<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1995
REGISTRATION NO. 33-60929
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
NEUROGEN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 2834 22-2845714
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number)
incorporation or
organization)
35 NORTHEAST INDUSTRIAL ROAD
BRANFORD, CONNECTICUT 06405
(203) 488-8201
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
HARRY H. PENNER, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NEUROGEN CORPORATION
35 NORTHEAST INDUSTRIAL ROAD
BRANFORD, CONNECTICUT 06405
(203) 488-8201
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
---------------
COPIES TO:
DONALD B. BRANT, JR., ESQ. FREDERICK W. KANNER, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY DEWEY BALLANTINE
1 CHASE MANHATTAN 1301 AVENUE OF THE AMERICAS
PLAZA NEW YORK, NEW YORK 10005 NEW YORK, NEW YORK 10019-6092
(212) 530-5000 (212) 259-8000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 16, 1995
PROSPECTUS
2,500,000 SHARES
LOGO NEUROGEN CORPORATION
COMMON STOCK
--------
All of the shares of Common Stock offered hereby are being offered by
Neurogen Corporation ("Neurogen" or the "Company"). The Common Stock is traded
on The Nasdaq Stock Market under the symbol "NRGN." On August 15, 1995, the
last sale price of the Common Stock as reported on The Nasdaq Stock Market was
$17.125 per share.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION SET FORTH
UNDER "RISK FACTORS" BEGINNING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
------------------------------------------------------------------------------------------
Total(3) $ $ $
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase from
the Company up to 375,000 additional shares of Common Stock on the same
terms as set forth above solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1995, at the offices of Smith Barney Inc., 388 Greenwich Street, New
York, New York 10013.
--------
SMITH BARNEY INC.
ROBERTSON, STEPHENS & COMPANY
PACIFIC GROWTH EQUITIES
, 1995
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at 7 World Trade Center, New York, New
York 10048, and at Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Reports, proxy statements and other information concerning the Company
may also be inspected at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the common stock, par value
$.025 per share, of the Company (the "Common Stock") offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and in the exhibits and schedules thereto, as certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement and to the exhibits and
schedules thereto filed as a part thereof. The Registration Statement may be
inspected without charge, and copies thereof may be obtained upon payment of a
prescribed fee, at the office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference: (i) Annual
Report on Form 10-K of the Company for the year ended December 31, 1994; (ii)
Quarterly Report on Form 10-Q of the Company for the quarter ended March 31,
1995; (iii) Quarterly Report on Form 10-Q of the Company for the quarter ended
June 30, 1995; (iv) Current Reports on Form 8-K of the Company dated June 20,
1995 and July 28, 1995; (v) Amended Current Report on Form 8-K/A dated August
16, 1995 and (vi) the description of the Company's Common Stock which is
contained in its Registration Statement on Form 8-A filed under the Exchange
Act on February 21, 1990, as amended on March 5, 1990. All documents filed by
the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to the termination of the offering
of the Common Stock made hereby shall be deemed to be incorporated by
reference in this Prospectus and to be part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for all purposes to the extent that a statement contained in this
Prospectus or any other subsequently filed document that is also incorporated
by reference herein modifies or supersedes such statement. The Company hereby
undertakes to provide without charge to each person to whom a copy of this
Prospectus has been delivered, on the written or oral request of any such
person, including any beneficial owner of Common Stock, a copy of any or all
of the documents referred to above which have been or may be incorporated in
this Prospectus by reference, other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into the documents
that the Prospectus incorporates. Requests for such copies should be directed
to Stephen R. Davis, Vice President--Finance of the Company, at 35 Northeast
Industrial Road, Branford, Connecticut 06504. Mr. Davis' telephone number is
(203) 488-8201.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS
IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements appearing elsewhere in this Prospectus or incorporated
herein by reference. Prospective investors should carefully consider the
information set forth under the heading "Risk Factors."
THE COMPANY
Neurogen Corporation is an emerging neuropharmaceutical company engaged in
the discovery and development of a new generation of drugs to treat psychiatric
and neurological disorders by regulating nerve cell (neuron) communication in
the brain. The Company is developing "receptor subtype specific" drugs based on
its expertise in neuronal communication. The Company believes that receptor
subtype specific drugs offer the potential for equivalent or improved efficacy
and fewer side effects than currently marketed psychotherapeutic drugs, most of
which interact with multiple receptor subtypes. The Company leverages its
resources, where it believes it to be advantageous, through collaborations with
large pharmaceutical companies for advanced clinical development and
commercialization of its products. The Company has existing collaborations with
Pfizer Inc ("Pfizer") and Schering Corporation and Schering-Plough Ltd.
(together, "Schering-Plough") and intends to enter into additional
collaborations where appropriate.
Neurogen believes that its expertise in neurobiology, medicinal chemistry and
molecular biology, combined with its biased combinatorial chemistry program,
enables it to identify and develop compounds more quickly and efficiently than
it could using traditional drug discovery techniques. Neurogen has developed a
portfolio of neuropharmaceutical drug candidates designed to treat anxiety,
psychosis, dementia, depression and epilepsy and sleep, eating and stress
disorders. Industry analysts estimate the worldwide market for currently
marketed neuropharmaceuticals for such disorders to be approximately $10.5
billion annually.
Communication between neurons occurs through complex electrical and chemical
processes involving the transmission of chemicals, known as neurotransmitters,
across spaces between nerve cells, known as synapses. After being released from
a neuron, a neurotransmitter interacts with "receptors" located on the surface
of adjacent neurons, thereby stimulating specific functions or actions. In
recent years, scientists have discovered that each neurotransmitter interacts
with not just one or two receptors, but with families of receptors with similar
molecular structures. Each family can be divided into a number of receptor
subtypes. Recent discoveries have also shown that specific receptor subtypes
play integral roles in triggering distinct physiological and emotional
responses.
Neurogen's mission is to be a leader in the design, development and
commercialization of drugs for the treatment of a variety of neuropsychiatric
disorders. The key points of the Company's strategy are as follows:
Target Multiple Psychotherapeutic Markets. Neurogen targets several
neuropsychiatric disorders representing large markets, thereby reducing
Neurogen's reliance on any single drug development program.
Develop Receptor Subtype Specific Compounds. The Company focuses its drug
discovery efforts on "receptor subtype specific" compounds the Company believes
will have fewer side effects than currently marketed drugs. The Company
believes that such drugs have the potential to penetrate and expand existing
markets as evidenced by the new class of antidepressants (e.g., Prozac(R),
Zoloft(R) and Paxil(R)), which selectively interact with certain receptors and
have less severe side effects than previous antidepressants.
Utilize Advanced Discovery Technologies. The Company utilizes its advanced
discovery technologies to enhance its drug discovery capabilities and to
provide new opportunities for strategic partnerships. Employing its biased
combinatorial chemistry capability, the Company is developing extensive
libraries of small molecule
3
<PAGE>
compounds. This program was instrumental in the discovery of NGD 95-1, the
Company's lead candidate for eating disorders.
Ratchet Growth Through Strategic Collaborations. The Company seeks to ratchet
its growth through successive strategic collaborations in which it hopes to
progressively retain additional commercial rights and assume additional
responsibilities to gradually develop its clinical development, manufacturing
and sales capabilities. Further, through its collaborations, Neurogen seeks to
diversify the development risk of its programs and to enhance the likelihood of
commercialization of its compounds.
Two of the Company's leading drug candidates are currently undergoing human
clinical testing: NGD 91-1 for the treatment of anxiety and NGD 94-1 for the
treatment of psychosis. In January 1995, Neurogen reported the results from a
Phase I-B clinical study conducted by Pfizer indicating that a single dose of
NGD 91-1 produced efficacy in situational anxiety comparable to a single dose
of diazepam (Valium(R)) without the sedation caused by Valium(R). In February
1995, Neurogen reported the results of a Phase I-A clinical study conducted by
the Company involving single escalating dose studies for safety which indicated
that NGD 94-1 was safe and well-tolerated across a broad dose range.
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered...................... 2,500,000 shares(1)
Common Stock outstanding after the offering..... 12,628,133 shares(1)(2)
Use of proceeds................................. Funding for research and development
activities, including planned clinical
development, and working capital and gen-
eral corporate purposes
Nasdaq Stock Market symbol...................... NRGN
</TABLE>
--------
(1) Does not include up to 375,000 shares of Common Stock that may be sold by
the Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based upon the number of shares of Common Stock outstanding as of June 30,
1995. Does not include 2,129,263 shares of Common Stock issuable upon
exercise of outstanding stock options and common stock purchase warrants at
June 30, 1995. At June 30, 1995, options and warrants to purchase 800,746
shares of Common Stock were exercisable. See "Capitalization" and Notes 4,
5 and 7 of Notes to Financial Statements.
RISK FACTORS
Prospective investors should carefully consider the factors set forth under
"Risk Factors" beginning on page 6 of this Prospectus, including risks relating
to the Company's history of operating losses and accumulated deficit, early
stage of product development, uncertainty of product development,
unpredictability of, and limited experience in conducting, preclinical and
clinical trials, reliance on corporate partners, future capital needs,
competition and risk of technological obsolescence, government regulation,
patents and proprietary technology, no assurance of adequate reimbursement,
attraction and retention of key employees and consultants, lack of
manufacturing capacity, lack of sales and marketing experience, potential
product liability, hazardous materials, volatility of stock price, shares
eligible for future sale, registration rights, dilution and possible loss of
net operating loss carryforwards.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total operating
revenues................ -- -- $ 4,595 $ 4,605 $ 5,789 $ 2,300 $17,739
Operating expenses:
Research and
development............. $ 2,189 $ 3,674 4,721 6,452 10,150 4,344 5,889
General and
administrative.......... 1,249 1,627 2,043 2,475 2,774 1,626 1,506
Other income, net....... 410 140 576 506 484 105 417
------- ------- ------- ------- ------- ------- -------
Net income (loss) before
provision for income
taxes................... (3,028) (5,161) (1,593) (3,816) (6,651) (3,565) 10,761
Provision for income
taxes................... -- -- -- -- -- -- 227
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $(3,028) $(5,161) $(1,593) $(3,816) $(6,651) $(3,565) $10,534
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share (1)............... $ (.52) $ (.77) $ (.18) $ (.43) $ (.70) $ (.40) $ .96
======= ======= ======= ======= ======= ======= =======
Weighted average number
of shares outstanding
(1)..................... 5,773 6,675 8,752 8,962 9,528 8,972 10,958
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995
------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities....... $ 29,944 $66,024
Total assets........................................... 40,639 76,720
Long-term obligations, excluding current portion....... 542 542
Accumulated deficit.................................... (11,232) (11,232)
Stockholders' equity................................... 34,962 71,043
</TABLE>
--------
(1) Fully diluted earnings per share for the six months ended June 30, 1995 was
$.93, based on an aggregate of 11,381,000 shares of common stock and common
stock equivalents. Fully diluted earnings per share are based upon the
weighted average number of common shares and dilutive common stock
equivalents outstanding. The common stock equivalents have not been
included in periods with losses as their inclusion would be antidilutive.
(2) Adjusted to give effect to the sale of 2,500,000 shares of Common Stock
offered hereby at an assumed public offering price of $15.438 per share and
the receipt of the estimated net proceeds therefrom.
----------------
Unless otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' option to purchase from the Company up
to 375,000 shares of Common Stock solely to cover over-allotments, if any.
Neurogen was incorporated in Delaware on September 29, 1987. The Company's
executive offices are located at 35 Northeast Industrial Road, Branford,
Connecticut 06405, and its telephone number is (203) 488-8201.
Valium(R), Dilantin(R), Tegretol(R), Xanax(R), Zoloft(R), Clozaril(R),
Haldol(R), Librium(R), Prozac(R) and Paxil(R) are trademarks of Hoffman-LaRoche
Inc., Parke-Davis & Company, Ciba-Geigy Corporation, The Upjohn Company,
Pfizer, Sandoz Inc., McNeil Laboratories, Incorporated, Hoffman-LaRoche Inc.,
Eli Lilly and Company and SmithKline Beecham Corporation, respectively.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
Neurogen has been unprofitable since its inception in 1987 and has incurred
a cumulative net loss of approximately $11.2 million through June 30, 1995.
Such loss has resulted principally from costs incurred in the discovery and
development of the Company's compounds. The Company to date has incurred
losses in each year of its existence and, excluding the effect of up-front
payments received from Schering-Plough in 1995 under the Collaboration and
License Agreement dated as of June 28, 1995 between the Company and Schering-
Plough (the "Schering-Plough Agreement"), the Company is likely to incur
significant and increasing losses over at least the next several years. The
only revenues generated by Neurogen to date have resulted from payments under
the Collaborative Research Agreement dated as of January 1, 1992 between the
Company and Pfizer (the "1992 Pfizer Agreement"), the Collaborative Research
Agreement dated as of July 1, 1994 between the Company and Pfizer (the "1994
Pfizer Agreement" and, together with the 1992 Pfizer Agreement, the "Pfizer
Agreements") and the Schering-Plough Agreement, interest on the proceeds of
prior private and public offerings of Common Stock by the Company and the
proceeds of an equipment lease financing. Payments under the 1992 Pfizer
Agreement, the 1994 Pfizer Agreement and the Schering-Plough Agreement are
scheduled to expire at the end of 1995, in the middle of 1997 and in the
middle of 1997, respectively, unless the research programs under such
agreements are extended by Pfizer or Schering-Plough. The Company does not
expect to achieve revenues from product sales for several years, if at all.
The Company will not achieve revenues from product sales unless it or one of
its collaborative partners successfully completes product development, obtains
required regulatory approvals and commercializes its products. There can be no
assurance that the Company will ever achieve significant product revenues or
profitable operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EARLY STAGE OF PRODUCT DEVELOPMENT; UNCERTAINTY OF PRODUCT DEVELOPMENT
The Company is in the early stage of product development and does not expect
to have any products resulting from its research efforts commercially
available for a number of years, if at all. To date, human clinical trials
have commenced with respect to only two of the Company's compounds, NGD 91-1,
its lead anxiolytic compound (designed to treat anxiety disorders), trials for
which commenced in May 1994, and NGD 94-1, its lead antipsychotic compound
(designed to treat psychosis disorders), trials for which commenced in
November 1994. All other compounds currently under development by the Company
will require significant research and development and preclinical testing
prior to the commencement of any human clinical testing. All compounds
developed by the Company, including NGD 91-1 and NGD 94-1, will require
extensive human clinical testing prior to submission of any regulatory
application for commercial use. Extensive preclinical and clinical testing
required to establish safety and efficacy will take several years and require
substantial expenditures for each compound developed by Neurogen, and the time
required and cost involved in commercializing any new drugs cannot be
predicted. There can be no assurance that the Company's research or product
development efforts, or those of Pfizer, Schering-Plough or any other future
collaborative partner, will result in products being successfully discovered,
developed or approved for human clinical trials or that such products will
successfully complete clinical trials, receive regulatory approval and be
successfully commercialized. Moreover, actual research and development costs
may exceed budgeted amounts. Product development of new pharmaceuticals is
highly uncertain, and unanticipated developments, clinical or regulatory
delays, unexpected adverse side effects or inadequate therapeutic efficacy
would slow or prevent product development efforts and have a material adverse
effect on the Company's operations. See "Business."
UNPREDICTABILITY OF, AND LIMITED EXPERIENCE IN CONDUCTING, PRECLINICAL AND
CLINICAL TRIALS
Before obtaining required regulatory approvals for the commercial sale of
products, the Company must demonstrate through human clinical trials that such
products are safe and efficacious for use. To date, the
6
<PAGE>
Company has limited experience in conducting clinical trials. The Company is
dependent on Pfizer and Schering-Plough to conduct clinical trials for
compounds subject to their collaborations, including its lead compounds NGD
91-1 and NGD 94-1, and may become dependent on other third parties to conduct
future clinical trials. With the exception of NGD 91-1 and NGD 94-1, none of
the compounds under development by the Company has received regulatory
clearance for any stage of clinical trials in humans. There can be no
assurance that regulatory approval for clinical trials will be obtained for
any of the Company's other compounds under development. The results of
preclinical tests, including in particular animal model studies designed to
parallel certain human psychiatric conditions, do not necessarily predict the
safety or efficacy of a drug candidate in humans, and the results of initial
clinical trials do not necessarily predict results that will be obtained in
the later stages of clinical trials. In particular, preclinical animal model
studies for schizophrenia may be less reliable than other animal model studies
because, unlike with most other neuropsychiatric disorders, no true animal
parallel exists for schizophrenia. Furthermore, certain of the Company's
compounds, including NGD 94-1, which are designed to interact with specific
receptor subtypes exhibit new mechanisms of action. There can be no assurance
that these or any other products developed by the Company will be safe and
efficacious in humans, or that the administration to humans of any product
under development by the Company will not produce undesirable side effects.
Adverse side effects or lack of efficacy could interrupt, delay or result in
termination of clinical testing of such potential products and could
ultimately prevent their approval by the United States Food and Drug
Administration (the "FDA") or foreign regulatory authorities. The Company or
the FDA may suspend clinical trials at any time if it is believed that
individuals participating in such trials are being exposed to unacceptable
health risks. Even if approved by the FDA and foreign regulatory authorities
for commercialization, products developed by the Company may later exhibit
adverse side effects that prevent their widespread use or necessitate their
withdrawal from the market. See "Business--Government Regulation."
RELIANCE ON CORPORATE PARTNERS
Neurogen has entered into strategic alliances with Pfizer and Schering-
Plough to develop and commercialize anxiolytics and cognition enhancers, drugs
to treat sleep disorders and drugs to treat schizophrenia and a variety of
disorders which act through the family of receptors that interact with the
neurotransmitter dopamine. The compounds covered by these collaborations
represent the most advanced work of the Company to date. Pursuant to these
collaborations, the Company has granted to Pfizer the exclusive worldwide
license to manufacture, use and sell products developed pursuant to the Pfizer
Agreements and to Schering-Plough the exclusive worldwide license to market,
and the exclusive license to manufacture for sale outside the United States,
products governed by the Schering-Plough Agreement. Because of these
agreements, Neurogen is dependent on Pfizer and Schering-Plough to fund a
significant portion of its research and development expenses and to
manufacture and market resulting products from the collaborations. Neurogen is
also dependent on Pfizer and Schering-Plough with respect to regulatory
filings relating to, and the clinical testing of, compounds developed under
these collaborations. Although NGD 91-1 and NGD 94-1 have been the subject of
clinical trials, either Pfizer or Schering-Plough may, based on data obtained
in these trials or otherwise, elect to halt or repeat these trials or conduct
clinical trials using different formulations of these compounds or using back-
up compounds. Any of these actions could result in delays in the clinical
development of compounds covered by these collaborations. Furthermore, the
amount and timing of resources dedicated by these strategic partners to the
collaborations is not within the Company's control. There can be no assurance
that the interests of the Company will continue to coincide with those of its
collaborators or that the collaborators will not develop independently or with
third parties products that could compete with the Company's products, or that
disagreements over rights or technology or other proprietary interests will
not occur. Further, there can be no assurance that the collaborative
agreements will be extended at the end of their respective terms. If any of
the Company's collaborators breaches or terminates its agreement with the
Company, or fails to conduct its collaborative activities in a timely manner,
the research program under the applicable collaborative agreement or the
development and commercialization of product candidates subject to such
collaboration may be adversely affected. There can be no assurance that the
Company's existing strategic alliances will be successful, that the Company
will receive any milestone payments pursuant to the collaborative agreements,
or that the collaborations will continue. If the strategic alliances are not
continued or successful, the Company's business could be materially adversely
affected, and if the
7
<PAGE>
Company's strategic partners did not continue development of its compounds,
there can be no assurance that the Company would be able to do so. See
"Business--Collaborative Research and Licensing Agreements."
The Company's strategy for the development, clinical testing, manufacturing
and marketing of certain of its products includes entering into additional
collaborations with corporate partners, licensors, licensees and others. There
can be no assurance that the Company will be able to negotiate any such
collaborative arrangements in the future on acceptable terms, if at all, or
that such collaborative arrangements will be successful. The Company may
become dependent on other third parties in any future relationships. To the
extent that the Company is not able to establish such arrangements, it would
require substantial additional capital to undertake such activities on its own
and would likely encounter significant delays in, or could be prevented from
carrying out, the development, manufacture or sale of its products. See
"Business--Patents and Proprietary Technology," "--Manufacturing" and "--Sales
and Marketing."
FUTURE CAPITAL NEEDS
The operation of the Company's business requires substantial capital
resources. The Company currently anticipates that its existing capital
resources, including the net proceeds of this offering, and the interest
earned thereon, plus future scheduled payments under the Pfizer Agreements and
the Schering-Plough Agreement, will enable it to maintain its current and
planned operations through 1998. See "Use of Proceeds." The Company's future
financial requirements will depend on many factors, including the continued
progress of its research and development programs, the timing and results of
preclinical testing and clinical studies of its drug candidates, the timing of
regulatory approvals (if any), technological advances, determinations as to
the commercial potential of its proposed products and the status of
competitive products. The Company's capital requirements will also depend on
the ability of the Company to establish and maintain collaborative
arrangements with others to fund certain research and development programs, to
conduct clinical studies, to seek regulatory approvals and, if such approvals
are obtained, to manufacture and market products and the time and expense
associated with filing and, if necessary, prosecuting and enforcing patent
claims. The Company will require the commitment of substantial resources to
conduct the costly and time-consuming research, preclinical development and
clinical trials and to establish production and marketing capabilities if any
products are successfully developed and approved for commercialization. The
Company expects that it will, in the future, seek to raise additional funds
for these purposes through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources. Adequate funds for these purposes may not be available when needed or
on terms acceptable to the Company. If additional funds are raised through the
issuance of equity, further dilution to stockholders may result. The Company
has no established bank lines of credit or other arrangements through which it
can obtain financing. Insufficient funds may require the Company to reduce
substantially or eliminate expenditures for research and development, testing,
production and marketing of its proposed products or to obtain funds through
additional arrangements with corporate partners or others that may require the
Company to relinquish rights to certain of its technologies, product
candidates or products, which could have a material adverse effect on the
Company's business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION AND THE RISK OF TECHNOLOGICAL OBSOLESCENCE
Pharmaceutical product discovery is characterized by extensive worldwide
research and development efforts and rapid technological change. New drug
discoveries and developments in the Company's field are expected to continue
at a rapid pace in both industry and academia, and the Company's success will
depend to a large extent upon its ability to develop these technologies. The
Company believes that its most significant competition comes from fully-
integrated pharmaceutical companies, including Eli Lilly, Merck, Upjohn and
others, most of which have products and major research and development
programs in the central nervous system area, certain of which are in late
stage clinical trials. In addition, there are many other entities, both public
and private, in the United States and overseas, including fully-integrated
chemical companies, specialized biotechnology firms, academic institutions,
government agencies and other research organizations which are involved in the
development of
8
<PAGE>
products similar to those of Neurogen. Many of the Company's existing or
potential competitors possess substantially greater research and development
capabilities, technical, clinical, manufacturing, regulatory and marketing
experience and financial, human and managerial resources than Neurogen.
Competition from other biotechnology and pharmaceutical companies is intense
and is expected to increase. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than those of the Company or that render the Company's
technologies or products obsolete or noncompetitive. Prior commercialization
of a substantially similar drug by a competitor could put the Company at a
significant competitive disadvantage. In addition, the Company's competitors
may also succeed in obtaining regulatory approvals and patent protection or
other intellectual property rights that would limit the Company's ability to
develop or commercialize its potential products. See "Business--Competition"
and "--Patents and Proprietary Technology."
GOVERNMENT REGULATION
The products under development by the Company are subject to extensive
regulation and review by numerous federal, state and local government agencies
in the United States, including the FDA, and similar governmental authorities
in other countries where the Company intends to test and market its products.
Obtaining regulatory approval to market a product involves substantial cost
and can take many years. Data obtained from preclinical and clinical trials
are subject to varying interpretations which can delay, limit or prevent FDA
approval. Similar delays may be encountered in foreign countries. Delays and
costs in obtaining regulatory approvals would have a material adverse effect
on the Company's results of operations. There can be no assurance that the FDA
will not change the end points for clinical trials, that clinical data will be
accepted by the FDA or that any approvals will be granted on a timely basis,
if at all. If regulatory approval of a drug is obtained, such approval may
involve limitations and restrictions on the drug's use. In addition, any
marketed drug and its manufacturer are subject to continual governmental
review, and any subsequent discovery of previously unrecognized problems could
result in restrictions on the product or manufacturer, including, without
limitation, withdrawal of the product from the market. Failure to comply with
applicable regulatory requirements can, among other things, result in fines,
suspension of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution. See "Business--Government
Regulation."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success depends, in part, on its ability to obtain patents,
maintain trade secrets and operate without infringing on the intellectual
property rights of third parties. The Company files patent applications both
in the United States and in foreign countries in order to protect both its
products and its processes. The patent position of biotechnology and
pharmaceutical firms is highly uncertain and involves many complex legal and
technical issues. There is no clear policy involving the breadth of claims
allowed in such cases or the degree of protection afforded under such patents.
As a result, there can be no assurance that patent applications relating to
the Company's products or processes will result in patents being issued or
that issued patents or patents issued in the future to the Company will
provide protection against competitors. It is possible that patents issued to
the Company will be successfully challenged, or that patents issued to others
may preclude the Company from commercializing its products under development.
Litigation to establish the validity of patents, to defend against
infringement claims or to assert infringement claims against others, if
required, can be lengthy and expensive. Moreover, much of the Company's know-
how and technology cannot be patented. The Company also relies on trade
secrets and confidentiality agreements with collaborators, advisors,
employees, consultants, vendors and other service providers in order to
protect proprietary know-how. There can be no assurance that these agreements
will not be breached, that the Company would have adequate remedies for any
breach or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors. Furthermore, the Company's
business may be adversely affected if competitors independently develop
substantially equivalent technology or if the Company is unsuccessful in
protecting its proprietary rights. See "Business--Patents and Proprietary
Technology."
9
<PAGE>
NO ASSURANCE OF ADEQUATE REIMBURSEMENT
The Company's ability to commercialize its products successfully will depend
in part on reimbursement of the costs of such products and related treatments
at acceptable levels from government authorities, private health insurers and
other organizations, such as health maintenance organizations ("HMOs"). Third-
party payors are increasingly challenging the prices charged for medical
products and services. Also, the trend towards managed health care in the
United States and the concurrent growth of organizations, such as HMOs, which
can control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for the
Company's products. The cost containment measures that health care providers
are instituting and the effect of any health care reform could adversely
affect the Company's ability to sell its products if successfully developed
and approved by the FDA and/or any other appropriate regulatory authority.
There can be no assurance that reimbursement in the United States or foreign
countries will be available for any products the Company may develop, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products,
thereby adversely affecting the Company's business. The unavailability or
inadequacy of third-party reimbursement for the Company's products would
adversely affect the Company's business. Moreover, the Company is unable to
predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted
in the future or what effect such legislation or regulation would have on the
Company's business. See "Business--Third-Party Reimbursement."
ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS
The Company's success to date has been highly dependent on the skills of its
scientific and management personnel. The Company believes its future success
will depend in large part on its ability to recruit and retain such personnel,
consultants and members of its Scientific Advisory Board. The Company faces
significant competition for such individuals from other companies, academic
institutions, government entities and other organizations. The failure to
attract and retain one or more of these key personnel could adversely affect
the Company. In addition, the failure to retain certain of the Company's
current personnel, some of whom do not have employment contracts with the
Company, could adversely affect the Company. Each of the Company's current
personnel has entered into confidentiality and non-competition agreements with
the Company. See "Business--Human Resources."
LACK OF MANUFACTURING CAPABILITY
Neurogen is currently relying, in significant part, on third-party
manufacturers to produce its compounds for preclinical and clinical trials.
Pfizer and Schering-Plough are responsible for the manufacture of compounds
for clinical trials which are subject to the Pfizer Agreements and the
Schering-Plough Agreement, respectively. See "Business--Collaborative Research
and Licensing Agreements." The Company also currently utilizes third-party
manufacturers from time to time to produce other compounds for its research
purposes. The Company expects to be dependent on its collaborative partners or
third-party manufacturers to supply adequate quantities of its compounds for
additional clinical trials and commercial distribution if approved by the FDA
and/or any other applicable regulatory authority, although the Company has
retained certain manufacturing rights under the Schering-Plough Agreement.
There can be no assurance that the Company will be able to enter into any
necessary third-party manufacturing arrangements on terms acceptable to the
Company, if at all. In the event that the Company is unable to obtain contract
manufacturing on commercially acceptable terms, its ability to commercialize
its potential products may be adversely affected. The Company's dependence
upon third parties for the manufacture of its potential products may adversely
affect the Company's future profit margins, if any, and its ability to develop
and manufacture products on a timely and competitive basis. Furthermore, there
can be no assurance that such manufacturers will abide by any use limitations
or confidentiality restrictions in licenses with the Company. In addition, any
such manufacturer may develop process technology related to the manufacture of
Neurogen's compounds which it owns independently or jointly with Neurogen,
which could
10
<PAGE>
increase the Company's reliance on such manufacturer or require the Company to
obtain a license from such manufacturer in order to have its products
manufactured. There can be no assurance that such license, if required, would
be available on terms acceptable to the Company, if at all. See "Business--
Manufacturing." In the event the Company decides to or is required to
establish internal manufacturing capabilities for additional clinical trials
or commercial distribution of any of its products there can be no assurance
that the Company will be able to establish such capabilities at an acceptable
cost or in an acceptable time frame, if at all.
LACK OF SALES AND MARKETING EXPERIENCE
Neurogen has limited experience in product sales, marketing and distribution
and intends to rely on co- promotion or other licensing arrangements with
corporate partners (including Pfizer and Schering-Plough) for the marketing
and sales of certain of its potential products in some or all geographic
markets, if regulatory approval is obtained. There can be no assurance that
the Company will be successful in establishing future strategic alliances to
market potential products, or that its licensees in these arrangements will be
successful in marketing such products. In the event that the Company is unable
or elects not to enter into such arrangements, there can be no assurance that
Neurogen will successfully develop sales and marketing capabilities, that the
cost of establishing a marketing staff or sales force will not exceed product
revenues, if any, or that any sales and marketing efforts by the Company will
be successful. In addition, the Company competes with many other companies
that currently have extensive and well-funded marketing and sales operations.
Moreover, even if products that the Company or any collaborative partner
develops are brought to market, there can be no assurance that they will gain
acceptance among physicians, patients or third-party payors. See "Business--
Sales and Marketing."
POTENTIAL PRODUCT LIABILITY
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have caused an
adverse effect on patients. Such risk exists for products being tested in
human clinical trials, as well as products that receive regulatory approval
for commercial sale. Manufacturers of pharmaceuticals have been the subject of
significant product liability litigation. The Company maintains product
liability insurance for compounds it is testing in clinical trials. The
Company intends to seek additional product liability insurance coverage if and
when its products are commercialized, but can give no assurance that it will
be able to obtain such insurance at acceptable costs, if at all. Furthermore,
there can be no assurance that such coverage, if obtained, will be adequate to
cover claims. There can be no assurance that the Company will not experience a
significant product liability claim or recall, which could adversely affect
the Company's business.
HAZARDOUS MATERIALS
As with many biotechnology companies, the Company's research and development
involves the controlled use of hazardous materials, chemicals and radioactive
compounds. There can be no assurance that the Company's safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by state and federal regulations or that it will not be subject to
the risk of accidental contamination or injury from these materials. In the
event of such an accident, the Company could be held liable for any damages
that result and any such liability could adversely affect the Company. See
"Business--Government Regulation."
VOLATILITY OF STOCK PRICE
The market prices for securities of biotechnology companies, including
Neurogen, have historically been highly volatile, and the market has from time
to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Announcements
of technological innovations, regulatory developments or new commercial
products by, and developments concerning proprietary rights and clinical
progress of, the Company or its competitors and period to period fluctuations
in financial results may have a significant impact on the Company's business
and on the market price of the Common Stock.
11
<PAGE>
Future sales of substantial amounts of Common Stock by existing stockholders
could also adversely affect the prevailing price of the Common Stock. See
"Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the prevailing market price of
the Common Stock. Upon completion of this offering, based on the number of
shares outstanding at June 30, 1995 and without taking into account shares of
Common Stock issuable upon the exercise of outstanding stock options or
warrants, the Company will have 12,628,133 shares (or 13,003,133 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock
outstanding. Of these shares, the Company believes 9,336,840 shares will be
freely tradeable under the Securities Act without restriction or further
registration under the Securities Act, and 3,189,936 shares will be held by
affiliates of the Company and will be freely tradeable subject to the volume
and other restrictions of Rule 144 promulgated under the Securities Act.
In addition, shares of Common Stock issuable upon the exercise of options
granted pursuant to the Company's stock option plans will be freely tradeable
without restriction when those options are exercised, subject, in certain
cases, to the volume and other restrictions of Rule 144. Options to purchase
753,388 shares of Common Stock were exercisable at June 30, 1995.
The Company and the officers and directors and certain other stockholders of
the Company (holding an aggregate of approximately 3,189,936 shares of Common
Stock) have agreed not to offer, sell, contract to sell or otherwise dispose
of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock except without the prior written
consent of Smith Barney Inc. for 90 days after the date of this Prospectus, in
the case of the Company, in certain limited circumstances.
In addition, certain holders of shares of Common Stock or warrants to
purchase shares of Common Stock have the right to cause the Company to
register their shares under the Securities Act, subject to certain conditions
and limitations. Exercise of any of these registration rights could involve a
substantial expense to the Company and may adversely affect the Company's
ability to complete future equity financings.
DILUTION; WARRANTS AND STOCK OPTIONS
The public offering price of the Common Stock is substantially higher than
the net tangible book value per share of the Common Stock prior to the
offering. Purchasers of shares of Common Stock in this offering, therefore,
will experience immediate and substantial dilution equal to approximately
$9.81 per share from the public offering price per share (assuming a public
offering price of $15.438 per share). Certain stock options and common stock
purchase warrants granted by Neurogen to date may be exercised at prices equal
to or lower than the public offering price and consequently may have a further
dilutive effect on the net tangible book value per share of the Common Stock.
Neurogen anticipates that it will grant additional stock options in the future
which may have similar dilutive effects in connection with its efforts to
recruit and retain key personnel. See "Dilution."
POSSIBLE LOSS OF NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1994, for federal income tax purposes, the Company had
generated net operating loss carryforwards of approximately $22,800,000, which
are scheduled to expire in the years 2003 through 2009. A significant portion
of these net operating loss carryforwards will be utilized in 1995 as a
result, in part, of up-front payments received and corresponding revenues
recognized pursuant to the Schering-Plough Agreement. The issuance of shares
by the Company pursuant to this offering, future issuance of securities by the
Company and/or sales of securities by the Company's principal shareholders
could result in an ownership change as defined by Section 382 of the Internal
Revenue Code of 1986. Such an ownership change could limit the Company's
utilization of net operating loss carryforwards to offset future taxable
income, if any.
12
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 2,500,000 shares of Common Stock
offered hereby, after deducting estimated offering expenses payable by the
Company, are estimated to be approximately $36.1 million ($41.5 million if the
Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $15.438 per share.
The Company intends to use the proceeds of this offering to fund its
research and development activities, including the clinical development of
compounds which are not the subject of existing collaborations with Pfizer and
Schering-Plough. While Pfizer and Schering-Plough have assumed responsibility
for the funding of the development of the compounds under their respective
collaborative agreements, Neurogen plans to seek to enter into additional
collaborations with respect to eating disorders, stress disorders or other
programs whereby it may assume additional responsibilities for the funding of
development activities and would seek to retain additional commercial rights.
The amount and timing of the proceeds allocated to specific research and
development activities will depend upon numerous factors, some of which are
beyond the Company's control, such as the status of competitive products, the
progress of the Company's research and development programs and the timing and
availability of alternative methods of financing for the Company, including
existing or future strategic alliances and joint ventures with third parties.
The Company evaluates on an ongoing basis potential collaborative arrangements
with third parties. In addition, the Company intends to use some of the
proceeds to fund working capital and general corporate purposes, which may
include capital expenditures in connection with improvements to the Company's
facilities. The Company has not determined the amount it plans to spend for
each of such purposes or the timing of such expenditures.
Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term, interest-bearing obligations of investment grade. The
Company anticipates that its existing capital resources, including the net
proceeds of the offering, will enable it to maintain its current and planned
operations through 1998. The Company's capital requirements may vary, however,
depending upon numerous factors, including those described above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DILUTION
At June 30, 1995, the net tangible book value of the Company was
approximately $35.0 million or $3.45 per share of Common Stock. The net
tangible book value per share of the Company represents the amount of total
tangible assets of the Company less the amount of total liabilities, divided
by the number of shares of Common Stock outstanding. Without giving effect to
any changes in net tangible book value after June 30, 1995, other than the
sale of the shares offered hereby and receipt of the net proceeds therefrom at
an assumed public offering price of $15.44 per share, the net tangible book
value of the Company at June 30, 1995 would have been approximately
$71,042,842 or $5.63 per share. This represents an immediate increase in net
tangible book value of $2.18 per share of Common Stock held by the existing
stockholders of the Company and an immediate dilution of $9.81 per share to
new investors purchasing shares at the public offering price. The following
table illustrates the dilution in net tangible book value per share to new
investors as of June 30, 1995, assuming that the Underwriters' over-allotment
option is not exercised:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $15.44
Net tangible book value per share before offering............ $3.45
Increase in net tangible book value per share attributable to
the offering................................................ 2.18
-----
Pro forma net tangible book value per share after the offering. 5.63
------
Dilution per share to new investors............................ $ 9.81
======
</TABLE>
The foregoing table assumes no exercise of stock options or warrants to
purchase 800,746 shares of Common Stock which were exercisable on June 30,
1995. To the extent such options and warrants are exercised at prices lower
than the public offering price, there will be further dilution to new
investors. See "Risk Factors--Dilution; Warrants and Stock Options."
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on The Nasdaq Stock Market under the symbol
"NRGN." The table below sets forth the high and low last sale prices for the
Common Stock on The Nasdaq Stock Market for the periods indicated since
January 1, 1993. The Company's fiscal year ends on December 31.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ----- -----
1993:
-----
<S> <C> <C>
First Quarter............................................. $ 8 3/8 $ 5 3/4
Second Quarter............................................ 7 5 1/2
Third Quarter............................................. 7 5/8 6
Fourth Quarter............................................ 7 5/8 6 1/8
<CAPTION>
1994:
-----
<S> <C> <C>
First Quarter............................................. $ 9 $ 7
Second Quarter............................................ 9 6 1/2
Third Quarter............................................. 6 7/8 4 3/4
Fourth Quarter............................................ 7 6
<CAPTION>
1995:
-----
<S> <C> <C>
First Quarter............................................. $ 9 5/8 $ 6 5/8
Second Quarter............................................ 17 9 1/4
Third Quarter (through August 15, 1995)................... 17 1/4 13 1/2
</TABLE>
On August 15, 1995, the last reported sale price for the Common Stock as
reported on The Nasdaq Stock Market was $17.125 per share. As of June 30,
1995, there were approximately 460 holders of record of the Common Stock.
DIVIDEND POLICY
Neurogen has never paid any dividends on its Common Stock. For the
foreseeable future, it is anticipated that earnings, if any, which may be
generated from Neurogen's operations will be used to finance growth and that
dividends will not be paid to stockholders.
14
<PAGE>
CAPITALIZATION
The following table sets forth the current and long-term portions of long-
term obligations and the stockholders' equity of Neurogen as of June 30, 1995
and as adjusted to reflect the sale by the Company of 2,500,000 shares of
Common Stock offered hereby, assuming a public offering price of $15.438 per
share, and the receipt of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1995
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term obligations................. $ 150 $ 150
======== ========
Long-term obligations, excluding current portion......... $ 542 $ 542
-------- --------
Stockholders' equity:
Preferred Stock, par value $.025 per share; 2,000,000
shares authorized; none issued and outstanding,
actual and as adjusted.............................. -- --
Common Stock, par value $.025 per share; 30,000,000
shares authorized; 10,128,133 shares issued and
outstanding, actual; and 12,628,133 shares issued
and outstanding, as adjusted(1)..................... 253 316
Additional paid-in capital............................. 45,806 81,824
Accumulated deficit.................................... (11,232) (11,232)
Unrealized gain on marketable securities............... 135 135
-------- --------
Total stockholders' equity........................... 34,962 71,043
-------- --------
Total capitalization................................ $ 35,504 $ 71,585
======== ========
</TABLE>
--------
(1) Does not include 2,129,263 shares of Common Stock issuable upon exercise
of outstanding stock options and common stock purchase warrants at June
30, 1995. At June 30, 1995, options and warrants to purchase 800,746
shares of Common Stock were exercisable. See Notes 4, 5 and 7 of Notes to
Financial Statements.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1990, 1991,
1992, 1993 and 1994 and for each of the years in the five-year period ended
December 31, 1994 are derived from the financial statements of Neurogen, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The selected financial data for the six-month
periods ended June 30, 1994 and 1995 have been derived from the unaudited
financial statements of the Company, and, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial data for such periods. The results
of operations for the six-month period ended June 30, 1995 are not necessarily
indicative of the results of operations for the full year. The selected
financial data presented below should be read in conjunction with the more
detailed information contained in the financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total operating
revenues................ -- -- $ 4,595 $ 4,605 $ 5,789 $ 2,300 $17,739
Operating expenses:
Research and
development............. $ 2,189 $ 3,674 4,721 6,452 10,150 4,344 5,889
General and
administrative.......... 1,249 1,627 2,043 2,475 2,774 1,626 1,506
Other income, net..... 410 140 576 506 484 105 417
------- ------- ------- ------- ------- ------- -------
Net income (loss)
before provision for
income taxes............ (3,028) (5,161) (1,593) (3,816) (6,651) (3,565) 10,761
Provision for income
taxes................... -- -- -- -- -- -- 227
------- ------- ------- ------- ------- ------- -------
Net income (loss)..... $(3,028) $(5,161) $(1,593) $(3,816) $(6,651) $(3,565) $10,534
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share(1)................ $ (.52) $ (.77) $ (.18) $ (.43) $ (.70) $ (.40) $ .96
======= ======= ======= ======= ======= ======= =======
Weighted average
number of shares
outstanding(1).......... 5,773 6,675 8,752 8,962 9,528 8,972 10,958
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1995
---------------------------------------------- --------
1990 1991 1992 1993 1994
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities........... $ 4,028 $ 7,638 $ 19,423 $ 12,326 $ 15,480 $ 29,944
Total assets.......... 11,156 14,695 27,426 22,704 25,889 40,639
Long-term obligations,
excluding
current portion...... 1,093 1,687 1,265 792 620 542
Accumulated deficit... (4,545) (9,706) (11,299) (15,115) (21,766) (11,232)
Stockholders' equity.. 9,771 12,065 24,587 20,771 24,081 34,962
</TABLE>
--------
(1) Fully diluted earnings per share for the six months ended June 30, 1995
was $.93, based on an aggregate of 11,381,000 shares of common stock and
common stock equivalents. Fully diluted earnings per share are based upon
the weighted average number of common shares and dilutive common stock
equivalents outstanding. The common stock equivalents have not been included
in periods with losses as their inclusion would be antidilutive.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since its inception in September 1987, Neurogen has been engaged in the
discovery and development of proprietary therapeutic products for the
treatment of psychiatric and neurological disorders. The Company has not
derived any revenue from product sales and, excluding the effect of
$14,000,000 in one-time license fees received from Schering-Plough in 1995,
expects to incur significant and increasing losses over at least the next
several years as it continues to expand its discovery and development
programs. Its revenues to date have come from two collaborative research
agreements entered into with Pfizer, one collaboration and license agreement
with Schering-Plough and from interest income. The Company entered into the
1992 Pfizer Agreement in February 1992 to collaborate with respect to the
development of compounds for anxiety and cognition disorders. The Company
entered into the 1994 Pfizer Agreement in June 1994 to collaborate with
respect to its sleep disorder program. The Company entered into the Schering-
Plough Agreement in June 1995 to develop and market compounds for the
treatment of psychiatric disorders which act through the dopamine family of
receptors.
RESULTS OF OPERATIONS
Results of operations may vary from period to period depending on numerous
factors, including the timing of payments received under existing or future
strategic alliances, joint ventures or financings, if any, the progress of the
Company's research and development projects, technological advances and
determinations as to the commercial potential of proposed products. Neurogen
expects research and development costs to increase significantly over the next
several years as its drug development programs progress. In addition, general
and administrative expenses necessary to support the expanded research and
development activities are expected to increase for the foreseeable future.
Six Months ended June 30, 1995 and 1994
In June 1995, the Company received, and recognized as revenue, $14,000,000
in one-time license fees from Schering-Plough in connection with entering into
the Schering-Plough Agreement. The Company's operating revenues were
$17,739,333 for the six months ended June 30, 1995 compared to $2,300,000 for
the same period in 1994. This increase is due primarily to the above-
referenced $14,000,000 in one-time license fees. In addition, research funding
pursuant to the Pfizer Agreements increased 63% for the six-month period ended
June 30, 1995 compared to the same period in 1994, due to the commencement of
the 1994 Pfizer Agreement in the third quarter of 1994. The Company will begin
recognizing research revenue under the Schering-Plough Agreement in the third
quarter of 1995. Research funding under the 1992 Pfizer Agreement, which has
represented $4.6 million per year for the last three years, is scheduled to
terminate at the end of 1995 if Pfizer does not extend the collaboration.
Research and development costs have increased $1,546,042, or 36%, to
$5,889,691 for the six-month period ended June 30, 1995 as compared to the
same period in 1994. This increase is due primarily to expansion of
preclinical and clinical testing on the Company's lead antipsychotic compound,
increased staffing levels and purchases of laboratory equipment, materials and
supplies. Research and development costs represented 80% of total operating
expenses for the first six months of 1995 as compared to 73% for the same
period in 1994.
General and administrative expenses decreased $119,849, or 7%, to $1,506,302
for the six-month period ended June 30, 1995 as compared to the same period in
1994. This decrease is primarily attributable to a refinement in the Company's
allocation of expenses between research and development and general and
administrative and to a general reduction of expenses in several areas.
Other revenues, consisting primarily of interest income and gains and losses
from U.S. government securities, increased 197% for the first six months of
1995 compared to the same period in 1994 due to higher interest rates,
realized gains on U.S. government securities and a higher level of invested
funds.
The Company recognized net income of $10,533,814 for the six-month period
ended June 30, 1995 as compared with a net loss of $3,565,268 for the same
period in 1994. The net income in 1995 is primarily due to the increase in
revenues resulting from one-time license fees of $14,000,000 from Schering-
Plough for rights to Neurogen's dopamine compounds.
17
<PAGE>
Years ended December 31, 1994, 1993 and 1992
The Company's research revenues were $5,789,333 in 1994, $4,604,524 in 1993
and $4,595,476 in 1992. Research funding pursuant to the Pfizer Agreements
constituted substantially all of the Company's revenues and increased 22% in
1994 compared to 1993 due to the commencement of the 1994 Pfizer Agreement.
Revenues remained relatively constant in 1993 as compared with 1992.
Research and development costs have increased substantially over the years,
rising 57% to $10,149,633 in 1994 as compared with 1993 and 37% to $6,451,876
in 1993 as compared with 1992. The increase in 1994 was due primarily to
expansion of preclinical and clinical testing on the Company's lead
antipsychotic compound, increased staffing levels and purchases of laboratory
equipment, materials and supplies. The increase in 1993 over 1992 was due to
expansion of preclinical testing on the Company's lead compounds in the
anxiolytic, anticonvulsant and antipsychotic programs, increased staffing
levels and purchases of laboratory equipment, materials and supplies. Research
and development costs represented 79%, 72%, and 70% of total operating
expenses in 1994, 1993, and 1992, respectively.
General and administrative expenses increased 12% to $2,774,380 in 1994, and
21% to $2,474,647 in 1993 as compared with 1992. The increases in both years
were due primarily to staff additions in connection with the expansion of the
Company's operations and the addition of related facilities.
Other revenues, consisting primarily of interest income and gains and losses
from U.S. government securities, decreased 7% in 1994 due to realized and
unrealized losses on U.S. government securities. Other income decreased in
1993 as compared with 1992 due to a lower level of invested funds and
declining interest rates.
The Company incurred a net loss of $6,651,195, $3,816,131 and $1,593,286 in
1994, 1993, and 1992, respectively. The increase from 1993 to 1994 was due to
increased development and clinical costs of NGD 94-1, its lead antipsychotic
compound, and additional staff and related laboratory supply costs for other
non-Pfizer projects. The net loss increased from 1992 to 1993 due to the
Company's expansion of operations unrelated to the Pfizer Agreements.
In 1993 and 1994, respectively, the Company adopted Financial Accounting
Standards Board Statements No. 109, "Accounting for Income Taxes" ("SFAS 109")
and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Adoption of SFAS 109 and 115 did not have a
significant impact on the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995 and December 31, 1994, cash, cash equivalents and
marketable securities were in the aggregate $29,944,000 and $15,480,000,
respectively. The increase in 1995 was due to $17,900,000 (including
$3,900,000 in unearned revenue) received from Schering-Plough in connection
with entering into the Schering-Plough Agreement, offset in part by the
application of such resources to fund operations. At December 31, 1994, 1993
and 1992, cash, cash equivalents and marketable securities were in the
aggregate $15,480,000, $12,326,000 and $19,423,000, respectively. The increase
in 1994 was due to cash received pursuant to the 1994 Pfizer Agreement. The
decrease in 1993 was primarily a result of $3,382,699 in cash required to fund
operations in excess of cash generated from operations, together with office
and research facility and equipment additions of $3,075,347. The Company's
aggregate level of cash, cash equivalents and marketable securities have
fluctuated in the past and are expected to fluctuate in the future as a result
of the factors described below.
Neurogen's cash requirements to date have been met by the proceeds of its
financing activities, including interest earned on such proceeds, and research
funding received pursuant to the Pfizer Agreements and the Schering-Plough
Agreement and one-time license fees from the Schering-Plough Agreement. The
Company's financing activities have included three private placement offerings
of the Company's common stock during 1988
18
<PAGE>
and 1989, a public offering of the Company's common stock in each of 1989 and
1991, and the sale of common stock to Pfizer in 1992 and 1994 in connection
with entering into the Pfizer Agreements. Total funding received from these
financing activities was approximately $45,400,000. The Company's expenditures
have been primarily to fund research and development and general and
administrative expenses, including hiring, management and administrative
personnel, and to construct and equip its research and development facility.
In the first quarter of 1992, the Company entered into the 1992 Pfizer
Agreement effective January 1992 pursuant to which Pfizer made a $13,750,000
equity investment in the Company. Pursuant to the 1992 Pfizer Agreement, the
Company expects to receive approximately $18,400,000 during the four-year
period which commenced January l, 1992 for research and development funding of
the Company's anxiolytic (anxiety-reducing drugs) and cognitive enhancer
programs, and may receive up to an additional $4,600,000 for a fifth year
should Pfizer exercise its option to extend the collaboration. Neurogen could
also receive milestone payments of up to $12,500,000 during the development
and regulatory approval of its products. In return, Pfizer received the
exclusive rights to manufacture and market anxiolytics that act through the
family of receptors which interact with the neurotransmitter gamma-
aminobutyric acid, or GABA, and cognition enhancers developed in the
collaboration for which it will pay Neurogen royalties based upon net sales
levels, if any, for such products. As of June 30, 1995, Pfizer had provided
$16,100,000 of research funding to the Company pursuant to the 1992 Pfizer
Agreement, in addition to its equity investment in 1992.
Neurogen and Pfizer entered into their second collaborative agreement, the
1994 Pfizer Agreement, in July 1994, pursuant to which Pfizer provided
$9,864,000 in equity financing. Pursuant to the 1994 Pfizer Agreement, the
Company expects to receive approximately $7,386,000 during the three-year
period which commenced July 1, 1994, for research and development funding of
the Company's sleep disorder program and may receive up to an additional
$2,379,000 for a fourth year should Pfizer exercise its option to extend the
collaboration. Neurogen could also receive milestone payments of up to
$3,250,000 during the development and regulatory approval of its sleep
disorder compounds. As part of this second collaboration, Pfizer received the
exclusive rights to manufacture and market GABA-based sleep disorder products
developed in the collaboration for which it will pay Neurogen royalties
depending upon net sales levels, if any. As of June 30, 1995, Pfizer had
provided $2,628,667 of research funding to the Company pursuant to the 1994
Pfizer Agreement, in addition to its equity investment in 1994.
Under both the 1992 Pfizer Agreement and the 1994 Pfizer Agreement, in
addition to making the equity investments and the research and milestone
payments noted above, Pfizer is responsible for funding the cost of all
clinical development and marketing, if any, of drugs developed from the
collaboration.
In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement pursuant to which Neurogen and Schering-Plough are collaborating in
the discovery and development of antipsychotics and drugs for other disorders
which act through the dopamine family of receptors. Pursuant to the Schering-
Plough Agreement, the Company received one-time license fees of $14,000,000
for the rights to Neurogen's dopamine compounds and $3,000,000 for the right
to test certain of Neurogen's combinatorial chemistry libraries in selected
non-CNS assays. Schering-Plough also agreed to pay an additional $3,000,000 in
1996 for the right to test additional libraries. Moreover, Neurogen expects to
receive approximately $7,200,000 during the two-year period which commenced
June 28, 1995, of which $900,000 had been paid as of June 30, 1995, for
research and development funding of the Company's antipsychotic program. The
Company may receive additional research and development funding of up to
$3,600,000 per year for three additional one-year periods depending on whether
and the extent to which Schering-Plough exercises its right to extend the
collaboration. Neurogen could also receive milestone payments of up to
approximately $32,000,000 if it achieves certain development and regulatory
objectives regarding its products subject to the collaboration. In return,
Schering-Plough received the exclusive worldwide license to market products
subject to the collaboration and Neurogen retained the rights to receive
royalties based on net sales levels, if any.
The Company plans to use its cash balance for its research and development
activities, working capital and general corporate purposes. Neurogen
anticipates that its cash balance, including the proceeds from this offering,
and interest thereon, as supplemented by research funding pursuant to the
Pfizer Agreements and the Schering-Plough Agreement, will be sufficient to
fund its current and planned operations through 1998. However,
19
<PAGE>
Neurogen's funding requirements may change and will depend upon numerous
factors including, but not limited to, the progress of the Company's research
and development programs, the timing and results of preclinical testing and
clinical studies, the timing of regulatory approvals, technological advances,
determinations as to the commercial potential of its proposed products, the
status of competitive products and the ability of the Company to establish and
maintain collaborative arrangements with others for the purpose of funding
certain research and development programs, conducting clinical studies,
obtaining regulatory approvals and, if such approvals are obtained,
manufacturing and marketing products. The Company anticipates that it will
augment its cash balance through financing transactions, including the
issuance of debt or equity securities and further corporate alliances. No
arrangements have been entered into for any future financing and no assurances
can be given that adequate levels of additional funding can be obtained on
favorable terms, if at all.
As of December 31, 1994, for federal income tax purposes, the Company had
generated net operating loss carryforwards of approximately $22,800,000, which
are scheduled to expire in the years 2003 through 2009. A significant portion
of these net operating loss carryforwards will be utilized in 1995 as a
result, in part, of one-time payments received and corresponding revenues
recognized pursuant to the Schering-Plough Agreement. The issuance of shares
by the Company pursuant to this offering, future issuance of securities by the
Company and/or sales of securities by the Company's principal shareholders
could result in an ownership change as defined by Section 382 of the Internal
Revenue Code of 1986. Such an ownership change could limit the Company's
utilization of net operating loss carryforwards to offset future taxable
income, if any.
20
<PAGE>
BUSINESS
OVERVIEW
Neurogen Corporation is an emerging neuropharmaceutical company engaged in
the discovery and development of a new generation of drugs to treat
psychiatric and neurological disorders by regulating nerve cell (neuron)
communication in the brain. The Company is developing "receptor subtype
specific" drugs based on its expertise in neuronal communication. The Company
believes that receptor subtype specific drugs offer the potential for
equivalent or improved efficacy and fewer side effects than currently marketed
psychotherapeutic drugs, most of which interact with multiple receptor
subtypes. The Company leverages its resources, where it believes it to be
advantageous, through collaborations with large pharmaceutical companies for
advanced clinical development and commercialization of its products. The
Company has existing collaborations with Pfizer and Schering-Plough and
intends to enter into additional collaborations where appropriate.
Neurogen believes that its expertise in neurobiology, medicinal chemistry
and molecular biology, combined with its biased combinatorial chemistry
program, enable it to identify and develop compounds more quickly
and efficiently than it could using traditional drug discovery techniques.
Neurogen has developed a portfolio of neuropharmaceutical drug candidates
designed to treat anxiety, psychosis, dementia, depression and epilepsy and
sleep, eating and stress disorders. Industry analysts estimate the worldwide
market for currently marketed neuropharmaceuticals for such disorders to be
approximately $10.5 billion annually.
BACKGROUND
The human central nervous system (the "CNS") is composed of neurons in the
brain and spinal cord which are organized into interconnecting networks
responsible for coordinating all functions in the body. As a result, neurons
are implicated in all psychiatric and neurological disorders.
Neurons can be divided into many different classes. While the fundamental
purpose of all neurons is to communicate with other neurons and cells
throughout the body, each class of neurons has a particular function to play
in the CNS, including controlling a physiological action, responding to
stimulation or storing memory. Communication between neurons occurs through
complex electrical and chemical processes involving the transmission of
chemicals, known as neurotransmitters, across spaces between nerve cells,
known as synapses. At a synapse, electrical signals in the transmitting neuron
cause the release of neurotransmitters. After being released from one neuron,
a neurotransmitter diffuses in the synapse and interacts with proteins, known
as receptors, located on the surface of adjacent neurons. Each neuron contains
thousands of receptors. When a neurotransmitter binds to and activates a
receptor, it produces a response in the receiving neuron thereby stimulating
specific functions or actions.
Disruption of normal neuronal communication has been implicated in many
neurological and psychiatric disorders, including anxiety, schizophrenia,
eating disorders, stroke and epilepsy. Such disruption can result from
abnormal release of neurotransmitters, aberrant signaling between nerve cells
or heightened sensitivity of receptors to normal levels of neurotransmitters.
[FIGURE 1.1]
Artist's depiction of neurotransmitter activity at the synapse
21
<PAGE>
The complex task of communication between neurons is carried out by almost
100 different types of neurotransmitters. Each neurotransmitter interacts only
with selected types of receptors specific to that neurotransmitter.
For many years, it was commonly believed that each neurotransmitter
interacted with one or at most two types of receptors. In the last decade,
however, scientists, including current members of Neurogen's scientific staff,
have discovered that each neurotransmitter interacts with not just one type of
receptor but with multiple receptor subtypes which are grouped into families
depending on the similarity of their molecular structure. Receptor subtypes
differ slightly from other members of their family, are distributed
differently throughout the brain and may control different physiological
functions from other receptor subtypes within the same family.
The neurotransmitters gamma-aminobutyric acid ("GABA"), dopamine and
neuropeptides control many important neurophysiological functions. GABA is
believed to be one of the most prevalent neurotransmitters in the CNS. GABA
interacts with a family of receptor subtypes, known as GABA receptors, to
regulate the activity level of neurons. Subtypes of GABA receptors have
evolved to carry out particular functions in the CNS. Because of its
prevalence in the CNS, disruption of normal GABA receptor function is
implicated in many neuro-psychiatric disorders, including anxiety, learning
and memory impairment, sleep disorders and seizures.
Dopamine is present at fewer synapses in the CNS than GABA, but is known to
control important functions such as movement and emotional responses. Dopamine
interacts with a family of receptors, known as dopamine receptors, consisting
of at least five subtypes, each of which is responsible for certain functions
in the CNS. For example, abnormalities in dopamine transmission have been
implicated in schizophrenia.
The Company believes neuropeptides, by interacting with certain receptors,
are associated with mood, eating and stress responses. Two neuropeptides,
neuropeptide Y ("NPY") and corticotrophin releasing factor ("CRF"), are
believed to be associated with eating and stress disorders. As with dopamine,
NPY and CRF interact with their own families of receptor subtypes.
Almost every psychotherapeutic drug currently on the market interacts not
with one specific receptor subtype, but with many or all members of one or
more receptor families. Neurogen believes that this nonselectivity is the
principal cause of the side effects, including sedation and addiction,
associated with such drugs. The discovery of receptor subtypes has provided an
opportunity for Neurogen to design drugs which target specific receptor
subtypes. Neurogen believes that receptor subtype specific drugs could be
efficacious with fewer adverse side effects than currently marketed drugs.
BUSINESS STRATEGY
Neurogen's mission is to be a leader in the design, development and
commercialization of psychotherapeutic drugs for the treatment of a variety of
neuropsychiatric disorders. The Company focuses its drug discovery programs on
small molecule compounds that target specific receptor subtypes implicated in
such disorders. Neurogen believes that such compounds offer the potential for
equivalent or improved efficacy with fewer side effects than drugs currently
on the market. The key points of the Company's strategy are as follows:
Target Multiple Psychotherapeutic Markets. Neurogen utilizes its expertise in
the CNS area to develop a diverse portfolio of drug candidates to treat common
neurological disorders, including anxiety, psychosis, depression and eating,
sleep and stress disorders. By targeting multiple neuropsychiatric disorders
which represent large markets, the Company seeks to reduce its reliance on any
single program.
Develop Receptor Subtype Specific Compounds. The Company focuses its drug
discovery efforts on receptor subtype specific small molecule compounds the
Company believes will have fewer side effects than currently marketed drugs.
The Company believes that such drugs have the potential to penetrate and
expand existing markets as evidenced by the new class of antidepressants
(e.g., Prozac, Zoloft and Paxil) which selectively
22
<PAGE>
interact with certain receptors and have less severe side effects than
previous antidepressants. In addition, the Company seeks to develop small
molecule drugs due to their relatively high solubility, increased ability to
cross the blood brain barrier (a critical consideration in developing safe and
efficacious psychotherapeutic drugs) and low manufacturing costs.
Utilize Advanced Discovery Technologies. The Company utilizes its advanced
discovery technologies, including its combinatorial chemistry program, to
enhance its drug discovery capabilities and to provide new opportunities for
strategic partnerships. Employing its biased combinatorial chemistry
capabilities, the Company is developing extensive libraries of small molecule
compounds. This program was instrumental in the discovery of NGD 95-1,
Neurogen's development compound for the treatment of eating disorders. In
addition, as part of its collaboration with Schering-Plough, Neurogen will
share its combinatorial libraries with Schering-Plough in return for $3.0
million per year for two years.
Ratchet Growth Through Strategic Collaborations. The Company seeks to ratchet
its growth through successive strategic collaborations in which it hopes to
progressively retain additional commercial rights and assume additional
responsibilities to gradually develop its clinical development, manufacturing
and sales capabilities. Further, through its collaborations, Neurogen seeks to
diversify the development risk of its programs and to enhance the likelihood
of commercialization of its compounds. In its collaborations with Pfizer,
Neurogen has focused its efforts primarily on research and discovery and looks
to Pfizer to conduct and fund all clinical development, manufacturing and
sales/marketing activities. In its collaboration with Schering-Plough, in
addition to leading the research and discovery efforts, Neurogen has retained
the right to participate in the clinical development of collaboration
compounds (while Schering-Plough will conduct and fund clinical trials) and an
option to manufacture products resulting from the collaboration for the United
States market.
PRODUCT RESEARCH AND DEVELOPMENT
The Company believes it is well positioned to capitalize on advances in
molecular biology, medicinal chemistry and neurobiology to develop new
psychotherapeutic compounds. The Company believes that its scientists possess
an advanced understanding of the biochemistry of the brain and its possible
connection to human behavior and that this understanding has enabled the
Company to develop a portfolio of compounds which include product candidates
for the treatment of anxiety, psychosis, epilepsy, dementia and depression and
sleep, eating and stress disorders.
DRUG DISCOVERY TECHNOLOGIES
Neurogen's drug discovery technologies have evolved from a traditional
approach of identifying leads from known chemical compounds to developing its
own proprietary library of potential compounds. When Neurogen first began to
concentrate on anxiety and psychosis disorders, a number of small molecule
compounds were known to interact with the GABA and dopamine receptor families
and provide therapeutic benefits. This allowed Neurogen to follow a
traditional medicinal chemistry approach by starting from known active
structures and from that starting point searching for novel chemical classes
of compounds to treat these disorders. Neurogen then coupled its understanding
of the biology of these receptor families with its expertise in medicinal
chemistry to pursue the discovery of receptor subtype specific compounds from
such novel classes. Throughout the discovery process, Neurogen employs its
expertise in pharmacology and animal behavioral assays to assess and further
define the activity of its compounds and thereby guide and refine its
discovery efforts.
At the commencement of Neurogen's neuropeptide program for the treatment of
eating disorders in 1994, no suitable starting points for chemical structures
were known to exist. In order to enhance its ability to discover and develop
lead compounds for this program and other therapeutic targets, Neurogen
developed a combinatorial chemistry program, an emerging field in the
biotechnology and pharmaceutical industries. Unlike traditional drug
discovery, in which compounds are typically designed and synthesized at a rate
of 50 to 100 compounds per year per chemist, combinatorial chemistry
technologies can generate libraries of thousands of compounds in
23
<PAGE>
days. Moreover, advances in screening techniques and robotics now allow the
rapid screening of thousands of compounds created through combinatorial
efforts. Combinatorial libraries like those being developed at Neurogen can be
used to find new lead structures for receptors or other targets where no leads
exist as well as to optimize lead structures by refining candidates into
structures with suitable drug characteristics.
Most companies with combinatorial chemistry programs have used these
technologies to systematically create immense libraries of diverse compounds.
However, since the number of unique organic compounds is essentially infinite,
Neurogen believes it is important to bias its libraries toward the selection
of molecules most likely to interact with receptor families of interest to
Neurogen and other pharmaceutical companies. Neurogen also biases its library
to create compounds more likely to have drug-like characteristics such as oral
availability. To bias its library, Neurogen first selects or designs a number
of known and proprietary pharmacophores (arrangements of atoms thought to have
activity in some biochemical assay) with the aid of Computer Assisted
Molecular Modeling (CAMM). These pharmacophores then serve as templates and
are subjected to "combinatorial" procedures, whereby the templates are reacted
with numerous different variants of a given reaction simultaneously, producing
a pool of ten or more compounds. The pools of compounds are then screened
through a variety of high capacity receptor-based assays to identify compounds
that bind with specific receptor subtypes. In 1994, Neurogen generated a
library of more than 100,000 compounds using these techniques.
To date, Neurogen's combinatorial program has been instrumental in
developing NGD 95-1, the Company's lead candidate for eating disorders, and
other candidates in its neuropeptide program. The Company believes that this
achievement required a fraction of the time that would have been needed using
traditional approaches. Neurogen believes these discovery technologies will
continue to enhance its ability to find lead structures for difficult
medicinal chemistry problems and significantly shorten the time required to
optimize such leads and produce viable drug candidates. In addition, the
Company believes that these discovery technologies will provide it with new
opportunities for strategic partnerships, as evidenced by the Schering-Plough
Agreement.
24
<PAGE>
PRODUCT DEVELOPMENT PROGRAMS
The following table lists the neuropsychiatric disorders being targeted by
the Company and the current status of Neurogen's potential products with
respect to each of these disorders.
<TABLE>
<CAPTION>
DISORDER RECEPTOR DEVELOPMENT COMMERCIAL
(COMPOUND) TARGET STATUS RIGHTS
---------- -------- ----------- ----------
<S> <C> <C> <C>
Anxiety (NGD 91-1) GABA receptor subtype Phase I-B clinical trials (1) Pfizer
(Neurogen royalty)
Schizophrenia (NGD 94-1) Dopamine D/4/ receptor Phase I-A clinical trials (1) Schering-Plough
(Neurogen royalty)
Schizophrenia (NGD 94-2) Dopamine D/4/, D/2/ receptors Preclinical Schering-Plough
development (2) (Neurogen royalty)
Schizophrenia (NGD 93-1) Multiple dopamine receptors Preclinical Schering-Plough
development (2) (Neurogen royalty)
Eating disorders (NGD NPY/1/ receptor Preclinical Neurogen
95-1) development (2)
Seizure disorders (ADCI) NMDA receptors Preclinical Neurogen
development (2) (NIH royalty)
Dementia, cognition GABA receptor subtype Leads identified (3) Pfizer
deficits (Neurogen royalty)
Insomnia GABA receptor subtype Leads identified (3) Pfizer
(Neurogen royalty)
Depression NPY/2/ receptor Discovery (4) Neurogen
Stress-related disorders CRF receptor Discovery (4) Neurogen
</TABLE>
--------
(1) See "--Government Regulation" for a description of the phases of clinical
trials.
(2) "Preclinical development" indicates that Neurogen is conducting
pharmacology testing, toxicology testing, formulation, process development
and/or manufacturing scale-up prior to possible submission of an
Investigational New Drug application (an "IND").
(3) "Leads identified" indicates that lead compounds have been discovered that
meet certain in vitro criteria of the Company. Lead compounds may undergo
structural modification and more extensive evaluation prior to selection
of candidates, if any, for preclinical development.
(4) "Discovery" activities include initial research related to specific
molecular targets and assay development for the identification of new lead
compounds.
ANXIETY PROGRAM. Estimates by the National Institute of Mental Health (the
"NIMH") suggest that anxiety, a sense of irrational fear or dread, is the most
common CNS disorder in the United States affecting approximately 23 million
people, or 12% of the adult population. The most common anxiety-reducing
drugs, or anxiolytics, are the class of drugs known as benzodiazepines (such
as Valium(R), Xanax(R) and Librium(R)) which are orally administered compounds
that exert their pharmacologic effect on the GABA family of receptors.
Benzodiazepines alleviate some of the symptoms of anxiety, but at the same
time cause numerous side effects, including drowsiness, impairment of motor
skills, memory loss and addiction. In addition, benzodiazepines can cause coma
or death if a patient consumes excess alcohol in conjunction with drug
treatment. The Company believes these side effects are due to benzodiazepines
interacting with and enhancing the activity of many or all GABA receptor
subtypes. Despite these side effects, based on studies by various market
sources, the Company estimates the annual market for currently marketed
anxiolytics to be approximately $3 billion worldwide and $1.5 billion in the
United States.
Neurogen's scientists have been leaders in defining the mechanism of action
of benzodiazepines at the GABA receptors. Based on their understanding of the
role which GABA receptor subtypes play in the side effects
25
<PAGE>
caused by benzodiazepines, Neurogen has developed small molecule, orally
administered anxiolytic compounds which it believes may avoid or reduce the
adverse side effects of currently marketed anxiolytics by binding to specific
subtypes in the GABA receptor family. The Company entered into the 1992 Pfizer
Agreement to jointly develop and commercialize with Pfizer anxiolytic and
cognition enhancing compounds that act through the GABA family of receptors,
including the Company's lead anxiolytic, NGD 91-1. See "--Collaborative
Research and Licensing Agreements."
NGD 91-1. Pursuant to the 1992 Pfizer Agreement, Pfizer filed an IND with
the FDA with respect to NGD 91-1 in March 1994. In a Phase I-B clinical trial
of situational anxiety, NGD 91-1 was compared to a known anxiolytic,
Valium(R), and to a control placebo. While Pfizer is developing NGD 91-1 for
use in patients with generalized anxiety disorder, a chronic condition, the
Phase I-B study was designed, in part, to obtain an early indication for the
efficacy of NGD 91-1 in an acute (situational) setting. The Phase I-B study
was "double-blinded" and involved 150 healthy men and women exposed to anxiety
caused by the anticipation of an unpleasant medical procedure. Both NGD 91-1
and Valium(R) demonstrated significant anxiolytic effects. However, while
Valium(R) caused significant sedation, NGD 91-1 did not cause any sedation.
Further Phase I safety studies of NGD 91-1 are currently underway. Under the
1992 Pfizer Agreement, Pfizer has the right to determine when to advance NGD
91-1 in the clinical process, if at all. The Company understands that Pfizer
is currently undertaking additional Phase I studies to determine the minimum
dose at which the existing formulation of NGD 91-1 is effective and the
relationship between blood levels achieved and variations in dosing levels.
The Company believes that Pfizer will use the results of these studies to
determine whether to begin Phase II clinical trials using the existing
formulation or whether adjustments to such formulation may be advisable. If
such adjustments were made, further Phase I studies would be required with
respect to the reformulated compound before Phase II clinical trials would
commence, if at all. As with all drugs that enter clinical testing, no
assurances can be given that NGD 91-1 will successfully complete the clinical
trials or advance through the regulatory approval process.
In order to increase the likelihood that Neurogen's portfolio will produce a
successful anxiolytic drug, Neurogen, in collaboration with Pfizer, has been
developing alternative anxiolytic candidates that act through the GABA family
of receptors and have properties similar to those of NGD 91-1 but which belong
to a different chemical series. Neurogen has filed patent applications with
respect to the composition of NGD 91-1 and the other compounds in its
anxiolytic program. See "--Collaborative Research and Licensing Agreements."
PSYCHOSIS PROGRAM. Schizophrenia refers to a group of mental illnesses of
unknown origin which have no known cure and are characterized by a variety of
symptoms including hallucinations, delusions and social withdrawal.
Schizophrenia is estimated to affect between one-half and one percent of the
population worldwide. Although the currently marketed antipsychotic drugs
Haldol(R) and Clozaril(R), which act at dopamine receptors among others, have
shown encouraging results in limiting mental deterioration, each may cause
impairment of motor function, orthostatic hypotension (a decrease in blood
pressure which may cause fainting) and numerous other side effects. In the
case of Clozaril(R), the possibility of life-threatening changes in the white
blood cell count (agranulocytosis) of patients requires blood monitoring of
all patients receiving the drug, adding significantly to the cost of the
therapy. Moreover, as many as 40% of all schizophrenics are unresponsive to
standard antipsychotic medications and as many as 60% of treated patients
subsequently relapse and require hospitalization. Industry analysts estimate
the current annual market for antipsychotic drugs to be approximately $1.5
billion worldwide and $560 million in the United States.
Neurogen's antipsychotic program has concentrated on the discovery and
development of drugs which block specific dopamine receptor subtypes. Research
indicates that dopamine and its receptors play a critical role in
schizophrenia. Neurogen scientists have investigated the pharmacology of
dopamine receptors and their interaction with the network of neurons involved
in emotional response and motor function. The Company believes that
selectively blocking certain dopamine receptor subtypes could be efficacious
in treating schizophrenia. Using a series of molecular biological,
biochemical, cellular biological and behavioral techniques, Neurogen has
selected three different lead antipsychotic candidates: NGD 94-1 (its most
advanced compound
26
<PAGE>
for the treatment of schizophrenia), NGD 94-2 and NGD 93-1. Each of these
compounds is subject to the Schering-Plough Agreement which the Company
entered into with Schering-Plough in June 1995 to jointly develop and
commercialize drugs to treat a variety of dopamine-mediated disorders. See "--
Collaborative Research and Licensing Agreements."
NGD 94-1. The Company's focus on dopamine receptor subtypes and the design
of specific binding agents for these subtypes is similar to its approach with
respect to GABA receptor subtypes. In recent years, distinct dopamine receptor
subtypes, known as D/1/, D/2/, D/3/, D/4/ and D/5/, have been discovered which
Neurogen believes may be involved in psychosis. Because elevated D/4/
receptors have been measured in the autopsied brains of schizophrenics,
Neurogen believes that high levels of D/4/ receptors may intensify signals in
the brain, thus causing many of the symptoms associated with schizophrenia. As
a result, Neurogen believes that a specific D/4/ antagonist might be an
effective antipsychotic agent and, because of its specificity, might have a
reduced side effect profile compared to currently marketed drugs. Neurogen
scientists have identified a series of small molecule, orally administered
compounds, including NGD 94-1, which preclinical research has indicated are
potent and highly selective antagonists for the D/4/ receptor subtype.
In November 1994, the Company initiated Phase I trials involving
approximately 60 normal male subjects. The Phase I-A trial involving single
escalating dose studies for safety was completed in January 1995 and indicated
that NGD 94-1 was safe and well-tolerated across a broad dose range.
Additional pharmacokinetic and pharmacodynamic data is currently being
gathered and analyzed, and a multiple dose trial is currently underway.
Pursuant to the Schering-Plough Agreement, Schering-Plough has the right to
determine when to advance NGD 94-1 in the clinical process, if at all. No
assurance can be given that NGD 94-1 will successfully complete the clinical
trials or advance through the regulatory approval process. In order to
increase the likelihood that Neurogen's portfolio will produce a successful
antipsychotic, Neurogen is developing alternative antipsychotic candidates,
including its broader spectrum compounds noted below, in collaboration with
Schering-Plough.
While NGD 94-1 is being evaluated primarily as a therapeutic agent, Neurogen
is also pursuing its potential for diagnosing schizophrenic patients. By
incorporating a radioisotope in the compound, NGD 94-1 may be able to identify
and diagnose potential D/4/ receptor abnormalities in patients. The Company
has filed patent applications with respect to the composition and use of NGD
94-1 and the other compounds in its antipsychotic program. See "--
Collaborative Research and Licensing Agreements."
Broader Spectrum Antipsychotics. Schizophrenia may not be a single disease,
but a syndrome or spectrum of diseases. As a result, the Company believes that
a single receptor subtype specific antipsychotic drug may not provide adequate
therapy for all patients. A complementary alternative to a selective agent,
such as NGD 94-1, would be a drug that possessed activity at a greater number
of, but not all, receptor subtypes to provide broad therapy for all possible
patients with fewer side effects than currently marketed drugs to treat
psychotic disorders, or antipsychotics. Neurogen has identified a series of
compounds with a balance of dopamine receptor blocking activities (at D/2/,
D/3/ and D/4/ receptors) and other related receptor blocking activities. In
this regard, the Company, together with Schering-Plough, is investigating
selected compounds with selectively broader receptor blocking properties.
These include NGD 94-2, which selectively blocks the D/4/ receptor and the
D/2/ receptor, NGD 93-1, which blocks a broader spectrum of receptors, and
other combinations of dopamine antagonists. Neurogen believes that because of
their activity at numerous receptor sites, these drugs, which are currently in
preclinical development, could potentially be used to treat a spectrum of
disorders associated with schizophrenia.
EATING DISORDERS PROGRAM. Obesity is a major health problem in the United
States. Recent studies indicate that almost one-third of the population fits
the criteria for at least moderate obesity and that severe obesity affects a
large subgroup of this population. Many health problems, including
hypertension, arthritis, non-insulin dependent diabetes and elevated
cholesterol, are associated with obesity. In addition, it is estimated that as
many as one percent and three percent of females in the United States suffer
from anorexia nervosa and bulimia nervosa, respectively.
27
<PAGE>
Obesity has traditionally been treated with amphetamines or amphetamine-like
drugs which can be highly addictive. More recently antidepressants, such as
Prozac(R), have been used with limited success in treating obesity. Due to the
limited success of eating disorder therapy and side effects, including
nervousness, tremors and insomnia, associated with currently available
medications, Neurogen believes that an eating disorder therapy without these
side effects would have the ability to penetrate and potentially expand the
market for these drugs. The Company further believes that a receptor subtype
specific drug that moderates eating habits may have such a reduced side effect
profile and represent a step forward in the treatment of eating disorders.
In recognition of health risks associated with obesity, the FDA transferred
the review of anti-obesity drugs to its Endocrine and Metabolic Division in
1994. This move, together with its proposed FDA Guidance for Weight-Control
Drugs, suggests that the FDA is increasingly viewing obesity as a disorder
which may require chronic treatment. These events have increased interest in
the development of improved treatments for obesity in the pharmaceutical
industry.
Academic research (both at Neurogen and at other institutions) has
demonstrated that the neurotransmitter NPY is closely connected with animal
feeding behavior and appetite control. In preclinical studies, injection of
NPY into the hypothalamic region of the brain has stimulated animals that have
just eaten to eat again. Studies indicate that animals develop no tolerance
for NPY and that those chronically exposed to NPY (over a period of days to
weeks) become obese. Independent of these studies, there has developed a
greater understanding of the existence and role of NPY receptor subtypes which
has stimulated interest in pursuing an NPY-mediated treatment of eating
disorders. Based on these studies and its understanding of receptor subtypes,
Neurogen believes that a drug which blocks the binding (that is, acts as an
antagonist) of NPY to one of its receptor subtypes located in the
hypothalamus, designated NPY/1/, may have the opposite effect of chronic
exposure to NPY and reduce the desire to eat.
Through its combinatorial chemistry program and throughput screening
capabilities, Neurogen has identified a number of antagonists for NPY/1/.
Neurogen has tested the most advanced of these orally available compounds,
which it has designated NGD 95-1, in rodents where it was shown to inhibit
NPY-induced eating. The compound was also shown in rodent studies to decrease
normal eating, both overnight and in a 21-day trial. NGD 95-1 is currently
undergoing additional rodent efficacy studies and preclinical safety and
toxicological testing to assess its suitability for human clinical testing.
The Company intends to commence human clinical testing of NGD 95-1 in early
1996, subject to the submission of an IND and no objection thereto by the FDA.
EPILEPSY AND SEIZURE DISORDERS. Approximately two million people in the
United States have epilepsy. Industry analysts estimate the current annual
market for anticonvulsants (drugs that prevent or arrest convulsions) to be
approximately $800 million worldwide and over $500 million in the United
States.
Convulsive disorders may have many origins and are characterized by abnormal
neuronal activity in the brain. Instead of normal small bursts of electrical
impulses, neurons in a person suffering a seizure fire a storm of strong,
extremely rapid electrical signals, disturbing the normal activity of the
brain. Seizures can be local, affecting only part of the brain, or
generalized, affecting the entire brain and resulting in unconsciousness and
subsequent amnesia. Drugs currently used to control seizures, such as
phenobarbital, phenytoin (Dilantin(R)) and carbamazepine (Tegretol(R)),
include drugs that are directed toward specific kinds of epilepsies and
anticonvulsants that have a broad spectrum of activity. Epilepsy remains
difficult to treat, however, because of limited understanding of the neuronal
activity associated with the different forms of seizures and the toxic side
effects caused by medication.
In 1992, Neurogen entered into a licensing and cooperative research and
development agreement ("CRADA") with the NIH which provided the Company
exclusive access to a library of compounds for evaluation as potential
anticonvulsants. In preclinical trials conducted by the Company, one of these
compounds, ADCI, exhibited effective anticonvulsant activity in animal model
systems used to predict efficacy and potential therapeutic value in treating
epilepsy. The Company believes ADCI might be an effective anticonvulsant
because it possesses two important modes of action: blocking the NMDA receptor
and antagonism of voltage-dependent
28
<PAGE>
sodium channels, which is important in the treatment of seizures. Each of
these defined biological activities has been associated with the activity of
ADCI in different animal seizure models.
In contrast to many anticonvulsants currently on the market, ADCI shows a
therapeutic effect in animal models at doses substantially below doses which
cause side effects in preclinical animal models. However, ADCI is difficult to
synthesize in large scale. Neurogen intends to improve the route to synthesis
before pursuing further development of ADCI. However, there can be no
assurance that Neurogen will be successful in this regard or that ADCI will be
tested in clinical trials.
COGNITION DISORDERS. Memory loss is one of the most devastating symptoms of
neurodegenerative diseases such as Alzheimer's disease and Parkinson's
disease. Research sponsored by the NIMH indicates that in any given year as
many as five million people in the United States suffer from dementia, a
condition characterized by the impairment of learning and memory recall. A
1990 study by the U.S. Office of Science and Technology Policy indicates that
dementia afflicts approximately 10% of people over the age of 65. The Company
believes that GABA may affect and modulate the activity of other
neurotransmitters which contribute to the storage and retrieval of memory. By
understanding how GABA affects these other neurotransmitters, the Company
believes that it may be able to develop a drug candidate that acts through
GABA receptor subtypes to enhance brain function and cognition where brain
function has been impaired through neurodegenerative processes caused by
aging, chemical toxins, Alzheimer's disease or Parkinson's disease.
The Company believes that the benzodiazepines, which produce their desired
anxiolytic effect by enhancing the activity of certain GABA receptors, cause
memory impairment and other side effects due to their non-selective binding to
GABA receptor subtypes. Accordingly, the Company believes that inhibition of
certain GABA receptor subtypes in the cortex and hippocampal regions of the
brain may enhance the storage and retrieval of memory. Neurogen has identified
a number of compounds that inhibit activity at these GABA receptor subtypes.
Of these compounds, Neurogen has identified candidates which it believes are
suitable for further preclinical evaluation. Neurogen is pursuing its
cognition enhancement program in collaboration with Pfizer under the 1992
Pfizer Agreement. See "--Collaborative Research and Licensing Agreements."
SLEEP DISORDERS. Recent studies indicate that as many as 20 million people
in the United States experience chronic insomnia and an additional 20 to 30
million Americans experience intermittent sleep-disorders. Industry analysts
estimate that the annual market for drugs to treat insomnia is approximately
$1 billion worldwide and over $300 million in the United States. Neurogen is
developing drugs to treat sleep disorders, primarily insomnia. While currently
marketed drugs to treat sleep disorders, or hypnotics, are effective, they
cause numerous side effects, including "hangovers," rebound insomnia, short-
term memory loss and addiction.
Humans possess an internal "biological clock" that controls the timing of
different biological processes and affects the ability to sleep. This
mechanism influences many different processes well beyond those associated
with activity and rest. Because GABA receptor subtypes are involved in sleep
regulation as well as anxiety, the portfolio of compounds which have been
synthesized as part of Neurogen's anxiolytic effort are also being evaluated
in animal model systems to assess their potential as improved hypnotics.
Neurogen's research suggests that some hypnotics may interact with different
GABA receptor subtypes than those which regulate anxiety. The Company has
identified certain compounds in its portfolio which interact with these
receptor subtypes and which it believes are suitable for further preclinical
evaluation. Neurogen believes that the side effects associated with many
currently marketed medications arise from the fact that these drugs bind non-
specifically to many different
GABA receptor subtypes. Neurogen believes that drugs which are selective for
certain sleep-inducing GABA receptor subtypes will have fewer side effects
than the non-selective benzodiazepines currently on the market and could
represent a substantial improvement in the treatment of sleep disorders.
Neurogen is pursuing its sleep disorder program in collaboration with Pfizer
under the 1994 Pfizer Agreement. See "--Collaborative Research and Licensing
Agreements."
29
<PAGE>
DEPRESSION AND STRESS DISORDERS. Depression is one of the most prevalent
mental illnesses in the United States, affecting approximately 17 million
people or 9% of the adult population annually according to the NIMH.
Depression occurs in a variety of forms, ranging from a single episode of
depressive symptoms to recurrent cycling of moods which can be severe in some
patients, alternating between manic "highs" and depressed "lows." Research
suggests that more than half of the people who have had one episode of major
depression will have another at some point in their lives. While many patients
function normally between episodes, it is believed that 20 to 35 percent of
the victims suffer chronic depression that prevents them from maintaining a
normal routine. Many depressed people sleep too much or too little, are
lethargic or agitated and experience feelings of worthlessness and guilt or
have recurring thoughts of death or suicide. Older generic antidepressants may
cause sedation, mouth dryness or heart irregularities and can be lethal in
overdose. Other classes of antidepressants exhibit toxicity when combined with
certain foods. While recent pharmaceutical research has led to improved drugs,
such as Prozac(R), for the treatment of depression, these medications have
limitations in their use primarily because of their slow onset of therapeutic
action (up to three weeks) and lack of efficacy in some patients. Neurogen
believes that exploring alternative mechanisms of action may lead to a new
class of antidepressants that act quickly, safely and effectively either by
themselves or in conjunction with existing medications.
Stress is a condition commonly associated with depression. A number of
neuropeptide receptors which appear to be involved in stress responses,
including receptors for NPY and CRF, are altered in depressed patients.
Neurogen does not believe drugs specifically targeting these receptors for the
treatment of depression have previously undergone clinical testing. By cloning
receptors thought to be involved in stress responses, Neurogen believes it may
be able to discover and develop small molecule chemical compounds that help to
relieve stress by acting as antagonists to NPY and CRF. Having identified
receptor subtypes it believes are relevant in stress-related responses,
Neurogen is in the process of drug discovery with respect to its depression
and stress disorder programs. Using its advanced drug discovery technologies,
Neurogen is currently screening its libraries for appropriate NPY and CRF
antagonists.
COLLABORATIVE RESEARCH AND LICENSING AGREEMENTS
As part of its business strategy, the Company seeks collaborative agreements
with pharmaceutical companies as a means to achieve ratcheted growth in its
own drug development, manufacturing and, possibly, sales and marketing
capabilities. In February 1992 and again in July 1994, Neurogen entered into
collaborations with Pfizer, and in June 1995, Neurogen entered into a
collaboration with Schering-Plough. Neurogen will strive through strategic
alliances with major pharmaceutical companies to balance its exposure to
market risks and to retain an increasing share in the success of its future
products. There can be no assurance that the Company will establish any
additional collaborative arrangements or that such future relationships, if
established, or its current relationships will result in marketed
pharmaceutical products.
PFIZER
In the first quarter of 1992, Neurogen and Pfizer entered into the 1992
Pfizer Agreement pursuant to which Neurogen and Pfizer are collaborating in
the discovery and development of anxiolytics and cognition enhancers which act
through the GABA family of receptors. Pursuant to the 1992 Pfizer Agreement,
Pfizer purchased 1.0 million shares of Common Stock for $13.8 million, and the
Company is entitled, subject to certain conditions, to receive approximately
$18.4 million during the four year period which commenced January 1, 1992, of
which approximately $16.1 million had been paid as of June 30, 1995, for
research and development funding of the Company's anxiolytic and cognition
enhancement programs. The Company may receive up to an additional $4.6 million
for a fifth year if Pfizer exercises its option to extend the collaboration
beyond December 1995. Neurogen could also receive milestone payments of up to
$12.5 million if it achieves certain development and regulatory objectives
regarding its anxiolytic and cognition enhancement products. In return, Pfizer
received the exclusive worldwide license to manufacture, use and sell GABA-
based anxiolytics and cognition enhancers developed in the collaboration.
Pfizer is required to pay Neurogen royalties based upon net sales levels, if
any, for such products. Any compound which acts through the GABA family of
receptors and is not an anxiolytic or cognition enhancer falls outside the
parameters of the 1992 Pfizer Agreement, but Pfizer has a right of first
review for a period of six months from disclosure of such compound to Pfizer
by Neurogen.
30
<PAGE>
In July 1994, Neurogen and Pfizer entered into the 1994 Pfizer Agreement.
Pursuant to this second agreement, Neurogen and Pfizer are collaborating in
the discovery and development of hypnotics which act through the GABA family
of receptors to treat sleep disorders. Pursuant to the 1994 Pfizer Agreement,
Pfizer purchased approximately 1.1 million shares of Common Stock for
approximately $9.9 million, and the Company is entitled, subject to certain
conditions, to receive approximately $7.4 million during the three-year period
which commenced July 1, 1994, of which approximately $2.6 million had been
paid as of June 30, 1995, for research and development funding of the
Company's sleep disorder program. The Company may receive additional funding
of up to approximately $2.4 million for a fourth year if Pfizer exercises its
option to extend the collaboration beyond July 1997. Neurogen could also
receive milestone payments of up to approximately $3.3 million if it achieves
certain development and regulatory objectives regarding its sleep disorder
compounds. As part of this second collaboration, Pfizer received the exclusive
worldwide license to manufacture, use and sell GABA-based sleep disorder
products developed in the collaboration. Pfizer is required to pay Neurogen
royalties based on net sales levels, if any, for such products.
Under both the Pfizer Agreements, in addition to making the equity
investments and the research and milestone payments noted above, Pfizer is
responsible for funding the cost of all clinical development and the
manufacturing and marketing, if any, of drugs developed pursuant to the
collaborations. As a result of these collaborations, Neurogen is dependent on
Pfizer to seek regulatory approvals for, to conduct trials for and to
determine the ultimate commercialization of compounds subject to the
collaborations.
SCHERING-PLOUGH
In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement to collaborate in the discovery and development of antipsychotics
and drugs for other disorders which act through the dopamine family of
receptors. Pursuant to the Schering-Plough Agreement, the Company received an
up-front payment of $14.0 million for the rights to Neurogen's dopamine
compounds and $3.0 million for the right to test Neurogen's combinatorial
chemistry libraries in selected non-CNS assays. Schering-Plough also agreed to
pay an additional $3.0 million in 1996 for the right to test additional
libraries. Moreover, Neurogen is entitled to receive approximately $7.2
million during the two-year period which commenced June 28, 1995 for research
and development funding of the Company's antipsychotic program and may receive
additional research and development funding of up to $3.6 million per year for
three additional one-year periods depending on whether and the extent to which
Schering-Plough exercises its rights to extend the collaboration beyond July
1997. Neurogen could also receive milestone payments of up to approximately
$32.0 million if it achieves certain development and regulatory objectives
regarding its products subject to the collaboration. In return, Schering-
Plough received the exclusive worldwide license to market products subject to
the collaboration and Neurogen retained the rights to receive royalties based
on net sales levels, if any. In addition to the payments described above,
Schering-Plough is responsible for funding the cost of all clinical
development and marketing, if any, of drugs subject to the collaboration.
Pursuant to the Schering-Plough Agreement, Neurogen has retained the right to
participate on an advisory clinical development committee and an option to
manufacture any products resulting from the collaboration for the United
States market. As a result of this collaboration, Neurogen is dependent on
Schering-Plough to seek regulatory approvals for, to conduct clinical trials
for and to determine the ultimate commercialization of compounds subject to
this collaboration.
NIH
In January 1992, Neurogen licensed the anticonvulsant compound ADCI from the
NIH. Pursuant to the CRADA with the NIH, Neurogen and the NIH are
collaborating on the preclinical development of ADCI. The National Technical
Information Service ("NTIS") has granted Neurogen the worldwide, exclusive
right to manufacture, use or sell ADCI for a period of seven years commencing
with the first sale, if any, of ADCI. Neurogen currently plans to utilize
third-party vendors for any such manufacturing and marketing. Neurogen is
required to pay the NTIS a royalty on any net sales if ADCI is marketed.
31
<PAGE>
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success depends, in part, on its ability to obtain patents,
maintain trade secrets and operate without infringing on the intellectual
property rights of third parties. The Company files patent applications both
in the United States and in foreign countries, as it deems appropriate, for
protection of both its products and processes. To date, Neurogen has filed
numerous patent applications in the United States and foreign countries, and
intends to file additional domestic and foreign applications in the near
future. Presently, the Company is the sole assignee of eighteen issued United
States patents and several foreign patents. Sixteen of the Company's issued
United States patents and several pending patent applications concern the
compounds in its anxiolytic program, including NGD-91-1. Two of the Company's
issued United States patents and several pending patent applications concern
the compounds in its antipsychotic program, including NGD 94-1. The Company
believes that it does not infringe any third-party patents and, except in the
case of the NIH with respect to ADCI, the Company has engaged in no technology
transfer which would obligate it to pay royalties to any third party.
There can be no assurance that patent applications relating to the Company's
products or processes will result in patents being issued or, if issued, the
claims allowed will be adequate to protect the Company's technology from
competitors. Moreover, patent positions of pharmaceutical and biotechnology
firms and patent protection for products such as those the Company is
developing and proposes to develop are often highly uncertain and involve
complex legal and factual questions. No assurance can be given that any
patents issued or licensed to the Company will not be held unenforceable,
invalidated or circumvented, or that the rights granted under such patents
will provide competitive advantages to the Company. Because patent
applications in the United States are maintained in secrecy until patents
issue and because publication of technological developments in the scientific
or patent literature often lags behind actual developments, the Company cannot
be certain that it was the first to invent the subject matter covered by its
patent applications or patents or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to
participate in litigation or interference proceedings declared by the United
States Patent and Trademark Office to determine priority of invention, which
could result in substantial cost to the Company, even if the eventual outcome
is favorable to the Company. There can be no assurance that the Company's
patents would be held valid and infringed by a court of competent
jurisdiction. An adverse outcome with regard to a third-party claim could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology, which could have a material adverse effect on the
Company's business.
The development of therapeutic products for CNS applications is intensely
competitive. A number of pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents in this field. Some of these applications or patents may be
competitive with the Company's applications or conflict in certain respects
with claims made under the Company's applications. Such conflict could result
in a significant reduction of the coverage of the Company's patents, if
issued. In addition, if patents are issued to other companies which contain
competitive or conflicting claims and such claims are ultimately determined to
be valid, the Company may be required to obtain licenses to these patents or
to develop or obtain alternative technology. If any licenses are required,
there can be no assurance that the Company will be able to obtain any such
licenses on commercially favorable terms, if at all. The Company's breach of
an existing license or failure to obtain a license to any technology that it
may require to commercialize its products may have a material adverse impact
on the Company.
In connection with the Pfizer Agreements and the Schering-Plough Agreement,
Neurogen has granted Pfizer and Schering-Plough, as the case may be, the
exclusive, worldwide license to manufacture (subject to Neurogen's option to
manufacture products for the United States pursuant to the Schering-Plough
Agreement), use and sell compounds subject to those agreements. To the extent
that Neurogen enters into future strategic alliances or collaborations with
third parties, it may have to share, or it may have no rights to, intellectual
property developed or patents obtained in connection with such arrangements.
In addition to patent protection, the Company also relies on trade secrets
and proprietary know-how which it seeks to protect, in part, by
confidentiality agreements with collaborators, advisors, employees and
consultants.
32
<PAGE>
There can be no assurance, however, that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or independently
discovered by competitors. The Company's business may be adversely affected by
competitors who independently develop substantially equivalent technology.
COMPETITION
The biopharmaceutical industry is highly competitive. The Company's most
significant competition comes from fully-integrated pharmaceutical companies,
including Eli Lilly, Merck, Upjohn and others, most of which have products and
major research and development programs in the CNS field, certain of which are
in late-stage clinical trials. In addition, there are many other entities,
both public and private, in the United States and overseas, including fully-
integrated chemical companies, specialized biotechnology firms, academic
institutions, government agencies and other research organizations which are
involved in the development of products similar to those of Neurogen.
Furthermore, these companies and institutions compete with the Company in
recruiting and retaining highly qualified scientific and management personnel.
Many of the Company's existing or potential competitors possess substantially
greater research and development, financial, technical, manufacturing,
marketing, and human resources than Neurogen. There can be no assurance that
the Company's competitors will not succeed in developing technologies and
products that are more effective than those developed by the Company or which
would render the Company's technology and products less competitive or
obsolete.
MANUFACTURING
Neurogen is currently relying, in part, on third-party manufacturers to
produce its compounds for research purposes and for preclinical and clinical
trials. The Company, which manufactures certain of its compounds to conduct
preclinical studies, may expand its facilities to produce sufficient
quantities of compounds for the clinical stage of development in certain
circumstances. Neurogen has focused its research on developing compounds that
are small molecules. The Company believes these compounds are more efficient
to manufacture and do not require purification associated with certain protein
compounds.
Pfizer manufactures drugs for clinical trials which are subject to the 1992
Pfizer Agreement and has the right to manufacture future products, if any, for
commercialization. Schering-Plough will be responsible for manufacturing for
clinical trials compounds which are subject to the Schering-Plough Agreement
and has the right to manufacture future products, if any, for
commercialization. Neurogen, however, has retained an option to manufacture
future products, if any, resulting from the collaboration for sales in the
United States. See "--Collaborative Research and Licensing Agreements." With
respect to compounds not currently subject to collaborations, the Company
plans either to establish supply arrangements with third-party manufacturers
for clinical trials and for commercial distribution or to develop its own
manufacturing capabilities. There can be no assurance that the Company will be
able to achieve third-party arrangements on terms acceptable to the Company or
that such arrangements will be successful. While the Company may attempt to
develop internal manufacturing capabilities for certain of its products, there
can be no assurance that the Company will be able to establish such
capabilities or to do so at an acceptable cost.
SALES AND MARKETING
The Company's strategy is to market products either directly or through co-
promotion arrangements or other licensing arrangements with large
pharmaceutical or biotechnology companies. Implementation will depend in large
part on the market potential of any products the Company develops as well as
on the Company's financial resources. The Company does not expect to establish
a direct sales capability for at least the next several years. Pfizer and
Schering-Plough each have the right to market worldwide future products, if
any, resulting from their respective collaborations.
33
<PAGE>
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous federal
regulation and to a lesser extent state regulation. The Federal Food, Drug and
Cosmetic Act, as amended ("FFDCA"), and the regulations promulgated
thereunder, and other federal and state statutes and regulations govern, among
other things, the testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising and promotion of the Company's products.
Product development and approval within this regulatory framework will take a
number of years and involve the expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include (i) preclinical laboratory tests, in vivo preclinical
studies and formulation studies, (ii) the submission to the FDA of an IND for
human clinical testing which must become effective before human clinical
trials can commence, (iii) adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug, (iv) the submission of a New
Drug Application ("NDA") or Product License Application ("PLA") to the FDA and
(v) FDA approval of the NDA or PLA prior to any commercial sale or shipment of
the drug. In addition to obtaining FDA approval for each product, each
domestic drug manufacturing establishment must be registered with, and
approved by, the FDA. Domestic manufacturing establishments are subject to
biennial inspections by the FDA and must comply with the FDA's Good
Manufacturing Practices ("GMP") for both drugs and devices. To supply products
for use in the United States, foreign manufacturing establishments must comply
with GMP and are subject to periodic inspection by the FDA or by regulatory
authorities in such countries under reciprocal agreements with the FDA.
Preclinical testing includes laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical testing are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. Unless the FDA objects to an IND, the IND will become
effective 30 days following its receipt by the FDA. There can be no assurance
that submission of an IND will result in commencement of clinical trials.
Clinical trials involve the administration of the new drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials must be conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution where the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution. Compounds must be formulated according to GMP.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse side effects),
absorption, dosage tolerance, metabolism, bio-distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a
limited patient population (i) to determine the efficacy of the drug for
specific, targeted indications, (ii) to determine dosage tolerance and optimal
dosage and (iii) to identify possible adverse side effects and safety risks.
When a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to further
evaluate clinical efficacy and to test for safety within an expanded patient
population at geographically dispersed clinical study sites. There can be no
assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specified or targeted time period, if at all, with
respect to any of the Company's products subject to such testing. Furthermore,
the Company or the FDA may suspend clinical trials at any time if it is
believed that the individuals participating in such trials are being exposed
to unacceptable health risks.
34
<PAGE>
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time and effort. The approval process
is affected by a number of factors including the severity of the disease, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. Consequently, there can be no assurance that any approval
will be granted on a timely basis, if at all. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, require additional testing
or information or require postmarketing testing and surveillance to monitor
the safety of the Company's products if it does not believe the NDA contains
adequate evidence of the safety and efficacy of the drug. Notwithstanding the
submission of such data, the FDA may ultimately decide that an NDA does not
satisfy its regulatory criteria for approval. Moreover, if regulatory approval
of a drug is granted, such approval may entail limitations on the indicated
uses for which it may be marketed. Finally, product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
Among the conditions for NDA approval is the requirement that any
prospective manufacturer's quality control and manufacturing procedures
conform to GMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by other federal, state
or local agencies.
Pursuant to the Prescription Drug User Fee Act of 1992, drug manufacturers
now will be required to pay three types of user fees: a one-time application
fee for a prescription NDA or PLA, an annual product fee imposed on
prescription drug products after FDA approval and an annual establishment fee
imposed on facilities used to manufacture prescription drugs. By 1997, the
user fee for the original submission of an NDA or PLA involving clinical data
will be $233,000 and the annual establishment fee could be up to $138,000;
annual product fees will be less significant, but will be required for each
specific strength or potency of the marketed drug. Although there are
exemptions for certain products, and deferrals of payment and significant
discounts for small businesses, it still is uncertain how the FDA will
interpret and apply these provisions of the legislation.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals
vary widely from country to country, and the time required for approval may be
longer or shorter than that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general,
each country at this time has its own procedures and requirements.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other present and potential future federal, state or
local regulations. The Company's research and development involves the
controlled use of hazardous materials, chemicals, and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
any accident, the Company could be held liable for any damages that result and
any such liability could exceed the resources of the Company.
THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize its products successfully will depend
in part on reimbursement of the costs of such products and related treatments
at acceptable levels from government authorities, private health insurers and
other organizations, such as health maintenance organizations ("HMOs"). Third-
party payors are increasingly challenging the prices charged for medical
products and services. Also, the trend towards managed
35
<PAGE>
health care in the United States and the concurrent growth of organizations,
such as HMOs, which can control or significantly influence the purchase of
health care services and products, as well as legislative proposals to reform
health care or reduce government insurance programs, may all result in lower
prices for the Company's products. The cost containment measures that health
care providers are instituting and the effect of any health care reform could
adversely affect the Company's ability to sell its products if successfully
developed and approved by the FDA and/or any other appropriate regulatory
authority.
There can be no assurance that reimbursement in the United States or foreign
countries will be available for any products the Company may develop, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products,
thereby adversely affecting the Company's business. The unavailability or
inadequacy of third-party reimbursement for the Company's products would
adversely affect the Company's business. Moreover, the Company is unable to
predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted
in the future or what effect such legislation or regulation would have on the
Company's business.
SCIENTIFIC ADVISORY BOARD
Neurogen's Scientific Advisory Board is composed of certain of its
scientists and other leading scientists from Yale University (the
"University") who have been actively involved in pioneering research in the
field of neurobiology and the treatment of neurological disorders for a number
of years. Scientific Advisory Board members meet as a group with management
and key scientific employees of the Company approximately on a monthly basis.
Scientific Advisory Board members have taken an active role in helping the
Company identify scientific and product development opportunities and recruit
and evaluate the Company's scientific staff.
The Scientific Advisory Board presently consists of the following
individuals:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<C> <S>
John F. Tallman, Ph.D................... Chairman of the Scientific Advisory
Board, Executive Vice President and
Scientific Director of Neurogen
Corporation
George K. Aghajanian, M.D............... Professor of Psychiatry and
Pharmacology, Yale University
B. Stephenson Bunney, M.D............... Professor of Psychiatry and
Pharmacology, Chairman, Department
of Psychiatry, Yale University
Dennis S. Charney, M.D.................. Associate Professor of Psychiatry
and Director, Clinical Neuroscience
Research Unit, Yale University
Michael Davis, Ph.D..................... Professor of Psychiatry and
Psychology, Yale University
Dorothy W. Gallager, Ph.D............... Vice President--Pharmacology,
Neurogen Corporation
George R. Heninger, M.D................. Professor of Psychiatry and Director
of the Abraham Ribicoff Research
Facilities of the Connecticut Mental
Health Center, Yale University
Alan J. Hutchison, Ph.D................. Vice President--Drug Discovery,
Neurogen Corporation
Eric Nestler, M.D., Ph.D................ Associate Professor of Psychiatry
and Pharmacology, Yale University
D. Eugene Redmond, Jr., M.D............. Professor of Psychiatry, Yale
University
Robert H. Roth, Ph.D.................... Professor of Psychiatry and
Pharmacology, Yale University
</TABLE>
Each of the members has served on the Scientific Advisory Board pursuant to
consulting agreements (the "SAB Agreements") since 1988, with the exception of
Dr. Nestler, who has served on the Scientific Advisory
36
<PAGE>
Board since January 1993. The SAB Agreements contain confidentiality
provisions and restrict the members of the Scientific Advisory Board from
competing with the Company for the term of the agreement and for one year
thereafter. The SAB Agreements expire in 1998. Each member of the Scientific
Advisory Board who is not also an employee of the Company receives a fee of
$15,000 per year for providing consulting services to Neurogen at least
fifteen days per year and is eligible to participate in the Neurogen
Corporation 1993 Omnibus Incentive Plan. All non-employee members of the
Scientific Advisory Board are employed on a full-time basis by the University
and, accordingly, devote only a small portion of their time to Neurogen. The
University has regulations and policies which limit the ability of such
personnel to act as part-time consultants or in other capacities for a
commercial enterprise. A change in these regulations or policies could
adversely affect the Company. Furthermore, it is possible that inventions or
processes discovered by the outside members of the Scientific Advisory Board
will not become the property of Neurogen, but will remain the property of such
persons, the University or other entities to which the Scientific Advisory
Board members have obligations.
HUMAN RESOURCES
As of June 30, 1995, the Company had 79 full-time employees, including 64
scientists and 15 administrative staff members. The Company's staff includes
25 persons with Ph.D. degrees, all of whom are actively involved in research.
Neurogen believes that its success will be dependent largely upon its ability
to continue to attract and retain scientists and technical staff qualified in
pharmacology, neuroscience, medicinal chemistry and molecular biology. The
failure to retain such personnel or to develop expertise in such fields could
materially adversely affect prospects for the Company's success. None of the
Company's employees are covered by collective bargaining agreements, and the
Company considers relations with its employees to be good. In addition, the
failure to retain certain of the Company's current scientific personnel, some
of whom do not have employment contracts with the Company, could adversely
affect the Company. Each of the Company's current scientific personnel has
entered into confidentiality and non-competition agreements with the Company.
PROPERTIES
The Company conducts its operations in a facility located in Branford,
Connecticut, which it purchased in March 1989. Since that time, Neurogen has
completed two stages of construction which provide approximately 36,000 square
feet of laboratory and administrative space. The Company is currently
negotiating to obtain additional space. The Company expects that its expanded
facility will accommodate the anticipated administrative and research needs of
the Company for the foreseeable future.
LEGAL PROCEEDINGS
Neurogen knows of no material litigation or proceeding pending or threatened
to which the Company is, or may become, a party.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Neurogen are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harry H. Penner, Jr....... 49 President, Chief Executive Officer and Director
John F. Tallman, Ph.D..... 48 Executive Vice President, Secretary, Scientific
Director, Chairman of the Scientific Advisory
Board and Director
Alan J. Hutchison, Ph.D... 41 Vice President--Drug Discovery
Stephen R. Davis.......... 34 Vice President--Finance, Chief Financial Officer
and Treasurer
Frank C. Carlucci (1)(2).. 64 Chairman of the Board of Directors
Barry M. Bloom, Ph.D. (3). 66 Director
Robert N. Butler, M.D. ... 68 Director
Jeffrey J. Collinson 53 Director
(1)(3)....................
Robert M. Gardiner (1)(3). 72 Director
Richard D. Harrison (1)... 71 Director
Mark Novitch, M.D. (2).... 62 Director
Robert H. Roth, Ph.D. .... 55 Director
John Simon (2)(3)......... 52 Director
</TABLE>
--------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Finance Committee.
Harry H. Penner, Jr., has been President, Chief Executive Officer and a
director of Neurogen since December 1993. Mr. Penner was employed by Novo
Nordisk A/S from 1981 to 1993, most recently serving as an Executive Vice
President of Novo Nordisk A/S and as President of Novo Nordisk of North
America Inc. Mr. Penner holds an L.L.M. in International Law from New York
University and a J.D. from Fordham University. Mr. Penner is a director of
Anergen, Inc.
John F. Tallman, Ph.D., has been Executive Vice President, Scientific
Director, Chairman of the Scientific Advisory Board and a director of Neurogen
since July 1988. Dr. Tallman has served as Secretary of the Company since
August 1994. Prior to joining Neurogen, Dr. Tallman was an Associate Professor
of Psychiatry and Pharmacology at Yale University and currently serves as an
Adjunct Professor in such departments. Dr. Tallman had previously served in
research director positions at the National Institute of Mental Health in
Bethesda, Maryland. Dr. Tallman received his Ph.D. in Biology from Georgetown
University.
Alan J. Hutchison, Ph.D., has been Vice President--Drug Discovery since 1992
and a member of Neurogen's Scientific Advisory Board since 1989. Dr. Hutchison
joined Neurogen in 1989 as Director of Chemistry. From 1981 through 1989, Dr.
Hutchison was employed by Ciba Giegy, most recently as a Distinguished
Research Fellow. Dr. Hutchison received his B.S. in Chemistry from Stevens
Institute of Technology and received his Ph.D. from Harvard University.
Stephen R. Davis has been Vice President--Finance, Chief Financial Officer
and Treasurer of Neurogen since July 1994. From 1990 through June 1994, Mr.
Davis was employed by Milbank, Tweed, Hadley & McCloy as a corporate and
securities attorney. Mr. Davis practiced as a Certified Public Accountant with
Arthur Andersen & Co. from 1984 to 1987. Mr. Davis studied at Vanderbilt
University School of Law, where he received his J.D. degree in 1990. Mr. Davis
received his B.S. in Accounting from Southern Nazarene University.
Frank C. Carlucci has served as a director and Chairman of the Board of
Neurogen since February 1989. Mr. Carlucci is principally employed as Chairman
of The Carlyle Group, a private merchant bank. Mr. Carlucci
38
<PAGE>
served as Secretary of Defense of the United States from November 1987 through
January 1989. Prior to his appointment as Secretary of Defense, Mr. Carlucci
was assistant to the President of the United States for National Security
Affairs. Mr. Carlucci had been Chairman and Chief Executive Officer of Sears
World Trade Inc. from 1984 to 1986, after having served as President and Chief
Operating Officer since 1983. Mr. Carlucci is also a director of Ashland Oil,
Inc., BDM International, Inc., Bell Atlantic Corporation, CB Commercial Real
Estate Group, Inc., Connecticut Mutual Life Insurance Company, General
Dynamics Corporation, Kaman Corporation, Northern Telecom Limited, The Quaker
Oats Company, Sun Resorts, The Upjohn Company and Westinghouse Electric
Corporation.
Barry M. Bloom, Ph.D., has served as a director of Neurogen since December
1993. Dr. Bloom retired in 1993 from Pfizer where he had been Executive Vice
President, Research and Development and a member of the board of directors.
Dr. Bloom is a director of Southern New England Telecommunications Company,
Vertex Pharmaceuticals, Inc., Incyte Pharmaceuticals, Inc. and Cubist
Pharmaceuticals, Inc.
Robert N. Butler, M.D., has served as a director of Neurogen since July
1989. Dr. Butler has served as the Brookdale Professor and Chairman of the
Department of Geriatrics and Adult Development at Mount Sinai Medical Center
since 1982. From 1976 until 1982, Dr. Butler was the founding director of the
National Institute of Aging of the National Institutes of Health. Dr. Butler
won the 1976 Pulitzer Prize for his book, Why Survive? Being Old in America.
He is the editor-in-chief of Geriatrics, a journal for primary care
physicians, and serves on the editorial board of several other professional
publications. Dr. Butler is a member of the Institute of Medicine of the
National Academy of Sciences, and a founding Fellow of the American Geriatrics
Society. He has served as a consultant to the United States Special Committee
on Aging, the National Institute of Mental Health, the Commonwealth Fund, the
Brookdale Foundation and numerous other foundations.
Jeffrey J. Collinson has served as a director of Neurogen since May 1989.
Mr. Collinson has served as President of Collinson Howe Venture Partners Inc.,
a venture capital firm, since 1990 and was President of Schroder Venture
Managers, Inc., a venture capital firm, from 1981 to 1990. Mr. Collinson is
chairman of the board of Incyte Pharmaceuticals, Inc. and is a director of
Envirogen, Inc.
Robert M. Gardiner has served as a director of Neurogen since June 1989. Mr.
Gardiner is currently a Senior Advisor to Dean Witter, Discover & Co., having
retired as Chairman and Chief Executive Officer of Dean Witter Financial
Services Group Inc. in August 1986. Prior to becoming Chairman and Chief
Executive Officer in 1982, Mr. Gardiner served as President of Dean Witter
Reynolds Inc., the predecessor of Dean Witter Financial Services Group Inc.
Mr. Gardiner has served as Chairman and President of the National Association
of Securities Dealers, Inc., as Chairman of the Securities Industry
Association and of its governing council, as Chairman of the National
Securities Processing Committee and as Vice Chairman of the New York Stock
Exchange, Inc. He is also a former governor or officer of the Association of
Stock Exchange Firms, the Investment Bankers Association of America, the
National Clearing Corporation, the Central Market System Advisory Committee of
the Securities and Exchange Commission, and the Securities Industry
Association. He is a director of Dean Witter, Discover & Co.
Richard D. Harrison has served as a director of Neurogen since July 1989.
Mr. Harrison has been Honorary Chairman of the Board of Fleming Companies,
Inc., a food distribution company, since April 1989. Prior to that date, he
served as Chairman of the Board and Chief Executive Officer since 1981 and
President and Chief Executive Officer since 1964.
Mark Novitch, M.D., has served as a director of Neurogen since December
1993. Dr. Novitch was appointed Professor of Health Care Sciences at The
George Washington University in 1994. He worked in senior executive positions
at The Upjohn Company from 1985 until his retirement as Vice Chairman of the
Board in 1993. Dr. Novitch served at the United States Food and Drug
Administration as Deputy Commissioner and as Acting Commissioner from 1983-
1984. Dr. Novitch is a director of Alteon, Inc. and Guidant Corporation.
39
<PAGE>
Robert H. Roth, Ph.D., has served as a director of Neurogen since December
1988 and as a member of the Company's Scientific Advisory Board since July
1988. Dr. Roth has been a Professor of Psychiatry and Pharmacology at Yale
University since 1974. Dr. Roth has a Ph.D. in Pharmacology from Yale
University.
John Simon has served as a director of Neurogen since May 1989. Mr. Simon is
a Managing Director of the investment banking firm of Allen & Company
Incorporated. Mr. Simon is a director of Lunn Industries, Inc., T Cell
Sciences, Inc., Immune Response Corporation and The Right Start, Inc.
CERTAIN TRANSACTIONS
Pfizer, a beneficial owner of more than five percent of the Common Stock,
paid $4,600,000 to the Company in the last fiscal year pursuant to the terms
of the 1992 Pfizer Agreement which governs their research and development
collaboration with respect to anxiolytics and cognition enhancers which act
through the GABA family of receptors. In addition, in 1994 the Company entered
into the 1994 Pfizer Agreement to develop drugs for the treatment of sleep
disorders pursuant to which Pfizer paid the Company $1,189,333 in the last
fiscal year. These amounts constituted payments in excess of five percent of
Neurogen's consolidated gross revenues for the last fiscal year. Neurogen
expects to receive amounts in excess of five percent of its consolidated gross
revenues from Pfizer in fiscal year 1995. In connection with the 1994 Pfizer
Agreement, the Company granted Pfizer registration rights with respect to
shares of Common Stock purchased in connection with the Pfizer Agreements as
well as the right to maintain its level of investment in the Company in public
offerings of Common Stock.
In July 1994, the Company granted registration rights to Allen & Company
Incorporated, Allen Value Limited, Allen Value Partners L.P., Allen Capital
L.P. and Allen Capital (International) L.P. (such entities, together with
Allen Holding Inc., the "Allen Group") and certain other persons, including
John Simon, a director of the Company, in connection with the purchase of
1,131,583 shares of Common Stock from a stockholder of Neurogen. The Allen
Group purchased 675,057 shares of Common Stock and John Simon purchased 34,754
shares of Common Stock in this transaction.
The Company expects that during 1995 it will make secured, non-interest
bearing loans to Harry H. Penner, Jr., its President and Chief Executive
Officer, and to John F. Tallman, its Executive Vice President and Scientific
Director, in amounts not to exceed $200,000 and $150,000, respectively.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 1995 (except as set forth
below), certain information with respect to the beneficial ownership of Common
Stock by each person known by Neurogen to own beneficially more than five
percent of its outstanding Common Stock, by each director and officer of
Neurogen and by all directors and officers as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
STOCK OWNED(1)(2)
--------------------
SHARES
BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED OFFERING OFFERING
---- ------------ ---------- ---------
<S> <C> <C> <C>
Pfizer Inc. (3).............................. 2,096,000 20.7% 16.6%
235 East 42nd Street
New York, NY 10017
Allen Holding Inc. (4)....................... 574,421 5.7 4.5
711 Fifth Avenue
New York, NY 10022
Harry H. Penner, Jr. (5)..................... 66,219 * *
John F. Tallman, Ph.D. (6)................... 177,800 1.7 1.4
Alan J. Hutchison, Ph.D. (7)................. 64,000 * *
Stephen R. Davis............................. 10,000 * *
Barry M. Bloom, Ph.D. (8).................... 13,232 * *
Robert N. Butler, M.D. (8)................... 17,232 * *
Frank C. Carlucci (8)(9)..................... 118,557 1.2 *
Jeffrey J. Collinson (8)(10)................. 176,449 1.7 1.4
Robert M. Gardiner (8)....................... 47,232 * *
Richard D. Harrison (8)...................... 17,232 * *
Mark Novitch, M.D. (8)....................... 16,232 * *
Robert H. Roth, Ph.D. (8)(11)................ 53,832 * *
John Simon (8)(12)........................... 46,986 * *
All directors and officers as a group (13
persons)..................................... 825,003 7.9 6.4
</TABLE>
--------
* Less than one percent.
(1) Share ownership in each case includes shares issuable upon exercise of
outstanding stock options that may be exercised within 60 days of June 30,
1995.
(2) Percentage of the outstanding shares of Common Stock, treating as
outstanding for each beneficial owner all shares of Common Stock which
such beneficial owners indicated are issuable on exercise of stock options
within 60 days of June 30, 1995.
(3) See "Certain Transactions" for a description of certain of Pfizer's rights
as a stockholder pursuant to the 1994 Pfizer Agreement. Decisions as to
voting and disposition of these shares may be made by various individuals
at Pfizer. Such decisions are in most cases made by committee.
(4) Includes 310,156 shares of Common Stock beneficially owned by Allen &
Company Incorporated, 21,210 shares of Common Stock beneficially owned by
Allen Value Limited, 178,245 shares of Common Stock beneficially owned by
Allen Value Partners L.P., 49,908 shares of Common Stock beneficially
owned by Allen Capital L.P. and 14,902 shares of Common Stock beneficially
owned by Allen Capital (International) L.P. Allen Holding Inc. owns 100%
of the outstanding common stock of Allen & Company Incorporated and
through its subsidiaries has a controlling interest in the general
partners of Allen Value Partners L.P., Allen Capital L.P. and Allen
Capital (International) L.P. and has voting control of Allen Value
Limited. Because of these relationships, Allen Holding Inc. may be deemed
to beneficially own Common Stock owned by such entities. Does not include
114,965 shares of Common Stock owned by officers or directors of Allen &
Company Incorporated or Allen Holding Inc. (including 34,754 shares of
Common Stock owned by John Simon, a director of the Company and a Managing
Director of Allen & Company Incorporated), of which shares Allen Holding
Inc. disclaims beneficial ownership. Decisions as to voting and
disposition of these shares may be made by various individuals at each of
these Allen entities. Such decisions are in most cases made by committee.
41
<PAGE>
(5) Includes 60,000 shares of Common Stock that Harry H. Penner, Jr. has the
right to acquire under stock options exercisable within 60 days of June
30, 1995. Does not include 100 shares of Common Stock owned by Mr.
Penner's son. Mr. Penner and his son disclaim beneficial ownership of each
other's shares.
(6) Includes 52,000 shares of Common Stock that John F. Tallman, Ph.D., has
the right to acquire under stock options exercisable within 60 days of
June 30, 1995. Does not include 12,500 shares of Common Stock owned by
Kathleen Person, Dr. Tallman's spouse. Kathleen Person and Dr. Tallman
disclaim beneficial ownership of each other's shares.
(7) Includes 64,000 shares of Common Stock that Alan J. Hutchison, Ph.D., has
the right to acquire under stock options exercisable within 60 days of
June 30, 1995.
(8) Includes 12,232 shares of Common Stock subject to stock options
exercisable within 60 days of June 30, 1995.
(9) Does not include 40,000 shares of Common Stock owned by Mr. Carlucci's
wife. Mr. Carlucci and his wife disclaim beneficial ownership of each
other's shares.
(10) Includes 23,500 shares, 107,200 shares and 26,800 shares of Common Stock
held by Schroder's Incorporated, Schroder Ventures Limited Partnership
and Schroder Ventures US Trust, respectively, for which Mr. Collinson
shares investment and voting power. Mr. Collinson disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
(11) Includes 5,600 shares of Common Stock subject to stock options
exercisable by Robert H. Roth, Ph.D., within 60 days of June 30, 1995.
(12) Does not include an aggregate of 654,432 shares of Common Stock held by
members of the Allen Group and by persons who may be deemed to be
affiliated with Allen & Company Incorporated or other members of the
Allen Group, of which shares Mr. Simon disclaims beneficial ownership.
Statements contained in the table as to securities beneficially owned by
directors and officers or over which they exercise control or direction are,
in each instance, based upon information received from such directors and
officers. Statements as to securities beneficially owned by the Allen Group
are based upon information in Amendment No. 1 to the Schedule 13D filed by the
Allen Group with the Commission on August 2, 1995.
42
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each of the Underwriters (the "Underwriters")
named below has severally agreed to purchase, and the Company has agreed to
sell to such Underwriter, shares of Common Stock which equal the number of
shares set forth opposite the name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Smith Barney Inc. ....................................................
Robertson, Stephens & Company, L.P....................................
Pacific Growth Equities...............................................
---------
Total................................................................ 2,500,000
=========
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Robertson, Stephens & Company,
L.P., and Pacific Growth Equities are acting as Representatives, propose to
offer part of the shares directly to the public at the public offering price
set forth on the cover page of this Prospectus and part to certain dealers at
a price which represents a concession not in excess of $ per share under
the public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the offering of the shares of Common Stock, the public offering
price and such concessions may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 375,000 additional
shares of Common Stock at the price to public set forth on the cover page of
this Prospectus less the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with the sale of the shares offered hereby.
To the extent such option is exercised, each Underwriter will be obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares as the number of shares set forth opposite such
Underwriter's name in the preceding table bears to the total number of shares
listed in such table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The Company and the officers, directors and certain other stockholders of
the Company, who hold, in the aggregate, approximately 3,189,936 shares of
Common Stock, have agreed that, for a period of 90 days from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock except, in the case of the Company, in certain
limited circumstances.
43
<PAGE>
The Underwriters and certain selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in
the Common Stock in accordance with Rule 10b-6A under the Exchange Act. Rule
10b-6A permits, upon the satisfaction of certain conditions, underwriters and
selling group members participating in a distribution that are also market
makers in the security being distributed to engage in limited market making
transactions during the period when Rule 10b-6 under the Exchange Act would
otherwise prohibit such activity. In general, under Rule 10b-6A, any
Underwriter or selling group member engaged in passive market making in the
Common Stock (i) may not effect transactions in, or display bids for, the
Common Stock at a price that exceeds the highest bid for the Common Stock
displayed by a market maker that is not participating in the distribution of
the Common Stock, (ii) may not have net daily purchases of the Common Stock
that exceed 30% of its average daily trading volume in such stock for the two
full consecutive calendar months immediately preceding the filing date of the
registration statement of which this Prospectus forms a part and (iii) must
identify its bids as bids made by a passive market maker.
LEGAL MATTERS
Certain legal matters relating to the shares offered by this Prospectus have
been passed upon by Milbank, Tweed, Hadley & McCloy, New York, New York,
counsel for the Company. Certain legal matters will be passed upon for the
Underwriters by Dewey Ballantine, New York, New York, counsel for the
Underwriters.
EXPERTS
The financial statements as of December 31, 1993 and 1994 and for the years
ended December 31, 1992, 1993 and 1994 included herein and in the Registration
Statement have been included in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
Except as to statements qualified by the Company's knowledge, the statements
included in this Prospectus under the captions "Risk Factors--Patents and
Proprietary Technology," "Business--Patents and Proprietary Technology" and
all other disclosure in this Prospectus relating to U.S. patent matters have
been reviewed and approved by Banner & Allegretti, Ltd., special patent
counsel for the Company, as experts on U.S. patent matters, and are included
herein in reliance upon that review and approval.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................... F-2
Balance Sheets at December 31, 1993, 1994.............................. F-3
Statements of Operations for the years ended December 31, 1992, 1993
and 1994 ............................................................. F-4
Statements of Stockholders' Equity for the years ended December 31,
1992, 1993 and 1994 .................................................. F-5
Statements of Cash Flows for the years ended December 31, 1992, 1993
and 1994 ............................................................. F-6
Notes to Financial Statements, December 31, 1994....................... F-7
Balance Sheet at June 30, 1995 (Unaudited)............................. F-13
Statements of Operations and Accumulated Deficit for the six months
ended June 30, 1994 and 1995 (Unaudited).............................. F-14
Statements of Cash Flows for the six months ended June 30, 1994 and
1995 (Unaudited)...................................................... F-15
Notes to Financial Statements, June 30, 1995 (Unaudited)............... F-16
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Neurogen Corporation:
We have audited the accompanying balance sheets of Neurogen Corporation as
of December 31, 1994 and 1993, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1994. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Neurogen Corporation at
December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1994,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1995
F-2
<PAGE>
NEUROGEN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1993 1994
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 6,403,987 $ 9,439,727
Marketable securities............................ 5,921,786 6,040,434
Other current assets............................. 199,564 398,542
------------ ------------
Total current assets........................... 12,525,337 15,878,703
Property, plant & equipment: (note 3)
Land............................................. 425,000 425,000
Building......................................... 8,327,696 8,379,703
Equipment........................................ 1,775,432 2,297,728
Furniture........................................ 95,904 110,668
Equipment and furniture under capital lease...... 1,200,000 1,200,000
------------ ------------
11,824,032 12,413,099
Less accumulated depreciation.................... 1,735,059 2,588,476
------------ ------------
Net property, plant and equipment.............. 10,088,973 9,824,623
Other assets, net.................................. 89,858 185,752
------------ ------------
$ 22,704,168 $ 25,889,078
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accrued expenses (note 10)....................... $ 555,019 $ 949,717
Current portion of mortgage payable (note 3)..... 124,623 141,125
Current portion of capital lease obligation (note
3)................................................. 348,768 30,863
------------ ------------
Total current liabilities...................... 1,028,410 1,121,705
Mortgage payable, excluding current portion (note
3)............................................ 761,011 619,887
Obligation under capital lease, excluding current
portion (note 3).................................. 30,863 --
Deferred gain on sale of assets (note 3)........... 30,625 4,375
Other compensation................................. 82,587 62,587
------------ ------------
Total liabilities.............................. 1,933,496 1,808,554
------------ ------------
Stockholders' equity: (notes 2, 4, 5 and 7)
Preferred stock, par value $.025 per share.
Authorized 2,000,000 shares; none issued...... -- --
Common stock, par value $.025 per share.
Authorized 30,000,000 shares in 1994 and
20,000,000 shares in 1993; issued and
outstanding 10,082,763 shares at December 31,
1994 and 8,961,763 at December 31, 1993....... 224,044 252,069
Additional paid-in capital....................... 35,661,615 45,607,590
Accumulated deficit.............................. (15,114,987) (21,766,182)
Unrealized loss on marketable securities......... -- (12,953)
------------ ------------
Total stockholders' equity..................... 20,770,672 24,080,524
------------ ------------
Commitments (notes 2, 7 and 8) $ 22,704,168 $ 25,889,078
</TABLE>
(See accompanying notes to financial statements)
F-3
<PAGE>
NEUROGEN CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Research revenue (note 2)............... $ 4,595,476 $ 4,604,524 $ 5,789,333
Operating expenses:
Research and development.............. 4,721,248 6,451,876 10,149,633
General and administrative............ 2,043,360 2,474,647 2,774,380
----------- ----------- -----------
Total operating expenses............ 6,764,608 8,926,523 12,924,013
Other income (expense):
Investment income..................... 735,352 615,112 573,127
Interest expense ..................... (159,506) (109,244) (89,642)
----------- ----------- -----------
Total other income.................. 575,846 505,868 483,485
Net loss.............................. $(1,593,286) $(3,816,131) $(6,651,195)
=========== =========== ===========
Net loss per common share............. $ (.18) $ (.43) $ (.70)
=========== =========== ===========
Weighted average number of shares
outstanding........................ 8,752,000 8,962,000 9,528,000
=========== =========== ===========
</TABLE>
(See accompanying notes to financial statements)
F-4
<PAGE>
NEUROGEN CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------- UNREALIZED
ADDITIONAL LOSS ON
SHARES PAID-IN ACCUMULATED MARKETABLE
ISSUED AMOUNT CAPITAL DEFICIT SECURITIES TOTAL
---------- -------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1991................... 7,847,663 $196,192 $21,574,260 $ (9,705,570) $ -- $12,064,882
Issuance of shares for
cash pursuant to
corporate partner
agreement.............. 1,000,000 25,000 13,725,000 -- -- 13,750,000
Exercise of
noncompensatory stock
options and warrants... 114,100 2,852 362,355 -- -- 365,207
Net loss for the year... -- -- -- (1,593,286) -- (1,593,286)
---------- -------- ----------- ------------ -------- -----------
Balance at December 31,
1992................... 8,961,763 $224,044 $35,661,615 $(11,298,856) $ -- $24,586,803
Net loss for the year... -- -- -- (3,816,131) -- (3,816,131)
---------- -------- ----------- ------------ -------- -----------
Balance at December 31,
1993................... 8,961,763 $224,044 $35,661,615 $(15,114,987) $ -- $20,770,672
Issuance of shares for
cash pursuant to
corporate partner
agreement.............. 1,096,000 27,400 9,836,600 -- -- 9,864,000
Exercise of warrants.... 25,000 625 109,375 -- -- 110,000
Net loss for the year... -- -- -- (6,651,195) -- (6,651,195)
Unrealized loss on
marketable securities.. -- -- -- -- (12,953) (12,953)
---------- -------- ----------- ------------ -------- -----------
Balance at December 31,
1994................... 10,082,763 $252,069 $45,607,590 $(21,766,182) $(12,953) $24,080,524
---------- -------- ----------- ------------ -------- -----------
</TABLE>
(See accompanying notes to financial statements)
F-5
<PAGE>
NEUROGEN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................... $(1,593,286) $(3,816,131) $(6,651,195)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization expense. 570,937 877,944 889,307
Unrealized loss on marketable
securities............................ -- -- 76,209
Net gain on sale of assets............ (22,007) (16,815) (26,250)
Changes in operating assets and
liabilities:
Increase (decrease) in accrued
expenses.............................. 618,843 (457,084) 394,698
(Increase) decrease in other current
assets................................ (50,284) 29,387 (198,978)
Increase in other assets, net......... (35,000) (64,015) (131,783)
----------- ----------- -----------
Net cash used in operating
activities........................... (510,797) (3,446,714) (5,647,992)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment........ (1,399,898) (3,075,347) (589,067)
Purchases of marketable securities..... (4,782,753) (21,515,226) (14,957,765)
Sales of marketable securities......... 1,347,959 18,839,865 14,749,954
----------- ----------- -----------
Net cash used in investing
activities........................... (4,834,692) (5,750,708) (796,878)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock,
net.................................... 13,750,000 -- 9,864,000
Exercise of employee stock options..... 37,058 -- --
Exercise of warrants................... 320,000 -- 90,000
Principal payments under mortgage
payable................................ (97,183) (110,050) (124,622)
Principal payments under capital lease
obligations......................... (278,871) (311,867) (348,768)
----------- ----------- -----------
Net cash provided by (used in)
financing activities........... 13,731,004 (421,917) 9,480,610
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 8,385,515 (9,619,339) 3,035,740
Cash and cash equivalents at beginning
of period.............................. 7,637,811 16,023,326 6,403,987
----------- ----------- -----------
Cash and cash equivalents at end of
period.................................. $16,023,326 $ 6,403,987 $ 9,439,727
----------- ----------- -----------
</TABLE>
(See accompanying notes to financial statements)
F-6
<PAGE>
NEUROGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Neurogen Corporation ("Neurogen" or the "Company") is an emerging
neuropharmaceuticals company engaged in the discovery and development of
therapeutic products to treat psychiatric and neurological disorders by
regulating nerve cell communications in the brain. Neurogen's strategy is to
discover and develop highly specific drugs without the negative side effects
typically associated with many currently prescribed psychotherapeutic
medications.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets.
Included in property, plant and equipment at December 31, 1994 and 1993 is
furniture and equipment leased under a capitalized lease of $1,200,000 with
related accumulated depreciation of $1,150,000 at December 31, 1994 and
$850,000 at December 31, 1993.
CASH EQUIVALENTS
All cash and cash equivalents consist primarily of highly liquid investments
with a maturity from date of purchase of three months or less.
MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" effective
January 1, 1994. Adoption of this method of accounting did not have a
significant impact on the Company's financial statements. During the first
three quarters of 1994, the Company's marketable securities were all
classified as trading securities. The change in net unrealized loss on trading
securities that has been included in earnings during the nine months ended
September 30, 1994 is approximately $76,000.
In the fourth quarter of 1994, the Company transferred marketable securities
from the trading category to the available for sale category and for that
quarter recorded a $13,000 unrealized loss as a separate component of
stockholders' equity and also during which time, received proceeds from sales
of securities of approximately $3,225,000. Realized gains and losses have been
determined by the specific identification method. Marketable securities at
December 31, 1994 have contractual maturities of three to eighteen months and
are carried at fair values which are estimated based on quoted market prices.
The aggregate cost at December 31, 1994 is approximately $6,138,000. During
1994, the Company recognized gross realized gains of $6,000 and gross realized
losses of $87,000.
REVENUE RECOGNITION
Payments under the Pfizer agreements are recorded as earned based on the
performance requirements of the contracts, while related costs are expensed as
incurred.
NET LOSS PER SHARE
Net loss per share is calculated by dividing net loss by the weighted
average common shares and common share equivalents outstanding during the
period.
F-7
<PAGE>
NEUROGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Company uses the asset and liability method in determining the tax
effect of temporary differences in the recognition of income and expense
reported in the financial statements and those reported for income tax
purposes.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 financial statements to
conform to the 1994 presentation.
2. PFIZER AGREEMENTS
On February 7, 1992, the Company entered into a collaborative research
agreement (the "1992 Pfizer Agreement") with Pfizer Inc ("Pfizer"), pursuant
to which Pfizer has provided $13,750,000 in equity financing. Pursuant to the
1992 Pfizer Agreement, the Company expects to receive approximately
$18,400,000 during the four year period which commenced January 1, 1992 for
research and development funding of the Company's anxiolytic and cognitive
enhancer projects, and may receive an additional $4,600,000 for a fifth year
should Pfizer exercise its option to extend the collaboration. Neurogen could
also receive additional milestone payments totaling $12,500,000 during the
development and regulatory approval of its products. In return, Pfizer
received the exclusive rights to manufacture and market GABA-based anxiolytics
and cognition enhancers developed in the collaboration for which it will pay
Neurogen royalties based upon net sales levels, if any, for such products. In
each of 1994, 1993 and 1992, Neurogen received approximately $4,600,000 in
research funding, which approximates the costs incurred by Neurogen in
connection with the collaboration in such years.
The Company entered into its second agreement (the "1994 Pfizer Agreement")
with Pfizer in June 1994 pursuant to which Pfizer provided $9,864,000 for
1,096,000 shares of common stock, bringing Pfizer's ownership of the Company's
common stock up to 21%. Pursuant to the 1994 Pfizer Agreement, the Company
expects to receive approximately $7,386,000 during the three-year period which
commenced July 1, 1994, for research and development funding of the Company's
sleep disorder project and may receive additional funding of $2,379,000 for a
fourth year should Pfizer exercise its option to extend the collaboration.
Neurogen could also receive additional milestone payments totaling $3,250,000
during the development and regulatory approval of its sleep disorder
compounds. As part of this second collaboration, Pfizer received the exclusive
right to manufacture and market GABA-based sleep disorder products developed
in the collaboration for which it will pay Neurogen royalties depending upon
levels of any net sales. In 1994 the Company received and earned its first
semiannual research funding payment of $1,189,000 which approximates the costs
incurred in connection with the second collaboration.
3. LONG-TERM DEBT AND LEASE OBLIGATIONS
At December 31, 1994, the Company had a $761,012 mortgage payable on, and
secured by, its Branford, Connecticut office and research facility, payable in
monthly installments over ten years. The interest rate is adjusted quarterly
to the prime rate plus 1%. At December 31, 1994, the prime rate was 8.5%.
F-8
<PAGE>
NEUROGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Aggregate annual principal payments applicable to the mortgage payable for
the five years subsequent to December 31, 1994 are:
<TABLE>
<CAPTION>
<S> <C>
1995............................................................. $141,125
1996............................................................. 159,812
1997............................................................. 180,974
1998............................................................. 204,937
1999............................................................. 74,164
--------
$761,012
</TABLE>
In February 1991, the Company entered into a capital lease for certain
furniture and equipment under a sale and lease back arrangement. At December
31, 1994 the company owed $30,863 under this obligation.
In connection with the sale of these assets, the Company incurred a gain of
$105,000 which it deferred and is amortizing over the four year life of the
lease. The lease expires in February 1995 and the Company has entered into a
commitment to buy back the equipment in 1995 for approximately $240,000.
4. STOCK OPTIONS
In November 1988, the Board of Directors of the Company adopted the Neurogen
Corporation Stock Option Plan (the "Plan"), which provided for the issuance of
incentive stock options for up to 600,000 shares of common stock.
On January 17, 1992, the stockholders approved an amendment to the Plan to
increase the number of option shares available for issuance under the plan
from 600,000 shares of common stock to 1,200,000 shares of common stock and to
include grants of non-qualified stock options. All options expire not later
than ten years after the date of grant.
In August 1993, the Board of Directors approved a resolution allowing
employees to exchange higher-priced options to purchase 410,050 shares of
common stock for new options having an exercise price of $6.50 per share, the
fair market value of the Company's stock on the date of the Board's action.
In May 1994, the stockholders approved the 1993 Omnibus Incentive Plan which
makes a total of 3,000,000 shares available for grant and the 1993 Non-
Employee Directors Stock Option Program which makes 500,000 shares available
for grant. The new plans allow for stock appreciation rights, restricted
shares, and performance units.
Shares under option for all plans are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- --------------
<S> <C> <C> <C>
Options outstanding at January
1............................. 1,485,725 668,450 497,600
Options granted............... 528,750 1,240,525 183,550
Options canceled.............. (13,890) (423,250) (3,600)
Options exercised............. -- -- (9,100)
------------- ------------- --------------
Options outstanding at Decem-
ber 31........................ 2,000,585 1,485,725 668,450
Option price range............ $5.38 to 9.00 $6.00 to 6.75 $2.38 to 13.00
Options exercisable at Decem-
ber 31........................ 700,428 380,514 181,020
</TABLE>
F-9
<PAGE>
NEUROGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. WARRANTS
As of December 31, 1994, a total of 159,058 shares of common stock were
issuable under outstanding warrants. Such warrants have been issued to members
of the Company's scientific advisory board, and to the lessor in a sale and
lease back of certain of the Company's furniture and equipment. During the
year ended December 31, 1994, 25,000 warrants were exercised at an average
price of $3.60 per share. Deferred compensation of $20,000 was credited to
additional paid in capital at time of exercise of the warrants.
The outstanding warrants expire and are exercisable for the number of shares
of common stock as shown below:
<TABLE>
<CAPTION>
NUMBER
OF EXERCISABLE AT EXERCISE
EXPIRATION DATE SHARES DECEMBER 31, 1994 PRICE
--------------- ------- ----------------- --------
<S> <C> <C> <C>
February 2001............................. 47,058 47,058 $2.55
November 2002............................. 98,000 39,200 $6.50
January 2003.............................. 14,000 2,800 $6.50
------- ------
159,058 89,058
</TABLE>
In August 1993, the Board of Directors approved a resolution allowing
members of the Company's scientific advisory board to exchange higher-priced
warrants to purchase 112,000 shares of common stock for new warrants having an
exercise price of $6.50 per share, the fair market value of the common stock
on the date of the Board's action. In February 1995, the Board of Directors
approved the conversion of all of the above warrants expiring in 2002 and 2003
to options under the 1993 Omnibus Incentive Plan. The new options have
substantially the same terms as the warrants.
6. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" as of January 1, 1993. There was no cumulative
effect of the change in the methods of accounting for income taxes as of
January 1, 1993.
Deferred income taxes reflect the impact of "temporary differences" between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations.
The significant components of deferred income taxes for the year ended
December 31, are as follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Deferred tax benefit............................... $ 2,945,421 $ 2,077,023
Increase in beginning of year balance of the
valuation allowance for deferred tax assets....... (2,945,421) (2,077,023)
----------- -----------
$ -- $ --
----------- -----------
</TABLE>
F-10
<PAGE>
NEUROGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, are presented below.
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Deferred Tax Assets:
Deferred compensation............................. $ 26,036 $ 34,356
Contribution carryforward......................... 46,249 20,030
Research & development credit..................... 490,957 308,194
Federal tax operating loss carryforwards.......... 7,679,462 5,434,270
State tax operating loss carryforwards............ 2,386,555 1,769,211
Other miscellaneous............................... 58,327 23,920
----------- ----------
10,687,586 7,589,981
Valuation allowance................................. 10,389,107 7,443,686
----------- ----------
Net asset........................................... 298,479 146,295
----------- ----------
Deferred Tax Liability:
Depreciation...................................... (298,479) (146,295)
----------- ----------
Net asset/liability............................... $ -- $ --
----------- ----------
</TABLE>
A valuation allowance in the amount of $10,389,107 and $7,443,686 has been
established at December 31, 1994 and 1993, respectively. This allowance has
been established due to the uncertainty in the ability of the Company to
benefit from the federal and state operating loss carryforwards as the Company
has no prior earnings history.
The Company did not pay federal income taxes for the period September 29,
1987 (date of incorporation) to December 31, 1994. As of December 31, 1994,
the Company had approximately $22,800,000 of net operating loss carryforwards
available for federal income tax purposes which expire from the years 2003
through 2009. The Company had approximately $20,800,000 of state tax net
operating loss carryforwards as of December 31, 1994 which expire in the years
1995 through 1999. Because of "change in ownership" provisions of the Tax
Reform Act of 1986, the Company's utilization of its net operating loss
carryforwards may be subject to an annual limitation in future periods.
7. COMMITMENTS
The Company has entered into consulting agreements with eight members of its
scientific advisory board pursuant to which each such member will receive a
fee of $15,000 per year for five years for consulting services to the Company
for a minimum of 15 days per year. The agreements expire in July 1998. During
the year ended December 31, 1994, the Company paid $120,000 under these
agreements.
In connection with the July 1988 and March 1989 private placements, the
Company entered into shareholder agreements with investors pursuant to which,
among other matters, the Company granted:
. Registration rights with respect to the shares of common stock acquired
if and to the extent registration rights are granted to any other
purchaser in the July 1988 offering.
. Limited preemptive rights with respect to future private offerings of
common stock by the Company.
. Limited rights of co-sale with two specific stockholders.
F-11
<PAGE>
NEUROGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
. The right to require the approval of 75% of the Company's stockholders
should 50% or more of the Company's shares of common stock be sold to
any party other than two stockholders.
. The right to one of the investors to a seat on the Board of Directors as
long as such investor holds at least 125,000 shares of common stock
purchased in the March 1989 offering.
The Company has granted Pfizer certain registration rights with respect to
2,096,000 shares of Common Stock and limited preemptive rights with respect to
future public offerings pursuant to stock purchase agreements entered into in
connection with the Pfizer Agreements.
The Company has granted certain registration rights with respect to
1,131,583 shares of Common Stock to Allen & Company Incorporated and certain
other persons in connection with the purchase of such Common Stock from a
prior stockholder in 1994.
The Company has also granted certain registration rights to the lessor in a
sale and lease back of certain of the Company's furniture and equipment with
respect to 47,058 shares of Common Stock underlying a warrant held by such
lessor.
8. BENEFIT PLANS
The Company maintains a 401(k) Plan under which all of the Company's
employees are eligible to participate. Each year the Company may, but is not
required to, make a discretionary matching contribution to the Plan. In 1992,
the Company made its first contribution to the Plan. On a quarterly basis the
Company matches employee contributions at a rate of 25% of up to 6% of an
employee's salary. Such contributions totaled approximately $36,000 in 1994,
$29,000 in 1993 and $17,700 in 1992.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The Company made interest payments of approximately $90,000 in 1994,
$109,000 in 1993, and $160,000 in 1992. Interest capitalized in construction
in progress in these years was $13,000 in 1993 and 1992.
10. ACCRUED EXPENSES
Accrued expenses at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Accrued compensation....................................... $323,995 $ 50,000
Accounts payable........................................... 625,722 505,019
-------- --------
$949,717 $555,019
</TABLE>
F-12
<PAGE>
NEUROGEN CORPORATION
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1995
------------
ASSETS
------
<S> <C>
Current Assets:
Cash and cash equivalents...................................... $ 24,246,293
Marketable securities.......................................... 5,697,547
Other current assets........................................... 333,465
------------
Total current assets......................................... 30,277,305
Property, plant & equipment:
Land........................................................... 425,000
Building....................................................... 8,401,582
Equipment...................................................... 2,938,801
Furniture...................................................... 140,364
------------
11,905,747
Less accumulated depreciation.................................. 1,750,161
------------
Net property, plant and equipment............................ 10,155,586
Other assets, net................................................ 206,446
------------
$ 40,639,337
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accrued expenses............................................... $ 1,021,766
Unearned revenue from collaborative partner.................... 3,900,000
Current portion of mortgage payable............................ 150,178
------------
Total current liabilities.................................... 5,071,944
Mortgage payable, excluding current portion...................... 542,464
Other compensation............................................... 62,587
------------
Total liabilities............................................ 5,676,995
------------
Stockholders' Equity:
Preferred stock, par value $.025 per share.
Authorized 2,000,000 shares; none issued.................... --
Common stock, par value $.025 per share.
Authorized 30,000,000 shares; issued and outstanding
10,128,133 shares........................................... 253,203
Additional paid-in capital..................................... 45,806,431
Accumulated deficit............................................ (11,232,368)
Unrealized gain on marketable securities....................... 135,076
------------
Total stockholders' equity................................... 34,962,342
------------
$ 40,639,337
============
</TABLE>
(See accompanying notes to financial statements)
F-13
<PAGE>
NEUROGEN CORPORATION
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Operating revenues:
License fees..................................... $ -- $ 14,000,000
Research revenue................................. 2,300,000 3,739,333
------------ ------------
Total operating revenues....................... 2,300,000 17,739,333
Operating expenses:
Research and development......................... 4,343,649 5,889,691
General and administrative....................... 1,626,151 1,506,302
------------ ------------
Total operating expenses....................... 5,969,800 7,395,993
Other income (expense):
Investment income................................ 152,589 453,470
Interest expense ................................ (48,057) (35,996)
------------ ------------
Total other income, net........................ 104,532 417,474
------------ ------------
Net income (loss) before provision for
income taxes...................................... (3,565,268) 10,760,814
Provision for income taxes......................... -- 227,000
------------ ------------
Net income (loss).................................. $ (3,565,268) $ 10,533,814
============ ============
Earnings (loss) per share:
Primary.......................................... $ (0.40) $ 0.96
============ ============
Fully Diluted.................................... -- $ 0.93
============ ============
Shares used in calculation of earnings
(loss) per share:
Primary.......................................... 8,972,000 10,958,000
Fully Diluted.................................... -- 11,381,000
------------ ------------
Accumulated deficit:
Beginning of period.............................. $(15,114,987) $(21,766,182)
------------ ------------
End of period.................................... $(18,680,255) $(11,232,368)
============ ============
</TABLE>
(See accompanying notes to financial statements)
F-14
<PAGE>
NEUROGEN CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $(3,565,268) $10,533,814
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization expense.............. 427,131 376,173
Unrealized loss on marketable securities........... 61,474 --
Net loss (gain) on sale of assets.................. (13,125) 3,053
Changes in operating assets and liabilities:
Increase in accrued expenses....................... 29,184 72,043
Increase in unearned revenue from collaborative
partner........................................... -- 3,900,000
Decrease in other current assets................... 74,866 65,076
Increase in other assets, net...................... (149,275) (29,610)
----------- -----------
Net cash provided by (used in) operating
activities........................................ (3,135,013) 14,920,549
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment..................... (277,679) (705,648)
Purchases of marketable securities.................. (8,360,449) (7,573,237)
Sales of marketable securities...................... 8,224,197 8,064,154
----------- -----------
Net cash used in investing activities............. (413,931) (214,731)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of employee stock options.................. -- 199,976
Exercise of warrants................................ 50,000 --
Principal payments under mortgage payable........... (60,375) (68,370)
Principal payments under capital lease obligations.. (169,510) (30,858)
----------- -----------
Net cash provided by (used in) financing
activities....................................... (179,885) 100,748
----------- -----------
Net increase (decrease) in cash and cash equivalents. (3,728,829) 14,806,566
Cash and cash equivalents at beginning of period..... 6,403,987 9,439,727
----------- -----------
Cash and cash equivalents at end of period........... $ 2,675,158 $24,246,293
=========== ===========
</TABLE>
(See accompanying notes to financial statements)
F-15
<PAGE>
NEUROGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements have been prepared from the books and
records of Neurogen in accordance with generally accepted accounting
principles for interim financial information pursuant to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Interim results are not necessarily
indicative of the results that may be expected for the fiscal year.
(2) AGREEMENT WITH SCHERING-PLOUGH CORPORATION
In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement to collaborate in the discovery and development of antipsychotics
and drugs for other disorders which act through the dopamine family of
receptors. Pursuant to the Schering-Plough Agreement, the Company received
one-time license fees of $14.0 million for the rights to Neurogen's dopamine
compounds and $3.0 million for the right to test Neurogen's combinatorial
chemistry libraries in selected non-CNS assays. Schering-Plough also agreed to
pay an additional $3.0 million in 1996 for the right to test additional
libraries. Moreover, Neurogen is entitled to receive approximately $7.2
million during the two-year period which commenced June 28, 1995 for research
and development funding of the Company's anti-psychotic program and may
receive additional research and development funding of up to $3.6 million per
year for three additional one-year periods depending on whether and the extent
to which Schering-Plough exercises its right to extend the collaboration
beyond July 1997. Neurogen could also receive milestone payments of up to
approximately $32.0 million if it achieves certain development and regulatory
objectives regarding its products subject to the collaboration. In return,
Schering-Plough received the exclusive worldwide license to market products
subject to the collaboration and Neurogen retained the rights to receive
royalties based on net sales levels, if any. In addition to the payments
described above, Schering-Plough is responsible for funding the cost of all
clinical development and marketing, if any, of drugs subject to the
collaboration.
Payments under the Schering-Plough Agreement are recorded based on the
performance requirements of the contracts, while related costs are expensed as
incurred. License fees of $14,000,000 were recorded as revenue in June 1995
for the sale of rights to Neurogen's dopamine compounds. Under the Schering-
Plough Agreement, the license fees are non-refundable and require no further
performance by the Company.
Unearned revenue from collaborative partner represents payments received
from Schering-Plough in exchange for rights to test Neurogen's combinatorial
chemistry libraries in selected non-CNS assays and for funding of dopamine
research under the Schering-Plough Agreement. Revenue will be recognized as
compounds from the combinatorial chemistry libraries are delivered to
Schering-Plough and as performance requirements under the dopamine research
program are met.
(3) EARNINGS PER COMMON SHARE
Earnings per common share are computed in accordance with the treasury stock
method. Primary and fully diluted earnings per share are based upon the
weighted average number of common shares and dilutive common stock equivalents
outstanding. Common stock equivalents include outstanding options under the
Company's stock option plans and outstanding warrants to purchase shares of
the Company's common stock. The common stock equivalents have not been
included in periods with losses as their inclusion would be antidilutive.
(4) FILING OF REGISTRATION STATEMENT
In July 1995, the Company filed a Registration Statement with the Securities
and Exchange Commission to offer and sell up to 2,875,000 shares of common
stock through an underwritten public offering. The offering is expected to be
completed in the third quarter of 1995.
F-16
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SE-
CURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAW-
FUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 6
Use of Proceeds............................................................ 13
Dilution................................................................... 13
Price Range of Common Stock................................................ 14
Dividend Policy............................................................ 14
Capitalization............................................................. 15
Selected Financial Data.................................................... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................................................. 17
Business................................................................... 21
Management................................................................. 38
Certain Transactions....................................................... 40
Principal Stockholders..................................................... 41
Underwriting............................................................... 43
Legal Matters.............................................................. 44
Experts.................................................................... 44
Index to Financial Statements.............................................. F-1
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2,500,000 SHARES
NEUROGEN CORPORATION
COMMON STOCK
------------
PROSPECTUS
, 1995
------------
SMITH BARNEY INC.
ROBERTSON, STEPHENS & COMPANY
PACIFIC GROWTH EQUITIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Stock being registered. All amounts shown are estimates, except
for the Securities and Exchange Commission ("SEC") registration fee and the
National Association of Securities Dealers, Inc. ("NASD") filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 15,305
NASD filing fee................................................. 4,938
Nasdaq listing fee.............................................. 17,500
Printing and engraving expenses................................. 110,000
Legal fees and expenses......................................... 130,000
Accounting fees and expenses.................................... 60,000
Transfer agent and registrar fees and expenses.................. 3,500
Blue Sky fees and expenses, including legal fees................ 15,000
Miscellaneous................................................... 18,757
--------
Total....................................................... $375,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Section 145 of the General
Corporation Law of Delaware permits indemnification of directors, officers and
employees of corporations organized thereunder under certain conditions and
subject to certain limitations. Article EIGHTH of the Restated Certificate of
Incorporation of the Company provides that the Company shall, to the full
extent permitted by Section 145, indemnify its directors and officers.
The Company's Certificate of Incorporation, pursuant to Section 102(b)(7) of
the General Corporation Law of Delaware, contains provisions eliminating the
personal liability of a director to the Company or its stockholders for money
damages for breach of fiduciary duty as a director. This provision in the
Restated Certificate of Incorporation does not eliminate the duty of care and,
in appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of the
law, for actions leading to improper personal benefits to the director, and
for payment of dividends or stock repurchases or redemptions that are unlawful
under Delaware law. The provision does not affect a director's
responsibilities under any other law, such as the state or federal securities
laws or state or federal environmental laws.
As permitted by the General Corporation Law of Delaware, the directors and
officers of the Company are covered by insurance against certain liabilities
which might be incurred by them in such capacities and in certain cases
against which they cannot be indemnified by the Company.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought
nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any officer, director, or employee of the
Company.
II-1
<PAGE>
ITEM 16. EXHIBITS
(4) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
1.1 -- Underwriting Agreement.
*4.1 -- Restated Certificate of Incorporation, filed June 17, 1994 (incorporated by
reference to Exhibit 4.1 to Registration Statement No. 33-81268 on Form S-
8).
*4.2 -- By-Laws, as amended (incorporated by reference to Exhibit 3.6 to the
Company's Form 10-K for the fiscal year ended December 31, 1993).
*5.1 -- Opinion of Milbank, Tweed, Hadley & McCloy.
23.1 -- Consent of KPMG Peat Marwick LLP, Independent Auditors.
*23.2 -- Consent of Milbank, Tweed, Hadley & McCloy (contained in Exhibit 5.1).
*23.3 -- Consent of Banner & Allegretti, Ltd., special patent counsel to the Company.
*24.1 -- Powers of Attorney of Frank C. Carlucci, Robert H. Roth, John F. Tallman,
Robert M. Gardiner, Robert N. Butler, M.D., Jeffrey J. Collinson, Mark
Novitch and Barry M. Bloom.
*24.2 -- Power of Attorney of Richard D. Harrison
</TABLE>
--------
* Filed previously.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each posteffective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Branford, State of Connecticut on this the 16th day
of August, 1995.
NEUROGEN CORPORATION
By: /s/ Harry H. Penner, Jr.
----------------------------------
Harry H. Penner, Jr. President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board and Director August 16, 1995
------------------------
FRANK C. CARLUCCI
/s/ Harry H. Penner, Jr. President, Chief Executive Officer and August 16, 1995
------------------------ Director (Principal Executive Officer)
HARRY H. PENNER, JR.
* Executive Vice President, Secretary and Director August 16, 1995
------------------------
JOHN F. TALLMAN, PH.D.
/s/ Stephen R. Davis Vice President-Finance, Chief Financial August 16, 1995
------------------------ Officer and Treasurer
(Principal Financial and Accounting Officer)
STEPHEN R. DAVIS
* Director August 16, 1995
------------------------
BARRY M. BLOOM
* Director August 16, 1995
------------------------
ROBERT N. BUTLER, M.D.
* Director August 16, 1995
------------------------
JEFFREY J. COLLINSON
* Director August 16, 1995
------------------------
ROBERT M. GARDINER
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director August 16, 1995
---------------------
RICHARD D. HARRISON
* Director August 16, 1995
---------------------
MARK NOVITCH
* Director August 16, 1995
---------------------
ROBERT H. ROTH, PH.D.
</TABLE>
/s/ Harry H. Penner, Jr.
*By ___________________________________
HARRY H. PENNER, JR., ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ ----------- -------------
<S> <C> <C> <C>
1.1 -- Underwriting Agreement.
*4.1 -- Restated Certificate of Incorporation, filed June 17, 1994
(incorporated by reference to Exhibit 4.1 to Registration Statement
No. 33-81268 on Form S-8).
*4.2 -- By-Laws, as amended (incorporated by reference to Exhibit 3.6 to
the Company's Form 10-K for the fiscal year ended December 31,
1993).
*5.1 -- Opinion of Milbank, Tweed, Hadley & McCloy.
23.1 -- Consent of KPMG Peat Marwick LLP, Independent Auditors.
*23.2 -- Consent of Milbank, Tweed, Hadley & McCloy (contained in Exhibit
5.1).
*23.3 -- Consent of Banner & Allegretti, Ltd., special patent counsel to the
Company.
*24.1 -- Powers of Attorney of Frank C. Carlucci, Robert H. Roth, John F.
Tallman, Robert M. Gardiner, Robert N. Butler, M.D., Jeffrey J.
Collinson, Mark Novitch and Barry M. Bloom.
*24.2 -- Power of Attorney of Richard D. Harrison.
</TABLE>
--------
* Filed previously
<PAGE>
EXHIBIT 1
Draft of August 15, 1995
2,500,000 SHARES
NEUROGEN CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
August , 1995
Smith Barney Inc.
Robertson, Stephens & Company, L.P.
Pacific Growth Equities
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Neurogen Corporation, a Delaware corporation (the "Company"), proposes
to issue and sell an aggregate of 2,500,000 shares of its common stock, $0.025
par value per share (the "Common Stock"), to the several Underwriters named in
Schedule I hereto (the "Underwriters"). The Company also proposes to sell to
the several Underwriters, upon the terms and conditions set forth in Section 2
hereof, up to an aggregate of 375,000 additional shares (the "Additional
Shares") of Common Stock. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares."
The Company wishes to confirm its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
statement"), including a prospectus subject to completion relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, or, if the registration statement
becomes effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said post-
effective amendment. The term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means
the
<PAGE>
prospectus subject to completion in the form included in the registration
statement at the time of the initial filing of the registration statement with
the Commission, and as such prospectus shall have been amended from time to time
prior to the date of the Prospectus. Any reference herein to the registration
statement, the Registration Statement, any Prepricing Prospectus or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Form S-3 under the Act, as of the date of the
registration statement, the Registration Statement, such Prepricing Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after such date under the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Exchange Act") and deemed incorporated by reference pursuant
to Form S-3 under the Act. As used herein, the term "Incorporated Documents"
means the documents which at the time are incorporated by reference in the
registration statement, the Registration Statement, any Prepricing Prospectus,
the Prospectus or any amendment or supplement thereto.
2. AGREEMENTS TO SELL AND PURCHASE. Subject to such adjustments as you
may determine to avoid fractional shares, the Company hereby agrees, subject to
all the terms and conditions set forth herein, to issue and sell to each
Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of $ per share (the
"purchase price per share"), the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised at
any time and from time to time prior to 9:00 P.M., New York City time, on the
30th day after the date of the Prospectus (or, if such 30th day shall be a
Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading), up to an aggregate of 375,000
Additional Shares. Additional Shares may be purchased only to cover over-
allotments made in connection with the offering of the Firm Shares. Upon any
exercise of the over-allotment option, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments as you may determine in order to avoid fractional
shares) which bears the same proportion to the number of Additional Shares to be
purchased by the Underwriters as the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof) bears to the aggregate number of
Firm Shares.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00
A.M., New York City time, on , 1995 (the "Closing Date"). The
place of closing for the Firm Shares and the Closing Date may be varied by
agreement between you and the Company.
2
<PAGE>
Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you to the Company of the Underwriters' determination to purchase a
number, specified in such notice, of Additional Shares. The place of closing
for any Additional Shares and the Option Closing Date for such Additional Shares
may be varied by agreement between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor by certified or official bank check or checks payable in New York
Clearing House (next day) funds to the order of the Company.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you, will
confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) during the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, stockholder's equity or results of operations, or of the
happening of any event which makes any material statement made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented) to comply in all
material respects with the Act or any other applicable law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four signed copies
of the registration statement as originally filed with the Commission and of
each amendment thereto, including financial statements and all exhibits and
Incorporated Documents thereto, and will also
3
<PAGE>
furnish to you, without charge, such number of conformed copies of the
registration statement as originally filed and of each amendment thereto, but
without exhibits, and Incorporated Documents thereto as you may reasonably
request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which you
shall not previously have been advised or to which you shall reasonably object
promptly after being so advised or (ii) so long as, in the opinion of counsel
for the Underwriters which has been delivered in writing to the Company, a
Prospectus is required to be delivered in connection with sales by any
Underwriter or dealer, file any document under the Exchange Act which upon
filing becomes an Incorporated Document, without delivering a copy of such
document to you prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered or will deliver to you, without charge, in such quantities as you
have requested or may hereafter reasonably request, copies of each form of the
Prepricing Prospectus. The Company consents to the use, in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the several Underwriters and by
dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so
furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as a prospectus is
required by the Act to be delivered in connection with sales by any Underwriter
or dealer, the Company will promptly deliver to each Underwriter and each
dealer, without charge, as many copies of the Prospectus (and of any amendment
or supplement thereto) as you may reasonably request. The Company consents to
the use of the Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several
Underwriters and by all dealers to whom Shares may be sold, both in connection
with the offering and sale of the Shares and for such period of time thereafter
as the Prospectus is required by the Act to be delivered in connection with
sales by any Underwriter or dealer. If during such period of time any event
shall occur that in the judgment of the Company or in the opinion of counsel for
the Underwriters is required to be set forth in the Prospectus (as then amended
or supplemented) or should be set forth therein in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary to supplement or amend the Prospectus, or to
file under the Exchange Act any document which upon filing becomes an
Incorporated Document, to comply with the Act, the Exchange Act or any other
applicable law, the Company will forthwith prepare and, subject to the
provisions of paragraph (d) above, file with the Commission an appropriate
supplement or amendment thereto or Incorporated Document, and will promptly
furnish to the Underwriters and dealers a reasonable number of copies thereof;
provided, however, that if such amendment or supplement is required by any
Underwriter later than six months from the date of this Agreement, the
preparation and furnishing thereof shall be at the expense of such Underwriter.
In the event that the Company and you agree that the Prospectus should be
amended or supplemented, or that a document should be filed under the Exchange
Act which upon filing becomes an Incorporated Document, the Company, if
reasonably requested by you, will promptly issue a press release announcing or
disclosing the matters to be covered by the proposed amendment or supplement or
such document.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified
4
<PAGE>
or to take any action which would subject it to (i) service of process in suits,
other than those arising out of the offering or sale of the Shares or (ii)
taxation, in either case in any jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security holders
an earnings statement, which need not be audited, covering a twelve-month period
commencing after the effective date of the Registration Statement and ending not
later than 15 months thereafter, as soon as practicable after the end of such
period, which earnings statement shall satisfy the provisions of Section 11(a)
of the Act.
(i) During the period of three years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, (ii) during the period
commencing on the date hereof and ending upon the completion of the offering
contemplated hereby such other information concerning the Company as you may
reasonably request, and (iii) from time to time such other publicly available
information concerning the Company as you may reasonably request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 or by notice given by you terminating this
Agreement pursuant to the first paragraph of Section 10 or Section 11 hereof) or
if this Agreement shall be terminated by the Underwriters because of any failure
or refusal on the part of the Company to comply with the terms or fulfill any of
the conditions of this Agreement, the Company agrees to reimburse the
Underwriters for all out-of-pocket expenses (including reasonable fees and
expenses of counsel for the Underwriters) incurred by you in connection
herewith.
(k) The Company will apply the net proceeds from the sale of the Shares
to be sold by it hereunder substantially in accordance with the description set
forth in the Prospectus under "Use of Proceeds."
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the
time and manner of such filing.
(m) Prior to the expiration of 90 days after the date of the Prospectus
the Company will not offer, sell, contract to sell or otherwise dispose of any
Common Stock (or any securities convertible into or exercisable or exchangeable
for Common Stock) or grant any options or warrants to purchase Common Stock,
except options currently outstanding under the Neurogen Corporation 1993 Omnibus
Plan, the Neurogen Corporation 1993 Non-Employee Directors Stock Option Plan and
the Neurogen Corporation Stock Option Plan and described as such in the
Prospectus, or as otherwise described in or contemplated by the Prospectus,
without the prior written consent of Smith Barney Inc.; provided, however, that
without such consent, the Company may offer, sell, contract to sell or
otherwise dispose of Common Stock (or securities convertible into or exercisable
or exchangeable for Common Stock) in connection with entering into any future
research collaboration (provided that the transferee of any such securities
shall have agreed in writing not to offer, sell, contract to sell or otherewise
dispose of such securities or any securities for which such securities are
exercisable or exchangeable or into which such securities are convertible, for
90 days after the date hereof) and may grant options pursuant to the Neurogen
Corporation 1993 Omnibus Incentive Plan in accordance with the terms of, and
subject to the limitations on the number of shares issuable under, such plan as
in effect on the date hereof and issue shares of Common Stock upon the exercise
of options currently outstanding under the Neurogen Corporation 1993 Omnibus
Incentive Plan, the Neurogen Corporation 1993 Non-Employee Directors Stock
Option Plan and the Neurogen Corporation Stock Option Plan.
(n) The Company has furnished or will furnish to you "lock-up" letters,
in form and substance satisfactory to you, signed by each of its current
officers and directors and each of its stockholders designated by you in writing
prior to entering into this Agreement.
(o) Except as stated in this Agreement and in the Prepricing Prospectus
and Prospectus, the Company has not taken, nor will it take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Shares listed,
subject to notice of issuance, on the Nasdaq National Market prior to or
concurrently with the effectiveness of the registration statement.
5
<PAGE>
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Company meets the requirements for use of Form S-3 under the
Act. The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective amendment
thereto shall become effective and the prospectus and any supplement or
amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made not misleading, except that this representation and
warranty does not apply to statements in or omissions from the registration
statement or the prospectus made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing by
or on behalf of any Underwriter through you expressly for use therein.
(c) The Incorporated Documents heretofore filed were filed in a timely
manner and, when they were filed (or, if any amendment with respect to any such
document was filed, when such document was filed), conformed with the
requirements of the Exchange Act and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and any further
Incorporated Documents will, when so filed, be filed in a timely manner and
conform with the requirements of the Exchange Act and will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
(d) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable and,
except as described in the prospectus, are free of any preemptive or similar
rights and were issued and sold in compliance with all applicable federal and
state securities laws; the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free of
any preemptive or similar rights; and the capital stock of the Company conforms
in all material respects to the description thereof in the Registration
Statement and the Prospectus.
(e) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, stockholder's
equity or results of operations of the Company. The only such jurisdiction
where the Company is so required to register and qualify to conduct its business
and be in good standing as a foreign corporation is the State of Connecticut.
The Company has no subsidiaries.
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company, or to which the
Company or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not
6
<PAGE>
so described. There are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement or an
Incorporated Document that are not described or filed as required by the Act or
the Exchange Act. The Company is not involved in any strike, job action or
labor dispute, and, to the Company's knowledge, no such action or dispute is
threatened.
(g) The Company is not (i) in violation of its certificate of
incorporation or by-laws, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or of any decree of
any court or governmental agency or body having jurisdiction over the Company or
(ii) in default in any material respect in the performance of any obligation,
agreement or condition contained in any material bond, debenture, note or any
other evidence of indebtedness or in any material agreement, indenture, lease or
other instrument to which the Company is a party or by which it or its
properties may be bound.
(h) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation by
the Company of the transactions contemplated hereby (i) requires any consent,
approval, authorization or other order of, or registration or filing with, any
court, regulatory body, administrative agency or other governmental body, agency
or official (except such as may be required for the registration of the Shares
under the Act and the Exchange Act and compliance with the securities or Blue
Sky laws of various jurisdictions, all of which have been or will be effected in
accordance with this Agreement) or conflicts or will conflict with the
certificate or bylaws, or other organizational documents, of the Company or (ii)
constitutes or will constitute a breach of, or a default under, any material
agreement, indenture, lease or other instrument to which the Company is a party
or by which the Company or its properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Company or its properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any material
property or assets of the Company pursuant to the terms of any agreement or
instrument to which it is a party or by which it may be bound or to which any of
its material property or assets is subject.
(i) The accountants, KPMG Peat Marwick LLP, who have certified or shall
certify the financial statements filed or to be filed as part of the
Registration Statement or the Prospectus (or any amendment or supplement
thereto) are independent public accountants as required by the Act and the
Exchange Act.
(j) The financial statements, together with related schedules and notes
forming part of the Registration Statement and the Prospectus (and any amendment
or supplement thereto), comply with the requirements of the Act and the Exchange
Act in all material respects and present fairly the consolidated financial
position, results of operations and changes in stockholders' equity and cash
flows of the Company on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial and
statistical information and data set forth in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) are accurately presented
and prepared on a basis consistent with such financial statements and the books
and records of the Company.
(k) The Company has all requisite power and authority to execute,
deliver and perform its obligations under this Agreement; the execution and
delivery of, and the performance by the Company of its obligations under, this
Agreement have been duly and validly authorized by the Company, and this
Agreement has been duly executed and delivered by the Company and constitutes
the valid and legally binding agreement of the Company, enforceable against the
Company in
7
<PAGE>
accordance with its terms, except as rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or principles of
public policy and subject to the qualification that the enforceability of the
Company's obligations hereunder may be limited by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and by general equitable principles.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), the
Company has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Company, and there has not been any change in the capital stock,
or material increase in the short-term or long-term debt, of the Company, or any
material adverse change, or any development involving or which may reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, stockholder's equity or
results of operations of the Company.
(m) The Company has good and marketable title to all property (real and
personal) described in the Prospectus as being owned by it, free and clear of
all material liens, claims, security interests or other encumbrances except such
as are described in the Registration Statement and the Prospectus or in a
document filed as an exhibit to the Registration Statement or an Incorporated
Document, and all the property described in the Prospectus as being held under
lease by the Company is held by it under valid, subsisting and enforceable
leases except where the failure of such a lease to be valid, subsisting or
enforceable would not have a material adverse effect on the Company.
(n) The Company has not distributed and, prior to the later to occur of
the Closing Date and completion of the distribution of the Shares, will not
distribute any offering material in connection with the offering and sale of the
Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the Act.
(o) The Company has such permits, licenses, franchises, authorizations
and clearances ("Permits") of governmental or regulatory authorities, including,
without limitation, the Food and Drug Administration (the "FDA") of the U.S.
Department of Health and Human Services and/or any committee thereof, as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus, subject to such qualifications as may be set forth
in the Prospectus; subject to such qualifications as may be set forth in the
Prospectus, the Company has fulfilled and performed all its material obligations
with respect to the Permits, and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof or
results in any other material impairment of the rights of the holder of any
Permit, subject in each case to such qualification as may be set forth in the
Prospectus and except where such revocation, termination or impairment would not
have a material adverse effect on the Company. Except as described in the
Prospectus, none of the Permits contains any restriction that is materially
burdensome to the Company.
(p) With respect to the clinical trials and human trials and other
studies and preclinical tests conducted by the Company or in which the Company
has participated that are described in the Registration Statement and the
Prospectus or the results of which are referred to in the Registration Statement
or the Prospectus, and to the knowledge of the Company, such trials, studies and
tests conducted on behalf of the Company, were and, if still pending, are being
conducted in accordance with appropriate experimental protocols, procedures and
controls applied by research scientists generally in the preclinical or clinical
study of new drugs. The descriptions of the results of such trials, studies and
tests contained in the Prospectus fairly present the data derived from such
trials, studies and tests. The Company has operated and currently is in
compliance in all material respects with all applicable FDA rules, regulations
and policies. The Company has not received any notices or other correspondence
from the FDA or any other governmental agency requiring the termination or
suspension of any clinical or human trials that are described in the Prospectus
or the results of which are referred to in the Prospectus.
8
<PAGE>
(q) The Company has not received nor is it aware of any communication
(written or oral) relating to the termination or modification or threatened
termination or modification of any of the agreements described or referred to in
the Prospectus under the caption "Business--Collaborative Research and Licensing
Agreements" which would materially and adversely affect the Company's rights
under such agreements.
(r) The property, assets and operations of the Company comply in all
material respects with all applicable federal, state or local laws, rules,
orders, decrees, judgments, injunctions, licenses, permits or regulations
relating to environmental matters (the "Environmental Laws"). None of the
Company's property, assets or operations is the subject of any federal, state or
local investigation evaluating whether any remedial action is needed to respond
to a release of any substance regulated by or form the basis of liability under
any Environmental Laws (a "Hazardous Material") into the environment or is in
contravention of any federal, state, local or foreign law, order or regulation.
The Company has not received any notice or claim, nor are there pending,
threatened or reasonably anticipated lawsuits against it with respect to
material violations of an Environmental Law or in connection with the release of
any Hazardous Material into the environment. The Company does not have any
material contingent liability in connection with any release of Hazardous
Material into the environment.
(s) The Company maintains insurance of the types and in amounts
generally deemed adequate by the Company for its business and consistent with
insurance coverage maintained by similar companies and businesses, all of which
insurance is in full force and effect.
(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(u) Neither the Company, nor any employee or agent of the Company, has
made any payment of funds of the Company or received or retained any funds in
violation of any law, rule or regulation, which payment, receipt or retention of
funds is of a character required to be disclosed in the Prospectus.
(v) The Company has filed all tax returns required to be filed, which
returns are complete and correct in all material respects, and the Company is
not in default in the payment of any taxes which were payable pursuant to said
returns or any assessments with respect thereto.
(w) Except as disclosed in the Registration Statement and the
Prospectus, no holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the registration statement or the consummation of the
transactions contemplated by this Agreement or otherwise; and all such rights
have been waived in connection with the offering contemplated hereby. Except as
contemplated by this Agreement, no person has the right, contractual or
otherwise, to cause the Company to permit such person to underwrite the sale of
any of the Shares. Except as described in or contemplated by the Prospectus,
there are no outstanding options, warrants or other rights calling for the
issuance of, and there are no
9
<PAGE>
commitments, plans or arrangements to issue, any shares of capital stock of the
Company or any security convertible into or exchangeable or exercisable for
capital stock of the Company.
(x) The Company owns or has obtained licenses for the patents,
technology and patent applications relating to such technology described in the
Prospectus as being owned by or licensed to it (collectively, the "Intellectual
Property"). Except as set forth in the Prospectus under the caption "Business -
- Patents and Proprietary Technology," (i) to the Company's best knowledge there
are no rights of third parties to any such Intellectual Property; (ii) to the
Company's best knowledge there is no infringement by third parties of any such
Intellectual Property; (iii) there is no pending or, to the Company's best
knowledge, threatened action, suit, proceeding or claim by others challenging
the Company's rights in or to any such Intellectual Property, and the Company is
unaware of any facts which would form a reasonable basis for any such claim;
(iv) there is no pending or, to the Company's best knowledge, threatened action,
suit, proceeding or claim by others challenging the validity or scope of any
such Intellectual Property, and the Company is unaware of any facts which would
form a reasonable basis for any such claim; (v) there is no pending or, to the
Company's best knowledge, threatened action, suit, proceeding or claim by others
that the Company infringes or otherwise violates any patent, trademark,
copyright, trade secret or other proprietary rights of others, and the Company
is unaware of any facts which would form a reasonable basis for any such claim;
(vi) to the Company's best knowledge there is no patent or patent application
which contains claims that dominate or may dominate any Intellectual Property
described in the Prospectus as being owned by or licensed to the Company or that
is necessary for the conduct of its business or that interferes with the issued
or pending claims of any such Intellectual Property; and (vii) there is no prior
art of which the Company is aware that may render any patent held by the Company
invalid or any patent application held by the Company unpatentable which has not
been disclosed to the U.S. Patent and Trademark Office.
(y) The Company is not, and, upon the sale of the Shares to be issued
and sold by it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds," will not be an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
(z) The Company is in compliance with all provisions of Florida
Statutes (S)517.075 and the regulations thereunder, relating to issuers doing
business with Cuba.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances under which they were made not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to such
Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with respect
to any Prepricing Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Shares by such Underwriter to any person if a copy of the Prospectus shall not
have been delivered or sent to such person within the time required by the Act
and the regulations thereunder, and the untrue statement or alleged untrue
statement or omission or alleged omission of
10
<PAGE>
a material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Company has previously delivered the Prospectus to
the several Underwriters in requisite quantity on a timely basis to permit such
delivery or sending. The foregoing indemnity shall be in addition to any
liability which the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the party or parties against whom
indemnification is being sought (the "indemnifying parties"), but the omission
so to notify the indemnifying parties will not relieve the indemnifying parties
from any liability which they may have to any indemnified party except to the
extent the indemnifying parties were materially prejudiced by such failure to
notify, and such indemnifying parties shall assume the defense thereof,
including the employment of counsel and payment of all fees and expenses. Such
Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action, suit or proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person unless (i) the
indemnifying parties have agreed in writing to pay such fees and expenses, (ii)
the indemnifying parties have failed to assume the defense and employ counsel,
or (iii) the named parties to any such action, suit or proceeding (including any
impleaded parties) include both such Underwriter or such controlling person and
the indemnifying parties and such Underwriter or such controlling person shall
have been advised by its counsel that representation of such indemnified party
and any indemnifying party by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them (in which case the indemnifying party shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
Underwriter or such controlling person). It is understood, however, that the
indemnifying parties shall, in connection with any one such action, suit or
proceeding or separate but substantially similar or related actions, suits or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Underwriters and controlling persons not having actual or potential
differing interests with you or among themselves, which firm shall be designated
in writing by Smith Barney Inc. The indemnifying parties shall not be liable
for any settlement of any such action, suit or proceeding effected without their
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
indemnifying parties agree to indemnify and hold harmless any Underwriter, to
the extent provided in the preceding paragraph, and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same
extent as the indemnity from the Company to each Underwriter set forth in
Section 7(a) hereof, but only with respect to information relating to such
Underwriter furnished in writing by or on behalf of such Underwriter through you
expressly for use in the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto. If any action,
suit or proceeding shall be brought against the Company, any of its directors,
any such officer or any such controlling person based on the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto, and in respect of which indemnity may be sought against any
Underwriter pursuant to this paragraph (c), such Underwriter shall have the
rights and duties given to the Company by paragraph (b) above (except that if
the Company shall have assumed the defense thereof such Underwriter shall not be
required to do so, but may employ separate counsel therein and participate in
the defense thereof, but the fees and expenses of such counsel shall be at such
11
<PAGE>
Underwriter's expense), and the Company, its directors, any such officer and any
such controlling person shall have the rights and duties given to the
Underwriters by paragraph (b) above. The foregoing indemnity shall be in
addition to any liability which the Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or reasonable expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other hand
from the offering of the Shares, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Underwriters on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, liabilities or reasonable
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus; provided that, in the event that the Underwriters shall have
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company and the Underwriters from the offering of the
Shares shall include the net proceeds (before deducting expenses) received by
the Company, and the underwriting discounts and commissions received by the
Underwriters, from the sale of such Additional Shares, in each case computed on
the basis of the respective amounts set forth in the notes to the table on the
cover page of the Prospectus. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other hand and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue or alleged untrue statement or
omission.
(e) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by a
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities and expenses referred to in paragraph (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7 are several in proportion
to the respective numbers of Firm Shares set forth opposite their names in
Schedule I hereto (or such numbers of Firm Shares increased as set forth in
Section 10 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which
12
<PAGE>
any indemnified party is or could have been a party and indemnity could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any person
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person controlling any Underwriter, or to the Company, its
directors or officers or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 7.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change, or any development involving a prospective change,
in or affecting the condition (financial or other), business, prospects,
properties, stockholder's equity or results of operations of the Company not
contemplated by the Prospectus, which in your opinion as Representatives of the
several Underwriters would materially adversely affect the market for the
Shares, or (ii) any event or development relating to or involving the Company
which, in the reasonable opinion of the Company and its counsel or the
Underwriters and their counsel, requires the making of any addition to or change
in the Prospectus in order to state a material fact required by the Act or any
other law to be stated therein or necessary in order to make the statements
therein not misleading in any material respect, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion as
Representatives of the several Underwriters, materially adversely affect the
market for the Shares.
(c) You shall have received on the Closing Date an opinion of Milbank,
Tweed, Hadley & McCloy, counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters to the effect
that:
(i) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware with corporate
power and authority to own, lease and operate its properties and conduct its
business as described in the Prospectus, and is duly qualified to do business
and is in good standing as a foreign corporation in the State of
13
<PAGE>
Connecticut; to our knowledge, the Company has all necessary Permits (except
where the failure to so have any such Permits, individually or in the
aggregate, would not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results
of operations of the Company) to own its properties and conduct its business
as described in the Prospectus.
(ii) The authorized capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus and conforms as to legal
matters in all material respects to the description thereof contained in the
Prospectus;
(iii) The shares of capital stock of the Company outstanding prior to
the issuance of the Shares have been duly authorized and validly issued and
are fully paid and nonassessable;
(iv) (A) The certificates for the Shares conform to the requirements
of the Delaware General Corporation Law; (B) when such certificates are duly
countersigned by the Company's transfer agent and delivered to the
Underwriters or upon the order of the Underwriters against payment of the
agreed consideration therefor in accordance with the provisions of this
Agreement, the Shares will be duly authorized and validly issued, fully paid
and nonassessable; (C) the issuance of the Shares is not subject to (1)
preemptive rights or (2) to the knowledge of such counsel, any similar rights
that entitle or will entitle any person to acquire any shares of capital
stock of the Company upon issuance of the Shares by the Company other than
any such preemptive or similar rights which have been effectively waived or
complied with; and (D) the Shares have been approved for quotation on the
Nasdaq Stock Market;
(v) The Registration Statement and all post-effective amendments, if
any, have become effective under the Act and, to the knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act; any required filing of
the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule
424(b), and the Registration Statement and any supplements or amendments
thereto (except for the financial statements and footnotes thereto and other
financial or statistical data included or incorporated by reference therein
as to which such counsel need not express any opinion), at the time of
effectiveness thereof, complied as to form in all material respects with the
requirements of the Act; and the Prospectus (excluding the financial
statements and footnotes thereto and other financial or statistical data
included or incorporated by reference therein, as to which such counsel need
express no opinion), at the time it was filed with the Commission pursuant to
Rule 424(b) under the Act, complied as to form in all material respects with
the requirements of the Act;
(vi) All documents incorporated by reference in the Prospectus
(excluding any financial statements and footnotes thereto and other financial
or statistical data included or incorporated by reference therein, as to
which such counsel need express no opinion), at the time they were filed with
the Commission, complied as to form in all material respects with the
requirements of the Exchange Act;
(vii) The Company has the power and authority to enter into this
Agreement and to issue, sell and deliver the Shares to the Underwriters as
provided herein, and this Agreement and the performance of the Company's
obligations hereunder have been duly authorized and this Agreement has been
duly executed and delivered by the Company; this Agreement is a valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforceability of the same may be
limited by the effect of (i) bankruptcy, insolvency, reorganization,
arrangement, moratorium or other similar laws relating to or affecting
14
<PAGE>
the rights of creditors generally, including without limitation laws relating
to fraudulent transfers or conveyances, preferences and equitable
subordination, (ii) limitations imposed by general principles of equity
(regardless of whether considered in a proceeding in equity or at law),
including without limitation (A) the possible unavailability of specific
performance, injunctive relief or any other equitable remedy and (B) concepts
of good faith and fair dealing and (iii) U.S. Federal, Delaware corporate or
state securities laws and the public policy underlying such laws which may
render unenforceable those provisions relating to indemnities and
contribution;
(viii) The Company is not, to the knowledge of such counsel, (i) in
violation of its certificate of incorporation or bylaws, or other
organizational documents, or (ii) in default in the performance of any
material obligation, agreement or condition contained in any bond, debenture,
note or other evidence of indebtedness made an exhibit to the Registration
Statement or any Incorporated Document;
(ix) The execution, delivery and performance by the Company of this
Agreement and the offer, sale and delivery of the Shares will not constitute
a material breach of the terms of, or result in a default under, any
agreement, indenture, lease, mortgage, deed of trust, or other instrument
filed as an exhibit to the Registration Statement or any Incorporated
Document by which the Company is bound or by which its property is bound and
which breach or default would be material to the Company; nor will any such
action result in the creation of any lien, charge or encumbrance upon any
property or assets of the Company, or violate any of the provisions of the
Company's certificate of incorporation or bylaws or any statute, order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Company, subject to the exception contained in clause (iii) of
paragraph (vii) hereof and assuming compliance with applicable state
securities and Blue Sky laws;
(x) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the
part of the Company (except as have been obtained under the Act and the
Exchange Act or such as may be required under state securities or Blue Sky
laws governing the purchase and distribution of the Shares) for the valid
issuance and sale of the Shares to the Underwriters as contemplated by this
Agreement;
(xi) To the knowledge of such counsel, the Company is not in violation
of any statute, ordinance, administrative or governmental rule or regulation
applicable to the Company or of any decree of any court or governmental
agency or body having jurisdiction over the Company, the violation of which
would have a material adverse effect on the condition (financial or other),
business, prospects, properties or results of operations of the Company;
(xii) The statements in the Registration Statement and Prospectus,
insofar as they are descriptions of contracts, agreements or other legal
documents, or refer to statements of law or legal conclusions, are accurate
and present fairly the information required to be shown;
(xiii) Except as described in the Prospectus, such counsel does not
know of any outstanding option, warrant or other right calling for the
issuance of, and such counsel does not know of any commitment, plan or
arrangement to issue, any share of capital stock of the Company or any
security convertible into or exchangeable or exercisable for capital stock of
the Company; and, except as described in the Prospectus, such counsel does
not know of any holder of any securities of the Company or any other person
who has the right, contractual or otherwise, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of
the Shares or the right to have any Common Stock or other securities of the
Company included in the Registration Statement the right or, as a result of
the filing of the Registration
15
<PAGE>
Statement, to require the Company to register under the Act any shares of
Common Stock or other securities of the Company, and any registration rights
in connection with the offering contemplated hereby have been waived; and
(xiv) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
In addition, such counsel shall state that (A) although such counsel has
not undertaken, except as otherwise indicated in their opinion, to verify
independently the accuracy, completeness or fairness of the statements in the
Registration Statement and the Prospectus, such counsel has participated in
conferences with representatives of the Company and its accountants and with
representatives of the Underwriters and considered the matters required to be
stated in the Registration Statement and the Prospectus, and nothing has come to
the attention of such counsel that leads it to believe that the Registration
Statement (including the information deemed to be part of the Registration
Statement at the time of effectiveness pursuant to Rule 430A(b), but excluding
the financial statements and footnotes thereto and other financial or
statistical data, as to which such counsel expresses no belief) at the time of
effectiveness thereof, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus as amended or
supplemented (except for the financial statements and footnotes thereto and
other financial or statistical data, as aforesaid), as of its date and as of the
Closing Date or the Option Closing Date, as the case may be, contained or
contains any untrue statement of a material fact or omitted or omits to state
any material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; (B) such counsel does
not know of any material legal or governmental proceedings pending or threatened
required to be described in the Prospectus which are not described as required,
nor of any agreements, contracts, indentures, leases or other documents of a
character required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement which are not described
or filed, as required; and (C) such counsel has no reason to believe that any
Incorporated Documents (other than the financial statements and footnotes
thereto or other financial or statistical data contained in any such
Incorporated Document, as to which such counsel expresses no belief), when they
were filed with the Commission, contained any untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were made
when such documents were so filed, not misleading.
In rendering the foregoing opinion, such counsel may state that they
express no opinion as to the patent and proprietary rights matters covered by
the opinion of Banner & Allegretti, Ltd.
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company as to laws of any jurisdiction other than the United States
or the State of New York or the corporation law of the State of Delaware,
provided that (1) each such local counsel is acceptable to the Representatives,
(2) such reliance is expressly authorized by each opinion so relied upon and a
copy of each such opinion is delivered to the Representatives and is, in form
and substance, satisfactory to them and counsel for the Underwriters and (3)
counsel shall state in their opinion that they believe that they and the
Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of Banner &
Allegretti, Ltd., patent counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters to the effect
that:
16
<PAGE>
(i) to the best knowledge of such counsel, the Company owns or has
obtained licenses for the patents, technology and patent applications
relating to the Intellectual Property described in the Prospectus as being
owned by or licensed to the Company;
(ii) (A) except as described in the Prospectus, such counsel is unaware
of any rights to third parties to any Intellectual Property described in the
Prospectus as being owned by or licensed to the Company or that is necessary
for the conduct of its business; (B) such counsel is unaware of any
infringement in the United States by third parties of any such Intellectual
Property; (C) such counsel is unaware of any pending or threatened action,
suit, proceeding or claim in the United States by others challenging the
rights of the Company in or to such Intellectual Property; (D) such counsel
is unaware of any pending or threatened action, suit, proceeding or claim in
the United States by others challenging the validity or scope of such
Intellectual Property; (E) such counsel is unaware of any pending or
threatened action, suit, proceeding or claim by others that the Company
infringes or otherwise violates any patent, trademark, copyright or trade
secret rights of others; (F) such counsel is unaware of any patent or patent
application in the United States which contains claims that dominate or may
dominate any Intellectual Property described in the Prospectus as being owned
by or licensed to the Company or that is necessary for the conduct of its
business or that interferes with the issued or pending claims of any such
Intellectual Property; and (G) such counsel is unaware of any prior art in
the United States that may render any patent held by the Company invalid or
any patent application held by the Company unpatentable which has not been
disclosed to the U.S. Patent and Trademark Office; and
(iii) the statements in the Prospectus under the captions "Risk
Factors--Patents and Proprietary Technology" and "Business--Patents and
Proprietary Technology" and other references therein to patent and licensing
matters, insofar as such statements constitute a summary of legal matters,
documents or proceedings referred to therein, are accurate and fairly present
the information purported to be shown.
(e) You shall have received on the Closing Date an opinion of Dewey
Ballantine, counsel for the Underwriters, dated the Closing Date and addressed
to you, as Representatives of the several Underwriters, with respect to the
matters referred to in clauses (iv)(B), (iv)(C)(other than sub-clause 2
thereof), (v), (vii), and sub-paragraph (A) of the third to the last paragraph
of the foregoing paragraph (c) and such other related matters as you may
request.
(f) You shall have received letters addressed to you and dated the date
hereof and the Closing Date from KPMG Peat Marwick LLP, independent certified
public accountants, substantially in the forms heretofore approved by you.
(g)(i) There shall not have been any change in the capital stock of the
Company nor any material increase in the short-term or long-term debt of the
Company (other than in the ordinary course of business) from that set forth or
contemplated in the Registration Statement or the Prospectus (or any amendment
or supplement thereto); (ii) there shall not have been, since the respective
dates as of which information is given in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), except as may otherwise be
contemplated by the Registration Statement and Prospectus (or any amendment or
supplement thereto), any material adverse change in the condition (financial or
other), business, prospects, properties, stockholder's equity or results of
operations of the Company; (iii) the Company shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company other than those reflected in or
contemplated by the Registration Statement or the Prospectus (or any amendment
or supplement thereto); and (iv) all the representations and warranties of the
Company contained in this Agreement shall be true and correct in all material
respects on and as of the date hereof and on and as of the
17
<PAGE>
Closing Date as if made on and as of the Closing Date, and you shall have
received a certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company (or such other officers
as are acceptable to you), to the effect set forth in this Section 8(h) and in
Section 8(i) hereof.
(h) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(i) The Shares shall have been listed or approved for listing subject
to notice of issuance on the Nasdaq National Market.
(j) The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have reasonably requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you, as Representatives of the Underwriters, and
counsel for the Underwriters.
Any certificate or document signed by any officer of the Company and
delivered on or prior to the Closing Date to you, as Representatives of the
several Underwriters, or to counsel for the Underwriters, shall be deemed a
representation or warranty by the Company to each Underwriter as to the
statements made therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 8, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (h) and paragraph (k) shall be
dated the Option Closing Date in question and the opinions called for by
paragraphs (c), (d), (e) and (f) shall be revised to reflect the sale of
Additional Shares.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, the Incorporated Documents and all
amendments or supplements to any of them as may be reasonably requested for use
in connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the offering of the Shares; (iv)
the printing (or reproduction) and delivery of this Agreement, the preliminary
and supplemental Blue Sky Memoranda and all other agreements or documents
printed (or reproduced) and delivered in connection with the offering of the
Shares; (v) the listing of the Shares on the Nasdaq National Market; (vi) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states as provided in Section 5(g)
hereof (including the reasonable fees, expenses and disbursements of counsel for
the Underwriters relating to the preparation, printing or reproduction, and
delivery of the preliminary and supplemental Blue Sky Memoranda and such
registration and qualification); (vii) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Company; (viii) the transportation and other expenses incurred
by or on behalf of the Company's
18
<PAGE>
employees in connection with presentations to prospective purchasers of the
Shares; and (ix) the performance by the Company of its other obligations under
this Agreement.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such post-
effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they have agreed to purchase hereunder, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares which the Underwriters are obligated to purchase on the Closing
Date, each non-defaulting Underwriter shall be obligated, severally, in the
proportion which the number of Firm Shares sets forth opposite its name in
Schedule I hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all non-defaulting Underwriters or in such other
proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney, Harris Upham & Co. Incorporated
(predecessor to Smith Barney Inc.), to purchase the Shares which such defaulting
Underwriter or Underwriters agreed, but failed or refused, to purchase. If any
Underwriter or Underwriters shall fail or refuse to purchase Shares which it or
they are obligated to purchased on the Closing Date and the aggregate number of
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares which the Underwriters are obligated to purchase on
the Closing Date and arrangements satisfactory to you and the Company for the
purchase of such Shares by one or more non-defaulting Underwriters or other
party or parties approved by you are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any non-
defaulting Underwriter or the Company. In any such case which does not result
in termination of this Agreement, either you or the Company shall have the right
to postpone the Closing Date, but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any such default of any such Underwriter under this
Agreement. The term "Underwriter" as used in this Agreement includes, for all
purposes of this Agreement, any party not listed in Schedule I hereto who, with
your approval and the approval of the Company, purchases Shares which a
defaulting Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be made by telegram, telecopy,
facsimile or telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange or the Nasdaq National Market shall
have been suspended or materially limited, (ii) a general moratorium on
commercial banking activities in New York shall have been declared by either
federal or state authorities, or (iii) there shall have occurred any material
outbreak or material escalation of hostilities or other international or
domestic calamity, crisis or material change in political, financial or economic
conditions, the effect of which on the financial markets of the United States is
such as to make it, in your judgment, impracticable or inadvisable to commence
19
<PAGE>
or continue the offering of the Shares at the offering price to the public set
forth on the cover page of the Prospectus or to enforce contracts for the resale
of the Shares by the Underwriters. Notice of such termination may be given to
the Company by telegram, telecopy, facsimile or telephone and shall be
subsequently confirmed by letter.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization and passive
market making legends on page two and the statements in the first, third and
last paragraphs under the caption "Underwriting" in any Prepricing Prospectus
and in the Prospectus, constitute the only information relating to the
Underwriters furnished by or on behalf of the Underwriters through you as such
information is referred to in Sections 6(b) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and
11 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at 35 Northeast Industrial Road, Branford, Connecticut 06405,
Attention: Harry H. Penner, Jr., President and Chief Executive Officer, with a
copy to Milbank, Tweed, Hadley & McCloy, 1 Chase Manhattan Plaza, New York, New
York 10005, Attention: Donald B. Brant, Jr., Esq.; or (ii) if to you, care of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention:
Manager, Investment Banking Division, with a copy to Dewey Ballantine, 1301
Avenue of the Americas, New York, New York 10019, Attention: Frederick W.
Kanner, Esq.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers and the
controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term "successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
20
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
Neurogen Corporation
By:______________________________________
Name:
Title:
Confirmed as of the date first
above mentioned.
Smith Barney Inc.
Robertson, Stephens & Company, L.P.
Pacific Growth Equities
As Representatives of the several Underwriters
By Smith Barney Inc.
By:_______________________________________________
Managing Director
21
<PAGE>
SCHEDULE I
NEUROGEN CORPORATION
Number of
Underwriter Firm Shares
----------- -----------
Smith Barney Inc. .....................................
Robertson, Stephens & Company, L.P. ...................
Pacific Growth Equities................................
_________
Total.............................................. 2,500,000
=========
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Neurogen Corporation
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Hartford, Connecticut
August 16, 1995
