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EXHIBIT 99.1
RISK FACTORS
An investment in our shares involves a high degree of risk and if any of the
risks discussed below come to fruition you may lose all or part of your
investment. In deciding whether to purchase shares of our common stock, you
should carefully consider the following risk factors discussed in Exhibit 99.1,
in addition to other information contained in this Form 10-QSB, in our most
recent annual report on Form 10-KSB, and in any other documents filed with the
SEC. This 10-QSB also contains forward-looking statements that involve risks and
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE discussed
in this form 10-QSB. Factors that could cause or contribute to differences in
our actual results include those discussed in this section, as well as those
discussed elsewhere in this 10QSB and in other documents filed with the SEC.
If we cannot obtain additional funding, our product development and
commercialization efforts may be reduced or discontinued.
We will require additional funding to sustain our research and development
efforts, provide for future clinical trials, and continue our operations until
we are able to generate sufficient revenue from the sale and/or licensing of our
products. We cannot be certain whether we will be able to obtain additional
funding on terms satisfactory to us, if at all. In addition, we have expended,
and will continue to expend, substantial funds on the preclinical development of
our product candidates and on preparing for clinical trials. We currently have
commitments to expend additional funds for the development of the Orasome/TM/
oral delivery system, the Medipad(R) infusion pump for iron chelation therapy,
license contracts, severance arrangements, employment agreements, and consulting
agreements. If we are unable to raise additional funds when necessary, we may
have to reduce or discontinue development, commercialization or clinical testing
of some or all of our product candidates or enter into financing arrangements on
terms that we would not otherwise accept.
We have had significant losses and anticipate future losses.
We are a development stage company, have experienced significant losses since
inception and have a significant accumulated deficit. We expect to incur
significant additional operating losses in the future and expect cumulative
losses to substantially increase due to expanded research and development
efforts, preclinical studies and clinical trials. All of our products are
currently in research and development, preclinical studies or clinical trials
(cancer products), and we have not generated any revenues from product sales or
licensing. There can be no guarantee that we will ever generate product revenues
sufficient to become profitable or to sustain profitability, if at all.
We may not be able to successfully sell our cancer products business.
On March 1, 2000 we announced our decision to exit and/or divest our oncology
business and related products to focus on our drug delivery business and
products. We cannot assure you that we will be able to implement this new
business strategy or that it will be successful if implemented. We have granted
a third party an option to purchase our Perillyl Alcohol cancer program and it's
related assets. We cannot
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assure you that the option to assign our rights to our perillyl alcohol cancer
program and to sell related assets will be exercised by the third party to which
such option has been sold. If the option is not exercised, we cannot assure you
that an alternative purchaser will be found.
We are dependent on our joint ventures with Elan Corporation plc, or Elan, and
any future joint ventures or corporate partnerships.
Our strategy for research, development and commercialization of certain of our
products is to rely on arrangements with corporate partners. As a result, our
products are dependent upon the success of third parties in performing
preclinical studies and clinical trials, obtaining regulatory approvals,
manufacturing and successfully marketing our products. In connection with our
two joint ventures with Elan, we are obligated to fund research and development
activities in proportion to our ownership interest in each joint venture,
currently 80.1% of each joint venture, based on the research and development
plan and budget that we mutually agree upon with Elan. If we do not have
sufficient resources to meet our funding obligations under each of the two Elan
joint ventures, we may have to terminate the venture prior to commercialization
or renegotiate the terms of the joint venture with Elan, or our interest in the
venture may be diluted. Newco, our MEDIPAD(R) iron chelator joint venture with
Elan, has licensed its first product on a worldwide basis to Schein
Pharmaceutical, which has been acquired by Watson Laboratories. Schein
Pharmaceutical will develop and market this product in the United States, and
Newco and Schein will jointly seek partners for marketing the product outside of
the United States. We cannot assure you that Schein and Newco will successfully
develop, market or commercialize this product in the United States or
internationally. We have also signed an exclusive research and option agreement
with Novo Nordisk to license our Orasome(TM) oral delivery system for their
human growth hormone product, Norditropin(R). We cannot assure you that Novo
Nordisk will license and develop this technology for this product. We intend to
pursue additional collaborations in the future; however, the terms available may
not be acceptable to us and the collaborations may not be successful. In
addition, the amount and timing of resources that our collaborators devote to
these activities are not within our control.
Problems in product development may cause our cash depletion rate to increase.
We have limited experience with clinical trials and if we encounter unexpected
difficulties with our operations or clinical trials, we may have to expend
additional funds, which would increase our cash depletion rate. Our ability to
manage expenses and our cash depletion rate are keys to the continued
development of product candidates and the completion of ongoing clinical trials.
Our cash depletion rate will vary substantially from quarter to quarter as we
fund non-recurring items associated with clinical trials, product development,
patent legal fees and consulting fees.
Our product development and commercialization efforts may not be successful.
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Our product candidates, which have not received regulatory approval, are
generally in the research and development and preclinical stages of development.
If the initial results from any future clinical trials are poor, those results
will adversely affect our ability to raise additional capital, which will affect
our ability to continue full-scale research and development for our oral
delivery technology. In addition, product candidates resulting from our research
and development efforts, if any, are not expected to be available commercially
for several years, if at all. Our products, if approved, may not be immediately
used by doctors unfamiliar with our product applications. We, or our marketing
partner may be required to implement an aggressive education and promotion plan
with doctors in order to gain market recognition, understanding and acceptance
of our products. Any such effort may be time consuming and might not be
successful. Accordingly, we cannot guarantee that our product development
efforts, including clinical trials, or commercialization efforts will be
successful or that any of our products, if approved, can be successfully
marketed.
Our technology and products may prove ineffective or harmful, or be too
expensive to market successfully.
Our future success is significantly dependent on our ability to develop and
test workable products for which we will seek approval from the U.S. Food and
Drug Administration, or FDA, and/or from similar agencies in other countries, to
market to certain defined patient groups. Although we are involved in developing
oral versions of injectable drugs and vaccines that have already been approved
by the FDA, the oral products we are currently developing will require
significant additional laboratory and clinical testing and investment for the
foreseeable future. Our product candidates may not show sufficient efficacy in
animal models to justify continuing research into clinical testing stages or may
not prove to be effective in clinical trials or they may cause harmful side
effects during clinical trials. In addition, our product candidates, if
approved, may prove impracticable to manufacture in commercial quantities at a
reasonable cost and/or with acceptable quality. Any of these factors could
negatively affect our financial position and results of operations.
Our product development and commercialization efforts may be reduced or
discontinued due to difficulties or delays in clinical trials.
We may encounter unanticipated problems, including development, manufacturing,
distribution, financing and marketing difficulties, during the product
development, approval and commercialization process. Our product candidates may
take longer than anticipated to progress through clinical trials. In addition,
patient enrollment in the clinical trials may be delayed or prolonged
significantly, thus delaying the clinical trials and causing increased costs. If
we experience any such difficulties or delays, we may have to reduce or
discontinue development, commercialization or clinical testing of some or all of
our product candidates.
Our dependence on a limited number of suppliers may negatively impact our
ability to complete clinical trials and market our products.
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We do not have the capacity to manufacture our potential products and,
accordingly, prior to commercial distribution of any of our products, if
approved, we will be required to identify and contract with a commercial
supplier or manufacturer or build an FDA-certified manufacturing facility. We
cannot guarantee that these suppliers or manufacturers will be able to qualify
their facilities under regulations imposed by the FDA or that they will be able
to label and supply us with drugs in a timely manner, if at all. Accordingly,
any change in our existing or future contractual relationships with, or an
interruption in supply from, any third-party service provider or supplier could
negatively impact our ability to complete clinical trials and to market our
products, if approved. Should we deem it necessary to build or buy our own
manufacturing facility, we cannot assure you that we will have the funds
available to do so or that the FDA will certify such facility.
We do not have a sales force to market our products.
If and when we receive approval from the FDA for our initial product
candidates, the marketing of these products will be contingent upon our ability
to either license these products or enter into marketing agreements with partner
companies or our ability to recruit, develop, train and deploy our own sales
force. We currently intend to sell our products in the United States and
internationally in collaboration with one or more marketing partners. However,
we presently have only one agreement for the licensing or marketing of our
product candidates, and we cannot assure you that we will be able to enter into
any such additional agreements in a timely manner or on commercially favorable
terms, if at all. Additionally, we do not presently have a sales force, or
possess the resources or experience necessary to market any of our product
candidates, if and when they are approved. Development of an effective sales
force requires significant financial resources, time and expertise. We cannot
assure you that we will be able to obtain the financing necessary to establish
such a sales force in a timely or cost effective manner, if at all, or that such
a sales force will be capable of generating demand for our product candidates,
if and when they are approved.
We maintain only limited product liability insurance and may be exposed to
claims if our insurance coverage is insufficient.
The research, development, manufacture, sale and use of our products involves
an inherent risk of product liability claims. We currently have product
liability insurance with limits of liability of $10 million. Because product
liability insurance is expensive and difficult to obtain, we cannot assure you
that we will be able to maintain existing insurance or obtain additional product
liability insurance on acceptable terms or with adequate coverage against
potential liabilities. Our inability to obtain sufficient insurance coverage on
acceptable terms or to otherwise protect against potential product liability
claims in excess of our insurance coverage, if any, could negatively impact our
financial position and results of operations.
We use hazardous chemicals and radioactive and biological materials in our
business. Any claims relating to improper handling, storage, or disposal of
these materials could be time consuming and costly.
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Our research and development processes involve the controlled use of hazardous
materials, including hazardous chemicals and radioactive and biological
materials. Our operations also produce hazardous waste products. We cannot
eliminate the risk of accidental contamination or discharge and any resultant
injury from these materials. Federal, state, and local laws and regulations
govern the use, manufacture, storage, handling, and disposal of these materials.
We believe that our current operations comply in all material respects with
these laws and regulations. We could be subject to civil damages in the event of
an improper or unauthorized release of, or exposure of individuals to, hazardous
materials. In addition, we could be sued for injury or contamination that
results from our use or the use by third parties or our collaborators of these
materials, and our liability may exceed our total assets. Compliance with
environmental laws and regulations may be expensive, and current or future
environmental regulations may impair our research, development, or
commercialization efforts.
We may not be able to compete with our competitors in the biotechnology
industry.
The biotechnology industry is intensely competitive, subject to rapid change and
sensitive to new product introductions or enhancements. Virtually all of our
existing competitors have greater financial resources, larger technical staffs,
and larger research budgets than we have, as well as greater experience in
developing products and conducting clinical trials. Our competitors in the
vaccine delivery field include: Aviron, which is developing a nasal flu vaccine
that is in Phase III clinical trials; BioVector Therapeutics, which is in Phase
I trials with an intranasal flu vaccine, and other specialized biotechnology
firms, universities, and governmental agencies. Our competitors in the liposomal
formulation field include The Liposome Company (owned by Elan Corporation),
Gilead Sciences, Inc. and ALZA Corporation. Our competitors in the field of the
oral delivery of protein and peptide-based drugs include Emisphere Technologies,
which has started Phase III trials for oral heparin and (through its
collaborator Novartis) Phase I trials with oral calcitonin; Unigene
Laboratories, which has an oral calcitonin product in Phase I/II trials; and
Nobex Corp. (formerly known as Protein Delivery) which has an oral insulin in
Phase II clinical trials. In addition, there may be other companies which are
currently developing competitive technologies and products or which may in the
future develop technologies and products that are comparable or superior to our
technologies and products. Accordingly, we cannot assure you that we will be
able to compete successfully with our existing and future competitors or that
competition will not negatively affect our financial position or results of
operations in the future.
We may not be successful if we are unable to obtain and maintain patents and
licenses to patents.
Our success depends, in large part, on our ability to obtain and maintain a
proprietary position in our products through patents, trade secrets and orphan
drug designations. We have been granted several United States patents and have
submitted several United States patent applications and numerous corresponding
foreign patent applications, and have also obtained licenses to patents or
patent applications owned by other entities. However, we cannot assure you that
any of these
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patent applications will be granted or that our patent licensors will not
terminate any of our patent licenses. We also cannot guarantee that any issued
patents will provide competitive advantages for our products or that any issued
patents will not be successfully challenged or circumvented by our competitors.
Further, the laws of certain countries may not protect our proprietary rights to
the same extent as U.S. law. We are dependent upon our license of oral delivery
technology from MIT, and licenses from Elan in connection with our two joint
ventures with Elan. We cannot assure you that the technology underlying such
licenses will be profitable, or that we will be able to retain licenses for such
technologies or that we will obtain patent protection outside the United States.
To the extent that we rely on trade secret protection and confidentiality
agreements to protect our technology, others may develop similar technology, or
otherwise obtain access to our findings or research materials embodying those
findings. The application of patent law to the field of biotechnology is
relatively new and has resulted in considerable litigation. There is a
substantial risk in the rapidly developing biotechnology industry that patents
and other intellectual property rights held by us could be infringed by others
or that products developed by us or their method of manufacture could be covered
by patents owned by other companies. Although we believe that our patents and
our licensors' patents do not infringe on any third party's patents, we cannot
be certain that we can avoid litigation involving such patents or other
proprietary rights. Patent and proprietary rights litigation entails substantial
legal and other costs, and we may not have the necessary financial resources to
defend or prosecute our rights in connection with any litigation. Responding to,
defending or bringing claims related to patents and other intellectual property
rights may require our management to redirect our human and monetary resources
to address these claims and may take years to resolve.
Our product development and commercialization efforts may be reduced or
discontinued due to delays or failure in obtaining regulatory approvals.
We will need to do substantial additional development and clinical testing
prior to seeking any regulatory approval for commercialization of our product
candidates. Testing, manufacturing, commercialization, advertising, promotion,
export and marketing, among other things, of our proposed products are subject
to extensive regulation by governmental authorities in the United States and
other countries. The testing and approval process requires substantial time,
effort and financial resources and we cannot guarantee that any approval will be
granted on a timely basis, if at all. At least initially, we intend, to the
extent possible, to rely on licensees to obtain regulatory approval for
marketing our products. The failure by us or our licensees to adequately
demonstrate the safety and efficacy of any of our product candidates under
development could delay, limit or prevent regulatory approval of the product,
which may require us to reduce or discontinue development, commercialization or
clinical testing of some or all of our product candidates. Companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks
in conducting advanced human clinical trials, even after obtaining promising
results in earlier trials. Furthermore, the United States Food & Drug
Administration, or FDA, may suspend clinical trials at any time on various
grounds, including a finding that the subjects or
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patients are being exposed to an unacceptable health risk. Also, even if
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Accordingly, we
may experience difficulties and delays in obtaining necessary governmental
clearances and approvals to market our products, and we may not be able to
obtain all necessary governmental clearances and approvals to market our
products.
Our products, if approved, may not be commercially viable due to health care
changes and third-party reimbursement limitations.
Recent initiatives to reduce the federal deficit and to change health care
delivery are increasing cost-containment efforts. We anticipate that Congress,
state legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, price controls on pharmaceuticals, and other fundamental changes to
the health care delivery system. Any such changes could negatively impact the
commercial viability of our products, if approved. Our ability to successfully
commercialize our product candidates, if and when they are approved, will depend
in part on the extent to which appropriate reimbursement codes and authorized
cost reimbursement levels of such products and related treatment are obtained
from governmental authorities, private health insurers and other organizations,
such as health maintenance organizations. In the absence of national Medicare
coverage determination, local contractors that administer the Medicare program,
within certain guidelines, can make their own coverage decisions. Accordingly,
there can be no assurance that any of our product candidates, if approved and
when commercially available, will be included within the then current Medicare
coverage determination or the coverage determination of state Medicaid programs,
private insurance companies and other health care providers. In addition, third-
party payers are increasingly challenging the prices charged for medical
products and services. Also, the trend toward managed health care and the growth
of health maintenance organizations in the United States may all result in lower
prices for our products, if approved and when commercially available, than we
currently expect. The cost containment measures that health care payers and
providers are instituting and the effect of any health care changes could
negatively affect our financial performance, if and when one or more of our
products are approved and available for commercial use.
Our operations and financial performance could be negatively affected if we
cannot attract and retain key personnel.
Our success is dependent, in part, upon a limited number of key executive
officers and technical personnel, including Michael S. Rosen, our President and
Chief Executive Officer and Frank C. Reid, our Vice President of Finance and
Corporate Development. We also believe that our future success will depend
largely upon our ability to attract and retain key executive personnel and
highly skilled research and development and technical personnel. Although we
maintain and are the beneficiary of key man insurance on Mr. Rosen, we do not
believe the proceeds would be adequate to compensate us for his loss. We face
intense competition in our recruiting activities, including competition from
larger companies with greater resources. We cannot assure you that
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we will be successful in attracting or retaining skilled personnel. The loss of
certain key employees or our inability to attract and retain other qualified
employees could negatively affect our operations and financial performance.
Our stock price is highly volatile and our common stock is thinly traded.
The market price of our common stock, like that of many other development-
stage public pharmaceutical and biotechnology companies, has been highly
volatile and may continue to be so in the future. Factors such as disclosure of
results of preclinical and clinical testing, adverse reactions to products,
governmental regulation and approvals, and general market conditions may have a
significant effect on the market price of the common stock and our other equity
securities. Since it commenced trading on the American Stock Exchange on August
6, 1998, our common stock has been thinly traded. We cannot guarantee that a
more active trading market will develop in the future.
Investors may suffer substantial dilution.
Endorex has a number of agreements or obligations that may result in dilution
to investors. These include:
. warrants to purchase 2,012,622 shares of common stock at $2.54375 per
share, subject to adjustment, issued in connection with our October 1997 private
placement of common stock;
. warrants to purchase 230,770 shares of common stock at $10.00 per share,
subject to adjustment, held by Elan;
. warrants to purchase 43,334 shares of common stock at $2.3125 per share,
subject to adjustment, held by the Aries Master Fund and warrants to purchase
23,334 shares of common stock at $2.3125 per share, subject to adjustment, held
by the Aries Domestic Fund, L.P.;
. warrants to purchase 452,383 shares of common stock at $5.91 per share,
subject to adjustment, held by certain investors pursuant to the April 2000
private placement of our common stock;
. warrants to purchase 226,190 shares of common stock at $5.25 per share,
subject to adjustment, issued in connection with the April 2000 private
placement of our common stock;
. conversion rights and dividend rights of preferred stock held by Elan,
consisting of 92,973, subject to adjustment, shares of Series B Convertible
Preferred Stock ($8.0 million original liquidation value) bearing an 8%
cumulative payment-in-kind dividend and convertible at liquidation value into
common stock at $7.38 per share, subject to adjustment, and 91,218, subject to
adjustment, shares of Series C Exchangeable Convertible Preferred Stock $8.4
million original liquidation value) bearing a 7% cumulative payment-in-kind
dividend and which is exchangeable for part of Endorex's interest in the second
joint venture or convertible at liquidation value into common stock at $8.86 per
share, subject to adjustment;
. options to purchase approximately 1.6 million shares of common stock
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outstanding to participants in our stock option plan with a weighted average
exercise price of approximately $2.78; and
. anti-dilution rights under the above warrants and preferred, which can
permit purchase of additional shares and/or lower exercise/conversion prices
under certain circumstances. To the extent that anti-dilution rights are
triggered, or warrants, options or conversion rights are exercised, our
stockholders will experience substantial dilution and the Company's stock price
may decrease.
Future sales of common stock by our existing stockholders could adversely affect
our stock price.
The market price of our common stock could decline as a result of sales by our
existing stockholders of shares of common stock in the market, or the perception
that these sales could occur. These sales also might make it more difficult for
us to sell equity securities in the future at a time and at a price that we deem
appropriate.
We have not paid cash dividends.
We have never paid cash dividends on our common stock and we do not anticipate
paying any dividends in the foreseeable future. We currently intend to retain
earnings, if any, for the development of our business.
We have certain interlocking relationships that may present potential conflicts
of interest.
Lindsay A. Rosenwald, M.D., is the Chairman and sole stockholder of Paramount
Capital Asset Management, Inc. ("PCAM"), Paramount Capital, Inc. ("Paramount"),
and Paramount Capital Investment LLC ("PCI"), a merchant banking and venture
capital firm specializing in biotechnology companies. PCAM is the investment
manager of The Aries Master Fund II, a Cayman Island exempted company, and the
general partner of each of the Aries Domestic Fund, L.P. and the Aries Domestic
Fund II, L.P., each of which is a significant stockholder of Endorex. In
addition, certain officers, employees and/or associates of Paramount and/or its
affiliates own securities in a subsidiary of Endorex. In the regular course of
its business, PCI identifies, evaluates and pursues investment opportunities in
biomedical and pharmaceutical products, technologies and companies. Generally,
Delaware corporate law requires that any transactions between Endorex and any of
its affiliates be on terms that, when taken as a whole, are substantially as
favorable to us as those then reasonably obtainable from a person who is not an
affiliate in an arms-length transaction. Nevertheless, neither such affiliates
nor PCI is obligated pursuant to any agreement or understanding with us to make
any additional products or technologies available to us. We do not expect and
you should not expect, that any biomedical or pharmaceutical product or
technology identified by such affiliates or PCI in the future will be made
available to us. In addition, certain of the current officers and directors of
Endorex or any officers or directors of the company hereafter appointed may from
time to time serve as officers, directors or consultants of other
biopharmaceutical or biotechnology companies. There can be no assurance that
such other companies will not have interests in conflict with us.
Certain directors and stockholders have significant influence.
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Our directors, executive officers and principal stockholders and certain of
their affiliates have the ability to influence the election of directors and
most other stockholder actions. Such stockholders may influence corporate
actions, including influencing elections of directors and significant corporate
events.
