5.9 million for fiscal 2000 a decrease of
$4.3 million, compared to fiscal 1999. The decrease was primarily attributable
to the absence of revenues from our former heparin development joint venture,
offset by increases from both the Novartis Pharma AG and Eli Lilly and Company
development programs.
In the prior fiscal year, we shifted our strategic focus from fundamental
research and technology licensing to product development. A key step in the
implementation of this strategy occurred with the fiscal 1999 acquisition of
our former partner's equity interest in a heparin development joint venture
with us. In fiscal 1999, development expense reimbursement from the former
joint venture was $5.7 million and approximated the costs associated with
research efforts conducted on behalf of the joint venture.
Revenues from Novartis approximated $3.5 million in fiscal 2000 which
included reimbursed research and development efforts of $1 million and
milestone payments of $2.5 million compared to $2.9 million of reimbursed
research and development efforts in fiscal 1999. Revenues from Lilly were $2.2
million in fiscal 2000 and were comprised of milestone payments related to the
Forteo development collaboration compared to $1.4 million of reimbursed
research and development efforts in fiscal 1999.
Revenues from milestones are recognized based upon actual efforts expended.
Contract research revenues are expected to fluctuate from year to year and are
dependent upon the timing of work plans mutually agreed to with collaborators
and to the allocation of efforts between ourselves and our collaborators.
Total operating expenses were $35.8 million for fiscal 2000, a decrease of
$5.9 million, or 14%, compared to fiscal 1999. The details of the decrease are
as follows:
Research and development costs were $27.4 million for fiscal 2000, an
increase of $6.2 million, or 29%, compared to fiscal 1999. This increase is
mainly attributable to increased costs related to initiating and conducting
Phase III clinical trials for our heparin solution.
We recognized an expense in fiscal 1999 for acquired in-process research and
development, which is discussed below. There were no similar costs incurred
during fiscal 2000.
General and administrative expenses were $5.9 million in fiscal 2000, a
decrease of $0.2 million, or 3%, compared to fiscal 1999. This decrease is
primarily the result of a decline in consulting costs associated with the
completion in early fiscal 2000 of a multi-year laboratory management system
implementation and a decrease in executive recruiting costs.
Depreciation and amortization were $2.4 million in fiscal 2000, an increase
of $0.8 million, or 49%, compared to fiscal 1999. The increase was primarily
due to amortization of purchased technology acquired in conjunction with the
fiscal 1999 purchase of our former partner's equity interest in the heparin
development joint venture and to depreciation of equipment and leasehold
improvements made in fiscal 1999 as we expanded our facilities.
The loss in Ebbisham Ltd.(heparin development joint venture) decreased by
$3.1 million in fiscal 2000 from fiscal 1999 due to the consolidation of the
joint venture after we acquired our former partner's interest in the joint
venture attaining 100% ownership. Thereafter, we discontinued the equity method
of accounting. We assumed heparin development efforts and the related costs are
included in research and development in fiscal 2000.
As a result of these factors, our operating loss was $29.9 million in fiscal
2000, a decrease of $1.6 million compared to an operating loss of $31.5 million
in fiscal 1999.
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Our other income and expenses were $3.0 million of net income in fiscal
2000, an increase of $2.2 million from fiscal 1999. This increase is primarily
the result of a $4.4 million increase in investment income resulting from
higher cash and investment balances, partially off-set by an increase of $2.9
million in non-cash interest accrued on a note payable. The increase in cash
and investments resulted from the sale of common stock in two follow-on public
offerings.
Based on the above factors, we sustained a net loss of $26.9 million in
fiscal 2000, a decrease of $3.8 million compared to a net loss of $30.7 million
in fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998
Our 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 the discontinuation of our heparin development joint venture with Elan
Corporation, plc for the development of oral heparin and the completion of the
research and development funding portion of the ongoing Lilly collaboration
(the funding was extended in fiscal 2000). In addition, revenues in fiscal 1998
included a $4.0 million milestone payment from Lilly. The Company received no
milestone payments in fiscal 1999.
Total operating expenses were $41.7 million in fiscal 1999, an increase of
$17.1 million, or 70%, compared to fiscal 1998. The details of the increase are
as follows:
Research and development costs were $21.2 million in fiscal 1999, an
increase of $7.0 million, or 49%, 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.
The $9.7 million non-cash charge incurred in fiscal 1999 for acquired in-
process research and development is related to our acquisition of our partner'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 attributable to the lower level of joint development
efforts preceding the change of control.
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,
consulting services related to a multi-year implementation of a laboratory
management system, and real estate taxes in connection with the new facility.
Depreciation and amortization were $1.6 million in fiscal 1999, an increase
of $0.7 million, or 71%, compared to fiscal 1998. The increase was primarily
related to increased capital expenditures in fiscal 1999 as we expanded our
research facilities.
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 (which we have since
repaid and cancelled) and a $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.
20
<PAGE>
Liquidity and Capital Resources
As of July 31, 2000, we had cash, cash equivalents and investments totaling
$207.8 million, an increase of $190.0 million compared to July 31, 1999.
Net cash used in operations was $21.7 million in the fiscal 2000 as compared
to $13.1 million in fiscal 1999. The increase in cash used in operations was
primarily due to the initiation during fiscal 2000 and subsequent continuation
of our liquid oral heparin Phase III clinical development.
Capital expenditures were approximately $1.0 million in fiscal 2000 compared
to $3.7 million for fiscal 1999. The decrease in capital expenditures is
primarily due to the completion of our build-out of leased laboratory and
office space in fiscal 1999.
Net cash generated from financing activities was approximately $212.5
million in fiscal 2000 compared to net cash consumed of $0.2 million fiscal
1999. The change was due primarily to the proceeds received from two follow-on
public offerings of common stock and higher levels of stock option exercises,
partially offset by the repayment of approximately $2.6 million of the
remaining balance of the senior convertible note payable.
We expect to continue to incur substantial increases in heparin solution
clinical development expenses in fiscal 2001, as the product progresses through
Phase III clinical development. In addition, we expect to expand development of
products for our own account, including oral insulin. As a result, we expect to
continue to incur increasing operating losses over those incurred in fiscal
2000.
We expect our cash requirements to continue to increase due to expected
increases associated with expanding research and development of our
technologies, development of additional drug formulations for our own account,
and general and administrative costs. These costs include, but are not limited
to, increases in personnel and personnel related costs, purchases of capital
equipment, and facilities expansion. Capital expenditures are expected to be in
excess of $10 million in fiscal 2001. Subsequent to July 31, 2000, we committed
to an additional 41,000 square feet of administrative and laboratory space at
our leased facility in Tarrytown, New York.
We expect that cash and equivalents, investments and the related projected
interest income, along with committed funding from our corporate partners, will
be adequate to meet our liquidity requirements for at least the next two years.
Impact of the Future Adoption of Recently Issued Accounting Standards
We do not currently believe that the future impact of Staff Accounting
Bulletin 101, "Revenue Recognition," issued by the Securities and Exchange
Commission, will have a material impact on our financial statements and future
revenue recognition policy. We are currently evaluating the recently issued
implementation guidance from the SEC staff before formally adopting this
statement, but expect to do so no later than the fourth quarter of fiscal 2001.
21
<PAGE>
Risk Factors
The following risk factors should be read carefully in connection with
evaluating our business and the forward-looking statements contained in this
Report. Any of the following risks could materially adversely affect our
business, our operating results, our financial condition and the actual outcome
of matters as to which forward-looking statements are made in this Report.
Risks Related to Emisphere Technologies
We are highly dependent on the success of our heparin products.
Our leading product candidate is a heparin solution 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. Enrollment in
the Phase III trial presently stands at less-than-anticipated levels, and we no
longer expect to complete the study by the end of calendar 2000.
The manufacture, marketing and distribution of pharmaceuticals is a
formidable undertaking. We do not have the marketing expertise to bring oral
heparin to market on our own. In July 1999, we reacquired all product,
marketing and technology rights for Emisphere's heparin products from Elan
Corporation, plc, which had been our joint venture partner since 1996. Although
we have executed a non-binding letter of intent with DuPont Pharmaceuticals,
the letter of intent only covers solid forms of heparin and is subject to
various conditions, including completion of documentation. We cannot assure you
that a final agreement with DuPont will be reached. Even if we finalized an
agreement with DuPont, we will remain responsible for the Phase III development
and marketing of liquid oral heparin. In the event that an agreement with
DuPont is not completed, we will also be responsible for the development,
manufacturing, marketing and distribution of our solid dosage forms of heparin
either on our own or with a substitute partner.
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 necessary to achieve these goals for any individual
product is long and uncertain. Before we can sell any of our products under
development, we must demonstrate through preclinical (animal) studies and
clinical (human) trials that each product is safe and effective for human use
for each targeted indication. We cannot be certain that we will be able to
begin, or continue, our planned clinical trials for our product candidates, or
if we are able, that our product candidates will prove to be safe and will
produce their intended effects.
A number of companies in the drug delivery, biotechnology and pharmaceutical
industries have suffered significant setbacks in clinical trials, even after
showing promising results in earlier studies or trials. We cannot assure you
that favorable results in any preclinical study or early clinical trial will
mean that favorable results will ultimately be obtained in future clinical
trials. Nor can we assure you that results of our limited animal and human
studies are indicative of results that would be achieved in future animal
studies 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
22
<PAGE>
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, either of
which may affect cost greatly.
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, Lilly and
Regeneron, and our letter of intent with DuPont Pharmaceuticals, 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.
We have incurred substantial losses since inception and may require
additional capital.
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 July 31, 2000, our
accumulated deficit was approximately $115 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 2001 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.
We anticipate that our existing capital resources will enable us to maintain
currently planned operations through at least the next two years. However, this
expectation is based on our current operating plan, could change as a result of
many factors, and we may need additional funding sooner than anticipated. To
the extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the
development and commercialization of our products. Such funds may not be
available on favorable terms, or at all. To the extent that additional capital
is raised through the sale of equity or convertible debt securities, the
issuance of such securities could result in dilution to our existing
stockholders.
23
<PAGE>
If we cannot adequately protect our patent and proprietary rights, our
business will suffer.
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. 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. We cannot assure you, however, that these agreements
will provide meaningful protection for our trade secrets in the event of
unauthorized use or disclosure of such information.
Our success also depends, 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 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.
Part of our strategy involves collaborative arrangements with other
pharmaceutical companies for the development of new formulations of drugs
developed by others and, ultimately, the receipt of royalties on sales of the
new formulations of those drugs. These drugs are generally the property of the
pharmaceutical companies and may be the subject of patents or patent
applications and other forms of protection owned by the pharmaceutical
companies. To the extent those patents or other forms of protection expire,
become invalid or otherwise ineffective, or to the extent those drugs are
covered by patents or other forms of protection owned by third parties, sales
of those drugs by the collaborating pharmaceutical company may be restricted,
limited, enjoined, or may cease. Accordingly, the potential for royalty
revenues to us may be adversely affected.
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.
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 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.
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.
24
<PAGE>
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.
Risks Relating to Our Common Stock
Anti-takeover provisions of our corporate charter documents, Delaware law
and our agreements with collaborators may affect the price of our common
stock.
Our board of directors has the authority to issue up to 1,000,000 shares of
preferred stock and to determine the rights, preferences and privileges of
those shares without any further vote or action by our stockholders. Of these
1,000,000 shares, 200,000 are currently designated Series A Junior
Participating Cumulative Preferred Stock in connection with our stockholders'
rights plan, and the remaining 800,000 shares remain available for future
issuance. Your rights as a holder of common stock may be adversely affected by
the rights of the holders of any preferred stock that may be issued in the
future. Additional provisions of our certificate of incorporation and by-laws
could have the effect of making it more difficult for a third party to acquire
a majority of our outstanding voting common stock. These include provisions
that classify our board of directors, limit the ability of stockholders to take
action by written consent, call special meetings, remove a director for cause,
amend the by-laws or approve a merger with another company.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law which prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, either alone or together
25
<PAGE>
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, Regeneron 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 July 31, 2000, we have outstanding options to purchase up to
3,691,689 shares of common stock which are currently exercisable and additional
options to purchase up to 1,591,272 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 4,091 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary investment objective is to preserve principal while maximizing
yield without significantly increasing our risk. Our investments consist of
U.S. Treasuries, commercial paper and corporate notes. Our investments totaled
$177.7 million at July 31, 2000. Approximately $104.2 million of these
investments had fixed interest rates and $73.5 million had interest rates that
were variable.
Due to the conservative nature of our short-term fixed interest rate
investments, we do not believe that we have a material exposure to interest
rate risk. Our fixed interest rate long-term investments are sensitive to
changes in interest rates. Interest rate changes would result in a change in
the fair value of these investments due to differences between the market
interest rate and the rate at the date of purchase of the investment. A 100
26
<PAGE>
basis point increase in the year-end market interest rates would result in a
decrease of approximately $1.2 million in the market values of these
investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules begin on page F-1
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
A list of the financial statements filed as a part of this report
appears on page F-1.
(2) Financial Statement Schedules
Schedules have been omitted because the information required is not
applicable or is shown in the Financial Statements or the corresponding
Notes to the Financial Statements.
(3) Exhibits
A list of the exhibits filed as a part of this report appears on page E-
1, which follows immediately after the financial statements.
(b) Reports on Form 8-K
None.
(c) See Exhibits listed under the heading "Exhibit Index" set forth on page
E-1.
(d) Not applicable. See Item 14 (a) (2).
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: October 25, 2000
Emisphere Technologies, Inc.
/s/ Michael M. Goldberg
By: _________________________________
Michael M. Goldberg, M.D.
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signature Title Date
------------------ ----- ----
<S> <C> <C>
/s/ Michael M. Goldberg Director, Chairman of the October 25, 2000
______________________________________ Board and Chief Executive
Michael M. Goldberg, M.D. Officer
/s/ Jere E. Goyan October 25, 2000
______________________________________
Jere E. Goyan, Ph.D Director
/s/ Peter Barton Hutt October 25, 2000
______________________________________
Peter Barton Hutt Director
/s/ Howard M. Pack October 25, 2000
______________________________________
Howard M. Pack Director
/s/ Mark I. Greene October 25, 2000
______________________________________
Mark I. Greene, M.D., Ph.D. Director
/s/ Joseph R. Robinson October 25, 2000
______________________________________
Joseph R. Robinson, Ph.D. Director
/s/ Robert J. Levenson October 25, 2000
______________________________________
Robert J. Levenson Director
/s/ Charles H. Abdalian, Jr. Vice President, Chief October 25, 2000
______________________________________ Financial Officer and
Charles H. Abdalian, Jr. Secretary
/s/ Friedrich K. Pfetsch October 25, 2000
______________________________________ Controller and Chief
Friedrich K. Pfetsch Accounting Officer
</TABLE>
30
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
Index
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Emisphere Technologies, Inc.
Report of Independent Accountants.................................. F-2
Financial Statements:
Balance Sheets as of July 31, 2000 and 1999...................... F-3
Statements of Operations for the fiscal years ended July 31,
2000, 1999 and 1998............................................. F-4
Statements of Cash Flows for the fiscal years ended July 31,
2000, 1999 and 1998............................................. F-5
Statements of Stockholders' Equity for the fiscal years ended
July 31, 2000, 1999 and 1998.................................... F-6
Notes to the Financial Statements................................ F-7 - F-19
Ebbisham Limited
Report of Independent Accountants.................................. F-20
Financial Statements:
Statements of Operations for the period from August 1, 1998 to
July 2, 1999, the fiscal year Ended July 31, 1998, and the
cumulative period from September 26, 1996 (inception) to July 2,
1999............................................................ F-21
Statements of Cash Flows for the period from August 1, 1998 to
July 2, 1999, the fiscal year Ended July 31, 1998, and the
cumulative period from September 26, 1996 (inception) to July 2,
1999............................................................ F-22
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, and the fiscal
year ended July 31, 1998........................................ F-23
Notes to the Financial Statements................................ F-24 - F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Emisphere Technologies, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Emisphere Technologies, Inc., at
July 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 2000 in conformity
with generally accepted accounting principles in the United States of America.
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 in the United States of America, 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 14, 2000
F-2
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
BALANCE SHEETS
July 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents....................... $ 30,050,036 $ 11,461,126
Investments..................................... 31,311,406 6,343,515
Prepaid expenses and other current assets....... 3,264,050 694,366
------------- ------------
Total current assets.......................... 64,625,492 18,499,007
Equipment and leasehold improvements, at cost, net
of accumulated Depreciation and amortization..... 10,606,596 11,500,767
Purchased technology, net of accumulated
amortization..................................... 7,832,595 8,395,415
Investments....................................... 146,431,837 --
Other assets...................................... 60,164 81,179
------------- ------------
Total assets.................................. $ 229,556,684 $ 38,476,368
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................ $ 46,791 $ 834,959
Accrued expenses................................ 4,400,633 1,398,055
Senior convertible notes........................ -- 2,647,603
------------- ------------
Total current liabilities..................... 4,447,424 4,880,617
Note payable, including accrued interest.......... 23,381,250 20,258,333
Deferred lease liability.......................... 2,176,975 2,050,042
------------- ------------
Total liabilities............................. 30,005,649 27,188,992
------------- ------------
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 17,679,504 shares
(17,636,004 outstanding) in 2000 and 12,181,468
shares (12,137,968 outstanding) in 1999........ 176,795 121,815
Additional paid-in capital...................... 315,148,140 99,161,980
Note receivable from officer and director....... (804,344) --
Accumulated deficit............................. (114,701,558) (87,804,852)
Accumulated other comprehensive (loss) income... (75,185) 1,246
------------- ------------
199,743,848 11,480,189
Less, common stock held in treasury, at cost;
43,500 shares in 2000 And 1999................. (192,813) (192,813)
------------- ------------
Total stockholders' equity.................... 199,551,035 11,287,376
------------- ------------
Total liabilities and stockholders' equity.... $ 229,556,684 $ 38,476,368
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
For the fiscal years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Contract research revenues........... $ 5,889,267 $ 10,179,925 $15,868,310
------------ ------------ -----------
Costs and expenses:
Research and development........... 27,448,149 21,216,373 14,236,196
General and administrative
expenses.......................... 5,877,650 6,051,215 5,344,665
Depreciation and amortization...... 2,434,226 1,633,314 953,615
Acquisition of in-process research
and development................... -- 9,685,794 --
Loss in Ebbisham Ltd............... -- 3,092,125 4,043,712
------------ ------------ -----------
35,760,025 41,678,821 24,578,188
------------ ------------ -----------
Operating loss................... (29,870,758) (31,498,896) (8,709,878)
------------ ------------ -----------
Other income and expense:
Investment income.................. 5,883,340 1,466,216 1,879,840
Rental income...................... 256,874 218,376 --
Interest expense................... (3,166,162) (867,145) (236,250)
------------ ------------ -----------
2,974,052 817,447 1,643,590
------------ ------------ -----------
Net loss......................... $(26,896,706) $(30,681,449) $(7,066,288)
============ ============ ===========
Net loss per share, basic and
diluted............................. $ (1.79) $ (2.63) $ (0.66)
============ ============ ===========
Weighted average shares outstanding,
basic and diluted................... 15,038,985 11,668,893 10,777,728
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
For the fiscal years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................... $ (26,896,706) $(30,681,449) $ (7,066,288)
------------- ------------ ------------
Adjustments to reconcile net loss
to net cash used in operating
activities:
Non-cash interest expense........ 3,122,917 258,333 --
Depreciation and amortization.... 1,871,405 1,586,412 953,615
Amortization of purchased
technology...................... 562,820 46,902 --
Increase in deferred lease
liability....................... 126,933 1,451,931 563,569
Non-cash compensation............ 45,416 275,000 295,000
Amortization of deferred
financing cost.................. 21,015 137,718 67,500
Amortization of (premium)
discount on investments......... (175,262) 69,717 13,440
Acquired in-process research and
development..................... -- 9,685,794 --
Loss in Ebbisham Ltd............. -- 3,092,125 4,043,712
Net realized gain on sale of
investments..................... -- (1,254) (14,123)
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)
(Increase) decrease in prepaid
expenses and other current
assets.......................... (2,569,684) 35,221 (281,473)
(Increase) in deferred financing
cost............................ -- -- (810,000)
(Increase) in investment in
Ebbisham Ltd.................... -- (7,225,440) --
(Increase) decrease in other
assets.......................... -- (194) 4,273
Increase in accounts payable and
accrued expenses................ 2,214,410 505,934 539,018
------------- ------------ ------------
Total adjustments.............. 5,219,970 17,628,255 (1,348,778)
------------- ------------ ------------
Net cash used in operating
activities.................... (21,676,736) (13,053,194) (8,415,066)
------------- ------------ ------------
Cash flows from investing
activities:
Purchases of investments........... (243,357,550) (3,346,350) (14,938,128)
Capital expenditures............... (977,234) (3,730,814) (8,601,855)
Proceeds from sales of
investments....................... 72,056,653 10,400,101 12,741,076
------------- ------------ ------------
Net cash (used in) provided by
investing activities.......... (172,278,131) 3,322,937 (10,798,907)
------------- ------------ ------------
Cash flows from financing
activities:
Net proceeds from issuance of
common stock...................... 211,643,185 -- 4,062,500
Proceeds from exercise of stock
options........................... 3,548,195 957,213 610,814
Redemption of senior convertible
notes............................. (2,647,603) (1,124,138) --
Proceeds from issuance of long-
term debt......................... -- -- 13,500,000
------------- ------------ ------------
Net cash provided by (used in)
financing activities.......... 212,543,777 (166,925) 18,173,314
------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... 18,588,910 (9,897,182) (1,040,659)
Cash and cash equivalents, beginning
of year............................ 11,461,126 21,358,308 22,398,967
------------- ------------ ------------
Cash and cash equivalents, end of
year............................... $ 30,050,036 $ 11,461,126 $ 21,358,308
============= ============ ============
Supplemental disclosure of cash flow
information:
Interest paid...................... $ 56,060 $ 158,671
============= ============
Non-cash investing and financing
activities:
Note received for stock option
exercise by officer............... $ 804,344
=============
Note issued for purchased
technology........................ $ 20,000,000
============
Conversion of debt to equity....... $ 9,459,468
============
Capital expenditures in accounts
payable........................... $ 263,490
============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the fiscal years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated Common Stock
Common Stock Additional Other Held in Treasury
------------------- Paid-in Note Accumulated Comprehensive ----------------
Shares Amount Capital Receivable Deficit Income (Loss) Shares Amount Total
---------- -------- ------------ ---------- ------------- ------------- ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
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
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
Net loss........ (26,896,706) (26,896,706)
Unrealized loss
on securities... (76,431) (76,431)
------------
Comprehensive
loss............ (26,973,137)
------------
Sale of common
stock under
employee stock
purchase plans
and exercise of
options......... 448,036 4,480 4,348,059 4,352,539
Issuance of
common stock in
connection with
public
offerings, net
of expenses..... 5,050,000 50,500 211,592,685 211,643,185
Note receivable
from officer and
director........ $(804,344) (804,344)
Issuance of
stock options
for services
rendered........ 45,416 45,416
---------- -------- ------------ --------- ------------- -------- ------ --------- ------------
Balance, July
31, 2000........ 17,679,504 $176,795 $315,148,140 $(804,344) $(114,701,558) $(75,185) 43,500 $(192,813) $199,551,035
========== ======== ============ ========= ============= ======== ====== ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<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 as well as through collaborations with corporate partners and academic
research institutions. The Company has no product sales to date. The Company
operates under a single segment.
The Company expects to incur a substantial increase in liquid oral heparin
clinical development expenses in fiscal 2001 as the product continues through
Phase III clinical trials. As a result, management believes that the Company
will continue to incur increasing operating losses and will require substantial
financial resources to continue not only its oral heparin clinical development
program, but also the expansion of its internal research and development
efforts.
Concentration of Credit Risk. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of cash
equivalents and investments. 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, Cash Equivalents, and Investments. The Company considers all highly
liquid, interest-bearing debt instruments with a maturity of three months or
less when purchased to be cash equivalents. Cash and cash equivalents include
demand deposits held in banks and interest bearing money market funds.
The Company considers its short- and long-term investments to be available
for sale. Investments are carried at fair value, with unrealized holding gains
and losses reported in stockholders' equity.
Realized gains and losses are included as a component of investment income.
For the fiscal years ended July 31, 2000, 1999 and 1998, gross realized gains
and losses were not significant. In computing realized gains and losses, the
Company determines the cost of its investments on a specific identification
basis. Such cost includes the direct costs to acquire the investments, adjusted
for the amortization of any discount or premium. The fair value of the
investments has been estimated based on quoted market prices.
The following is a summary of the fair value of available for sale
investments as of July 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------------ ----------
<S> <C> <C>
Maturities less than one year:
Corporate debt securities......................... $ 31,311,406 $3,849,615
Maturities between one and three years:
U.S. government securities........................ -- 993,900
Corporate debt securities......................... 144,424,732 1,500,000
Maturities between five and ten years:
Corporate debt securities......................... 2,007,105 --
------------ ----------
$177,743,243 $6,343,515
============ ==========
</TABLE>
As of July 31, 2000 and 1999, the difference between the fair value and
amortized cost of available for sale investments was immaterial.
F-7
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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 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 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 as earned.
The Company currently believes that the impact of adopting the Securities
and Exchange Commission's ("SEC") Staff Accounting Bulletin 101, "Revenue
Recognition" ("SAB 101"), will not have a material impact on its financial
statements. The Company is currently evaluating the recently issued
implementation guidance from the SEC staff before adopting SAB 101, but expects
to do so no later than the fourth quarter of fiscal 2001.
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.
F-8
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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 8.
The fair value of options and warrants granted to non-employees for goods or
services is included in the financial statements and expensed as the goods are
utilized or the services performed.
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. For the fiscal years ended July 31, 2000, 1999 and 1998, 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. 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 4,466,661,
2,559,295, and 4,029,129 shares for the fiscal years ended July 31, 2000, 1999
and 1998, respectively, relating to outstanding options (after application of
the Treasury Stock Method).
Risks and Uncertainties. 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.
2. Equipment and Leasehold Improvements
Equipment and leasehold improvements as of July 31, 2000 and 1999 consist of
the following:
<TABLE>
<CAPTION>
Useful Lives
in Years 2000 1999
------------- ----------- -----------
<S> <C> <C> <C>
Equipment............................ 3-7 $ 6,715,831 $ 6,133,395
Leasehold improvements............... Life of lease 11,561,827 11,167,029
----------- -----------
18,277,658 17,300,424
Less, accumulated depreciation and
amortization........................ 7,671,062 5,799,657
----------- -----------
$10,606,596 $11,500,767
=========== ===========
</TABLE>
During 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
F-9
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
administrative expenses, which represented the write-down of leasehold
improvements, net of accumulated amortization, at the subleased space offset by
the excess of sublease rental income over related rental expense.
3. Accrued Expenses
Accrued expenses consist of the following as of July 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Clinical trial expenses and contract research......... $2,083,394 $ 136,649
Compensation.......................................... 1,589,303 689,146
Professional fees..................................... 489,299 379,000
Interest.............................................. -- 33,830
Other................................................. 238,637 159,430
---------- ----------
$4,400,633 $1,398,055
========== ==========
</TABLE>
4. Senior Convertible Notes Payable
In 1998, the Company issued $13.5 million of its 5% Senior Convertible
Notes, with an amended due date of September 15, 1999 (the "Notes"). The
remaining balance of approximately $2.7 million and interest thereon were
repaid on the amended due date. At July 31, 1999, the Company had accrued
$33,830 of interest on the Notes.
In connection with the issuance of the Notes, the Company incurred direct
costs to obtain the financing of $810,000. Amortization of these costs totaled
$21,015, $137,718, and $67,500 for the fiscal years ended July 31, 2000, 1999
and 1998, respectively.
During 1999, the note holders converted principal and interest of
approximately $9.7 million and $315,000, respectively, into 999,602 shares of
the Company's common stock. Deferred financing costs of $583,767 were 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.
5. Commitments
Leases. The Company leases office and laboratory space under non-cancelable
operating leases expiring in various years through 2008. As of July 31, 2000,
future minimum rental payments are as follows:
<TABLE>
<CAPTION>
Minimum
Rental
Years Ending July 31, Payments
--------------------- ----------
<S> <C>
2001.............................................................. $1,187,864
2002.............................................................. 1,121,826
2003.............................................................. 1,308,544
2004.............................................................. 1,333,200
2005.............................................................. 1,333,200
Thereafter........................................................ 2,777,500
----------
$9,062,134
==========
</TABLE>
F-10
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Subsequent to July 31, 2000 the Company entered into an additional lease to
expand its current facilities for administrative, laboratory, and manufacturing
activities. Total future minimum rental payments for the additional lease are
approximately $5.1 million.
As described in Note 2, in 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, 2000, 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>
2001............................................................. $218,866
2002............................................................. 111,995
--------
$330,861
========
</TABLE>
Rent expense for the fiscal years ended July 31, 2000, 1999 and 1998 was
approximately $1,207,000, $1,079,000, and $1,230,000, respectively. Additional
charges for real estate taxes and common maintenance charges for the fiscal
years ended July 31, 2000, 1999 and 1998 were approximately $678,000, $240,000
and $459,000, respectively.
Other. The Company, for the fiscal years ended July 31, 2000, 1999 and 1998,
made payments for research totaling approximately $521,000, $578,000 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 certain of these Entities.
6. Income Taxes
As of July 31, 2000, the Company has available, for tax reporting purposes,
unused net operating loss carry-forwards of approximately $89.7 million, which
will expire in various years from 2001 to 2020. The Company's research and
experimental tax credit carry-forwards expire in various years from 2001 to
2020. 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, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax assets and valuation allowance:
Accrued liabilities.......................... $ 1,079,173 $ 980,130
Equipment and leasehold improvements......... 831,577 604,283
Net operating loss carry-forwards............ 36,714,694 25,068,407
Research and experimental tax credit carry-
forwards.................................... 4,643,272 3,649,856
Purchased technology......................... 3,805,993 3,805,993
Valuation allowance.......................... (47,074,709) (34,108,669)
------------ ------------
$ -- $ --
============ ============
</TABLE>
F-11
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity
a. During fiscal 2000, the Company issued approximately 5.1 million shares
of common stock in two public follow-on offerings for net proceeds of
approximately $212 million.
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, 2000 and 1999, 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.
d. The note receivable from officer and director resulted from the July 31,
2000 exercise of stock options by an officer and director of the Company. The
exercise price and income taxes resulting from the exercise were loaned to the
officer by the Company. The loan is in the form of a full recourse promissory
note bearing a variable interest rate based upon LIBOR plus 1.00% (7.6% at July
31, 2000), and collateralized by the stock issued upon exercise of the stock
options. Interest is payable monthly and principal is due the earlier of July
31, 2005 or upon the sale of stock held as collateral.
8. 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
2,550,000 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 of Directors, 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
F-12
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
95 Plan provide for the granting to officers and other key employees options to
purchase the Company's common stock. The number and terms of each grant will be
determined by an independent committee of the Board of Directors, 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, 2000, shares available for future grants under the Plans
amounted to 172,115.
The following table summarizes stock option information for the Plans as of
July 31, 2000:
<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 49,401 4.75 $ 1.50 49,401 $ 1.50
$2.63 1,331 4.87 $ 2.63 1,331 $ 2.63
$4.00-
$4.25 40,526 3.80 $ 4.01 40,526 $ 4.01
$6.13-
$9.00 1,566,351 5.66 $ 8.23 1,372,548 $ 8.59
$9.50-
$13.75 1,693,979 4.15 $11.08 1,398,317 $11.91
$14.88-
$21.25 406,794 7.38 $16.51 146,620 $17.58
$23.00-
$23.25 8,000 4.90 $23.04 6,000 $23.13
$38.50-
$48.06 753,300 9.93 $46.81 -- --
--------- ---------
$1.50-
$48.06 4,519,682 5.93 $20.60 3,014,743 $10.42
========= =========
</TABLE>
Transactions involving stock options awarded under the Plans during fiscal
1998, 1999 and 2000 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, 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
2000
Granted................ 896,751 $41.71
Canceled............... (134,801) $13.93
Exercised.............. (262,697) $10.41
---------
Balance outstanding
July 31, 2000......... 4,519,682 $20.60 3,014,743 $10.42
=========
</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
F-13
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(the "Outside Directors' Plan"). Under this plan, as amended, a maximum of
525,000 shares of the Company's common stock is available 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 of Directors
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, 2000:
<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 6.15 $ 7.80 81,667 $ 8.27
$13.00-
$13.75 273,000 2.90 $13.17 273,000 $13.17
$23.50 35,000 6.50 $23.50 35,000 $23.50
$41.06 63,000 9.74 $41.06 -- --
------- -------
$6.13-
$41.06 476,000 4.79 $16.44 389,667 $13.07
======= =======
</TABLE>
Transactions involving stock options awarded under the Outside Directors'
Plan during fiscal 1998, 1999 and 2000 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, 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
2000
Granted................ 63,000 $41.06
-------
Balance outstanding
July 31, 2000......... 476,000 $16.44 389,667 $13.07
=======
</TABLE>
Directors' Deferred Compensation Stock Plan. Pursuant to the Directors'
Deferred Compensation Stock Plan (the "Directors' Deferred Plan"), outside
directors have a right to receive for each meeting of the Board of Directors,
or a committee thereof, attended a number of shares of the Company's common
stock equal to the amount determined by the Board of Directors 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 2000, 1999 and 1998, the outside directors earned the rights to
receive an aggregate of 743 shares, 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. The
Company records as an expense the fair market value of the common stock
issuable.
F-14
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Non-Plan Options. The Company's Board of Directors has issued options
("Non-Plan Options") to an executive officer ("Executive"), a former executive
officer, the Emisphere Charitable Foundation, and a consultant, who are not
covered by the Plans or the Outside Directors' Plan. The employment agreement
for the Executive also contains provisions whereby the Executive is allowed to
borrow defined amounts from the Company at specified interest rates in
connection with exercise of options. The Board of Directors 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, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Range of Weighted Average Weighted Weighted
Exercise Number Remaining Average Number Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$8.00-$9.75 287,279 4.49 $8.87 287,279 $8.87
</TABLE>
Transactions involving awards of Non-Plan Options during fiscal 1998, 1999
and 2000 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, 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
2000
Exercised.............. (100,543) $ 8.00
--------
Balance outstanding
July 31, 2000......... 287,279 $ 8.87 287,279 $8.87
========
</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
qualified employees of options to purchase the Company's common stock. These
options are granted for dollar amounts of up to 15% of an employee's 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.
F-15
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Purchases of common stock under the Purchase Plans during the fiscal years
ended July 31, 2000, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Qualified Plan Non-Qualified Plan
---------------------- -----------------------
Shares Shares
Purchased Price Range Purchased Price Range
--------- ------------ --------- -------------
<S> <C> <C> <C> <C>
2000.......................... 77,340 $6.59-$39.13 7,456 $6.59-$ 13.50
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
</TABLE>
At July 31, 2000, shares reserved for future purchases under the Qualified
and Non-Qualified Plans were 124,228 and 51,135, 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 awarded during 2000, 1999 and 1998 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
future years of the application of the fair value-based method. The options'
exercise prices equal the quoted market price of the Company's common stock on
the date of grant.
<TABLE>
<CAPTION>
Fiscal Years Ended July 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss................ $(32,086,643) $(35,446,893) $(10,409,698)
Pro forma net loss per share...... $ (2.13) $ (3.04) $ (0.97)
</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 2000, 1999 and 1998 was $26.24, $5.94, and $10.96, respectively. The
following assumptions were used in computing the fair value of options granted:
expected volatility of 85% in 2000 and 80% in 1999 and 1998, expected lives of
five years (except for the Purchase Plans, where the expected lives are six
months), zero dividend yield, and weighted-average risk-free interest rate of
6.4% in 2000, 5.2% in 1999, and 5.9% in 1998.
9. 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, 2000, 1999 and
1998 the Company made contributions to the Plan totaling approximately
$241,000, $183,000, and $139,000, respectively.
10. The Emisphere Charitable Foundation, Inc.
The Emisphere Charitable Foundation, Inc. (the "Foundation") 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
F-16
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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.
11. Ebbisham Limited
Ebbisham Limited ("Ebbisham"), an Irish corporation owned jointly by Elan
Corporation, plc ("Elan") and the Company until July 1999 when it was acquired
by the Company, was formed in fiscal 1997 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. Prior to
the Company's acquisition of Ebbisham, the Company recorded its investment in
Ebbisham in accordance with the equity method of accounting.
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
two fiscal years ended July 31, 1999 of approximately $5.7 million and $7.1
million, respectively.
In fiscal 1999, the Company acquired Elan's ownership interest in Ebbisham,
in exchange for a seven year $20.0 million zero coupon 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.
The acquisition by the Company 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. At the time
acquired, the Company estimated the cost to complete clinical trials and to
obtain regulatory approval to be in excess of $30.0 million. The Company
expected 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 ten-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. At July 31, 2000 and 1999, accumulated
amortization of purchased technology was $609,722 and $46,902, respectively.
F-17
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
At July 31, 2000 Ebbisham was in the process of being liquidated.
Selected financial data of Ebbisham, prior to acquisition for the period
from August 1, 1998 to July 2, 1999 (the acquisition date), and fiscal year
ended July 31, 1998, are as follows:
<TABLE>
<CAPTION>
Period from
August 1, Fiscal year
1998 to ended
July 2, July 31,
1999 1998
----------- -----------
<S> <C> <C>
Total revenue...................................... $ 104,829 $ 32,760
Total expenses(1).................................. (6,289,084) (8,120,183)
----------- -----------
Net loss........................................... $(6,184,255) $(8,087,423)
=========== ===========
</TABLE>
--------
(1) Includes $5.7 million and $7.1 million related to services performed by the
Company on behalf of Ebbisham for the period from August 1, 1998 to July 2,
1999, and the year ended July 31, 1998, respectively.
12. Collaborative Research Agreements
The Company is a party in collaborative agreements with corporate partners
(the "Partners") to provide research and development services relating to the
Partners' products. These agreements are in the form of research collaboration
and licensing agreements. In connection with these agreements, the Company has
granted licenses or the rights to obtain licenses to the Company's oral drug
delivery technology. In return, the Company will receive certain payments upon
the achievement of milestones and will receive royalties on sales of products
developed. Under these agreements, the Company will also be reimbursed for
development costs. The Company also has the right to manufacture and supply to
its Partners its delivery agents developed under these agreements.
The Company also performs research and development for others pursuant to
feasibility agreements, which are of short duration and are designed to
evaluate the applicability of the Company's drug delivery carriers to specific
drugs. Under the feasibility agreements, the Company is generally reimbursed
for the cost of work performed.
All of the Company's collaborative agreements are cancelable by the Partners
without significant financial penalty to the Partners.
Eli Lilly and Company In June 2000, the Company and Eli Lilly and Company
("Lilly") executed a follow-on development agreement to their 1997 multi-year
research and option agreement to develop oral formulations of ForTeo
(recombinant parathyroid hormone) and Humatrope (human growth hormone (HGH))
utilizing the Company's proprietary drug delivery technology. Under the new
agreement, the two companies will collaborate to bring oral forms of ForTeo and
Humatrope into clinical testing. The new agreement also provides for
supplemental research and development funding.
In fiscal 1998, Lilly entered into two license agreements to use the
Company's technologies in connection with ForTeo and Humatrope. Through July
31, 2000, the Company has recognized contract research revenues of $10.2
million ($2.2 million, including a $2.0 million milestone payment, $1.4
million, and $6.6 million in 2000, 1999 and 1998, respectively).
Regeneron Pharmaceuticals Inc. During fiscal 2000, the Company entered into
a research collaboration with Regeneron Pharmaceuticals Inc. ("Regeneron") to
investigate the applicability of the Company's
F-18
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
technology to the development of an oral form of Regeneron's protein compound
candidate for the treatment of obesity, Axokine.
Novartis Pharma AG In connection with the 1997 research collaboration
between the Company and Novartis Pharma AG ("Novartis"), in fiscal 2000
Novartis agreed to execute its option to acquire an exclusive license to
develop and commercialize oral salmon calcitonin. In addition, during fiscal
2000, Novartis agreed to extend its collaboration with the Company to
investigate the oral delivery of a second Novartis compound.
Through July 31, 2000, the Company has recognized contract research revenues
of $8.6 million in conjunction with the above agreements ($3.5 million,
including a $2.5 million milestone payment, $2.9 million, and $2.2 million in
2000, 1999 and 1998, respectively).
Under the salmon calcitonin technology license and the technology license
option for the second compound, Novartis has the obligation, subject to the
Company's approval, to purchase up to $11.0 million of the Company's common
stock upon Novartis' decision to exercise its technology license option and
upon the attainment by the Company of certain development and clinical
milestones. These equity investments are based on market prices at the time of
purchase.
13. Summarized Quarterly Financial Data (Unaudited)
Following are summarized quarterly financial data for the fiscal years ended
July 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000
----------------------------------------
October 31 January 31 April 30 July 31
---------- ---------- -------- --------
(in thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Total revenues...................... $ 625 $ 467 $ 2,500 $ 2,297
Operating loss...................... (9,378) (8,859) (5,255) (6,379)
Net loss............................ (9,883) (9,162) (4,262) (3,590)
Net loss per share, basic and
diluted............................ $ (0.81) $ (0.63) $ (0.27) $ (0.21)
<CAPTION>
1999
----------------------------------------
October 31 January 31 April 30 July 31
---------- ---------- -------- --------
(in thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Total revenues...................... $ 3,579 $ 4,452 $ 1,524 $ 625
Operating loss(*)................... (3,241) (5,437) (6,524) (16,297)
Net loss............................ (2,980) (5,144) (6,333) (16,224)
Net loss per share, basic and
diluted............................ $ (0.27) $ (0.45) $ (0.52) $ (1.34)
</TABLE>
--------
(*) The July 31 quarter includes a $9.7 million charge ($.80 per share) for the
acquisition of in-process research and development (Note 11).
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ebbisham Limited:
In our opinion, the accompanying statements of operations, stockholders'
deficit and cash flows present fairly, in all material respects, the results of
operations and cash flows of Ebbisham Limited ("Ebbisham") (a development stage
enterprise) for 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 in the United States of America. 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 in the United States of America, 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 6 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-20
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
STATEMENTS OF OPERATIONS
For the period from August 1, 1998 to July 2, 1999, the fiscal
year ended July 31, 1998, and the cumulative period
from September 26, 1996 (inception) to July 2, 1999
<TABLE>
<CAPTION>
For the Cumulative for
period from the period from
August 1, For the September 26, 1996
1998 to fiscal year (inception)
July 2, ended July through July 2,
1999 31, 1998 1999
----------- ----------- ------------------
<S> <C> <C> <C>
Revenues:
Interest income.................. $ 104,829 $ 32,760 $ 209,634
Expenses:
Research and development......... (6,165,393) (8,120,183) 19,457,532)
General and administrative....... (123,691) -- (123,691)
----------- ----------- ------------
Net loss........................... $(6,184,255) $(8,087,423) $(19,371,589)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-21
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
For the period from August 1, 1998 to July 2, 1999, the fiscal
year ended July 31, 1998, and the cumulative period
from September 26, 1996 (inception) to July 2, 1999
<TABLE>
<CAPTION>
Cumulative for
For the the period from
period from For the September 26, 1999
August 1, fiscal year (inception)
1998 to ended July through July 2,
July 2, 1999 31, 1998 1999
------------ ----------- ------------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $ (6,184,255) $(8,087,423) $(19,371,589)
Changes in assets and
liabilities:
(Decrease) increase in payable
to Elan Corporation plc....... (1,698,462) 1,058,913 --
(Decrease) increase in payable
to Emisphere Technologies,
Inc........................... (7,684,826) 7,061,270 25,230
Increase in accrued expenses... 10,408 -- 10,408
------------ ----------- ------------
Net cash (used in) provided by
operating activities............ (15,557,135) 32,760 (19,335,951)
------------ ----------- ------------
Cash flows from financing
activities:
Proceeds from issuance of share
capital....................... -- -- 20,000
Proceeds from issuance of
subordinated debt............. 26,847,699 -- 31,347,699
Repayment of subordinated
debt.......................... (11,949,233) -- (11,949,233)
------------ ----------- ------------
Net cash provided by financing
activities...................... 14,898,466 -- 19,418,466
------------ ----------- ------------
Net (decrease) increase in cash
and cash equivalents............ (658,669) 32,760 82,515
Cash at beginning of period...... 741,184 708,424 --
------------ ----------- ------------
Cash at end of period............ $ 82,515 $ 741,184 $ 82,515
============ =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-22
<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, and
the fiscal year ended July 31, 1998
<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-23
<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 6). As a development stage enterprise,
Ebbisham's primary efforts had 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.
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. 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.
4. 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.
F-24
<PAGE>
EBBISHAM LIMITED
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
5. 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 performed 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. 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.
6. Ownership:
In July 1999, Emisphere acquired Elan's ownership interest in Ebbisham in
exchange for a seven-year $20 million zero coupon note. The acquisition, which
resulted in Ebbisham becoming a wholly owned subsidiary of Emisphere, will be
accounted for by Emisphere in accordance with the purchase method of
accounting. The 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.
7. Subsequent Event:
In September 1999, Emisphere initiated procedures to liquidate Ebbisham.
F-25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Incorporated
Exhibit by Reference(1)
------- ---------------
<C> <C> <S> <C>
3.1 -- Restated Certificate of Incorporation of the A
Company dated June 13, 1997, as amended by the
Certificate of Amendment dated February 5,
1999.
3.2 -- By-Laws of Emisphere, as amended December 7,
1998.
4.1 -- Rights Agreement dated as of February 23, 1996 B
between Emisphere and Continental Stock
Transfer & Trust Company.
4.2 -- Note Purchase Agreement, dated July 2, 1999, C
between Emisphere and Elan International
Service, Ltd.
4.3 -- Zero Coupon Note, dated July 2, 1999, issued by C
Emisphere to Elan International Services, Ltd.
For an initial principal amount of $20
million.
10.1 -- 1991 Stock Option Plan, as amended. J(2)
10.2 -- Stock Option Plan for Outside Directors, as D(2)
amended.
10.3 -- Employee Stock Purchase Plan, as amended. E(2)
10.4 -- Non-Qualified Employee Stock Purchase Plan. E(2)
10.5 -- 1995 Non-Qualified Stock Option Plan, as J(2)
amended.
10.6 -- Directors' Deferred Compensation Stock Plan. F(2)
10.7 -- Employment Agreement dated as of July 31, 2000 *(2)
between Michael M. Goldberg and Emisphere.
10.8 -- Stock Option Agreements dated as of January 1, E(2)(3)
1991, February 15, 1991, December 1, 1991,
August 1, 1992 and October 6, 1995 between
Michael M. Goldberg and Emisphere.
10.9 -- Stock Option Agreement dated as of July 31, *(2)
2000 between Michael M.Goldberg and Emisphere.
10.10 -- Termination Agreement, dated July 2, 1999, C
among Emisphere, Elan Corporation, plc and
Ebbisham Limited, now a wholly owned
Subsidiary of Emisphere.
10.11 -- Patent License Agreement, dated July 2, 1999, C
between Emisphere and Elan Corporation, plc.
10.12 -- Subscription Agreement, dated July 2, 1999 C
between Emisphere and Elan International
Management, Ltd.
10.13 -- Registration Rights Agreement, dated July 2, C
1999 between Emisphere and Elan International
Management, Ltd.
10.14 -- Research Collaboration and Option Agreement G(4)
dated as of December 3, 1997 between Emisphere
and Novartis Pharma AG.
10.15 -- Research Collaboration and Option Agreement *(4)
dated as of June 8, 2000 between Emisphere and
Eli Lilly and Company.
10.16 -- Research Collaboration and Option Agreement I(4)
dated March 8, 2000 between Emisphere and
Regeneron Pharmaceuticals, Inc.
10.17(a) -- License Agreement dated as of April 7, 1998 *(4)
between Emisphere and Eli Lilly and Company.
10.17(b) -- License Agreement, dated as of April 7, 1998, *(4)
between Emisphere and Eli Lilly and Company.
</TABLE>
E-1
<PAGE>
<TABLE>
<C> <C> <S> <C>
10.18(a) -- Lease Agreement, dated as of March 31, 2000, between H
Emisphere and Keren Limited Partnership.
10.18(b) -- Amendment to Lease Agreement, dated as of March 31, 2000, *
between Emisphere and Eastview Holdings, LLC.
10.18(c) -- Amendment to Lease Agreement, dated as of March 31, 2000, *
between Emisphere and Eastview Holdings, LLC.
10.19 -- Promissory Note dated August 10, 2000, by Robert A. *
Baughman in favor of Emisphere.
10.20 -- Promissory Note dated July 31, 2000, by Michael M. *(2)
Goldberg in favor of Emisphere.
10.21 -- Emisphere Technologies, Inc. 2000 Stock Option Plan *
23.1 -- Consent of PricewaterhouseCoopers LLP (Regarding *
Emisphere)
23.2 -- Consent of PricewaterhouseCoopers LLP (Regarding Ebbisham *
Limited)
27.1 -- Financial Data Schedule *
</TABLE>
--------
* Filed herewith.
(1) If not filed herewith, filed as an exhibit to the document referred to by
letter as follows:
A. Quarterly Report on Form 10-Q for the quarterly period ended January
31, 1999
B. Current Report on Form 8-K dated March 5, 1996.
C. Current Report on Form 8-K dated July 2, 1999.
D. Annual Report on Form 10-K for the fiscal year ended July 31, 1997.
E. Annual Report on Form 10-K for the fiscal year ended July 31, 1995.
F. Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
G. Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1997.
H. Quarterly Report on Form 10-Q for the quarterly Period ended January
31, 1997.
I. Quarterly Report on Form 10-Q for the quarterly period ended April 30,
2000.
J. Annual Report on Form 10-K for the fiscal year ended July 31, 1999.
(2) Management contract or compensatory plan or arrangement.
(3) Omitted in part pursuant to Instruction 2 of Item 601 of Regulation S-K.
(4) Portions of this exhibit have been omitted based on a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
E-2
