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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18311
NEUROGEN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2845714
(State or other jurisdiction of (I.R.S. Employer
Corporation or organization) Identification No.)
35 NORTHEAST INDUSTRIAL ROAD
BRANFORD, CONNECTICUT 06405
(Address of principal executive offices)(Zip Code)
(203) 488-8201
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.025 per share (the "Common Stock")
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The approximate aggregate market value of the Common Stock held by non-
affiliates of the registrant was $326,529,700 as of March 1, 1996, based upon
the closing price of the Common Stock as reported on The Nasdaq National Market
on such date. For purposes of determining this number, shares of Common Stock
held by officers, directors and stockholders whose ownership exceeds five
percent were excluded. This number is provided only for purposes of this report
and does not represent an admission by either the registrant or any such person
as to the status of such person.
As of March 1, 1996, the registrant had 14,042,409 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) The Neurogen Corporation Proxy Statement for the Annual Meeting of
Stockholders to be held on June 4, 1996, is incorporated by reference into
Items 10, 11, 12 and 13 of Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
Neurogen Corporation ("Neurogen" or the "Company") 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 Accelerated Intelligent Drug
Design (AIDD) program, a 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 in excess of $10 billion annually.
The Company was incorporated in Delaware in September 1987 and
commenced operations in July 1988. The Company's executive offices and its
research and development facility are located at 35 Northeast Industrial Road,
Branford, Connecticut 06405. Its telephone number is (203) 488-8201.
BACKGROUND
The human central nervous system (the "CNS") is composed of nerve cells
(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
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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.
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
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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(R), Zoloft(R) and Paxil(R)) which selectively interact with serotonin
(another neurotransmitter) reuptake 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 AIDD program, to enhance its drug
discovery capabilities and to provide new opportunities for strategic
partnerships. Through its AIDD program, the Company is employing biased
combinatorial chemistry methodologies to develop 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
a portion of 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 first two collaborations with Pfizer
(1992 and 1994), 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 (June 1995), in addition to leading the research and discovery
efforts, Neurogen 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. In its third collaboration with Pfizer (November
1995), in addition to retaining similar rights relating to clinical trials and
manufacturing, Neurogen retained an option to earn a portion of the profits, if
any, generated by sales of
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collaboration drugs in to the North American Free Trade Agreement ("NAFTA")
countries by funding a portion of the cost of clinical trials and marketing
in those countries.
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.
ACCELERATED INTELLIGENT DRUG DESIGN
Neurogen's drug discovery technologies have evolved from a traditional
approach of identifying leads from known chemical compounds to developing its
own proprietary libraries of potential compounds through its AIDD program. 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.
In January 1996, Neurogen announced it had integrated its combinatorial
chemistry program and screening capabilities with state-of-the-art automation
and an interactive data system under a program entitled "Accelerated Intelligent
Drug Design" or "AIDD". 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. For example, 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. Applying its AIDD technologies with traditional methodologies,
Neurogen discovered and optimized lead compounds for this program, including NGD
95-1, which entered clinical trials in March 1996.
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 days. Moreover, advances in screening techniques and robotics now
allow the rapid screening of thousands of compounds created through
combinatorial efforts to identify possible new drug candidates.
Most companies with combinatorial chemistry programs have used these
technologies to systematically and randomly 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 AIDD libraries (rather
than randomly generate compounds) toward the selection of molecules
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most likely to interact with receptor families of interest to Neurogen and other
pharmaceutical companies. Neurogen also biases its libraries to create
compounds more likely to have drug-like characteristics such as oral
availability. To bias its libraries, 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
numerous 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.
To date, Neurogen has generated libraries of more than 400,000
compounds in its AIDD program, which, as noted above, has been instrumental in
developing NGD 95-1, and other small molecule drug candidates. The Company
believes that the discovery and development of NGD 95-1 required a fraction of
the time that would have been needed using only 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 Company's collaboration with Schering-Plough.
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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 Phase I Pfizer
receptor clinical (Neurogen royalty)
subtype trials (1)
Eating disorders (NGD 95-1) NPY1 Phase I Pfizer
receptor clinical (Neurogen
trials (1) royalty,
manufacturing and
profit sharing)
Schizophrenia (NGD 94-1 Dopamine D4 Phase I Schering-Plough
and other selective D4 receptor clinical (Neurogen royalty
antagonists) trials (1) and and manufacturing)
preclinical
development
(2)
Schizophrenia (NGD 94-2) Dopamine Preclinical Schering-Plough
D4, D2 development (Neurogen royalty
receptors (2) and manufacturing)
Seizure disorders (ADCI) NMDA Preclinical Neurogen
receptors development (NIH royalty)
(2)
Dementia, cognition GABA Leads Pfizer
deficits receptor identified (3) (Neurogen royalty)
subtype
Insomnia GABA Leads Pfizer
receptor identified (3) (Neurogen royalty)
subtype
Depression NPY2 Discovery (4) Neurogen
receptor
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
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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 its scientists'
understanding of the role which GABA receptor subtypes play in the side effects
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 Collaborative
Research Agreement dated as of January 1, 1992 between the Company and Pfizer
(the "1992 Pfizer Agreement") to research, 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 United States Food and Drug Administration (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 has completed Phase I studies to
determine the minimum blood levels at which NGD 91-1 is effective and that
additional studies to determine the blood levels achieved with an alternate
formulation believed to be longer acting are to be performed. The Company
believes that Pfizer will use the results of these studies to determine whether
to begin Phase II clinical trials. As with all drugs that enter clinical
testing, no assurances can be given that NGD 91-1 or any other collaboration
compound 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."
EATING DISORDERS PROGRAM. Obesity is a major health problem in the
United States. Recent studies indicate that almost one-third of the adult
population fits the criteria for at least moderate
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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.
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 and receptor
modulation, Neurogen believes that a drug which blocks the binding (that is,
acts as an antagonist) of NPY to its receptor subtypes located in the
hypothalamus may have the opposite effect of chronic exposure to NPY and reduce
the desire to eat.
NGD 95-1. Through its AIDD program, Neurogen has identified a number
of antagonists for the NPY1 family of receptors. 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. Neurogen filed an IND with the FDA in December 1995 and commenced
Phase I clinical trials of NGD 95-1 in March 1996. The Company entered into the
Collaborative Research Agreement dated as of November 1, 1995 between the
Company and Pfizer (the "1995 Pfizer Agreement") to develop and commercialize
with Pfizer drugs to treat NPY-mediated disorders, including obesity and eating
disorders. 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
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(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. The Company's
primary and most advanced approach in its psychosis program is the development
of compounds which selectively block the D4 receptor subtype, as described
below. In addition, the Company is pursuing the development of broader acting
compounds. All compounds in the Company's dopamine psychosis program are
subject to the Collaboration and License Agreement dated as of June 28, 1995
between the Company and Schering-Plough (the "Schering-Plough Agreement")
pursuant to which the Company and Schering-Plough aim to develop and
commercialize drugs to treat a variety of dopamine-mediated disorders, including
schizophrenia. See "--Collaborative Research and Licensing Agreements."
D4 Selective Antipsychotics. 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, D2, D3, D4 and D5, have been
discovered which Neurogen believes may be involved in psychosis. Because
elevated D4 receptors have been measured in the autopsied brains of
schizophrenics, Neurogen believes that high levels of D4 receptors may intensify
signals in the brain, thus causing many of the symptoms associated with
schizophrenia. As a result, Neurogen believes that a specific D4 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 and related compounds, which
preclinical research has indicated are potent and highly selective antagonists
for the D4 receptor subtype.
In November 1994, the Company initiated Phase I trials of NGD 94-1
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.
In November 1995, the Company reported that Phase I multiple dosing studies
confirmed that NGD 94-1 is well tolerated across a broad dose range. In the
course of Phase I trials, it was also learned that NGD 94-1 is extensively
metabolized to an active metabolite which is also a highly D4 selective
compound, but which is longer lived than NGD 94-1. The existence of this
metabolite, which is itself being considered as a drug candidate, will require
further preclinical toxicology studies to confirm the safety of the metabolite
across a broad exposure range before NGD 94-1 or the metabolite could advance
into further clinical trials. Neurogen and Schering-Plough
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have accelerated the joint exploration of other highly D4 selective compounds
in Neurogen's portfolio of anti-psychotic drug candidates. Pursuant to the
Schering-Plough Agreement, Schering-Plough has the right to determine when to
advance collaboration compounds in the clinical process, if at all. No
assurance can be given that any collaboration compound 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 the Company's selective D4 compounds are being evaluated
primarily as therapeutic agents, Neurogen is also pursuing their potential for
diagnosing schizophrenic patients. By incorporating a radioisotope in such a
selective compound, it may be able to identify and diagnose potential D4
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 a
greater number of 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
D2, D3 and D4 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 D4 receptor and the D2 receptor,
and other combinations of dopamine antagonists. Neurogen believes that because
of their activity at alternate receptor sites, these drugs, which are currently
in preclinical development or earlier stage research, could potentially be used
to treat a spectrum of disorders associated with schizophrenia.
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.
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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 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 is attempting 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
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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 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 and
the 1995 Pfizer Agreement, the "Pfizer Agreements"). See "--Collaborative
Research and Licensing Agreements."
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. 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. Through its AIDD programs, Neurogen is
currently screening its libraries for appropriate NPY and CRF antagonists.
COLLABORATIVE RESEARCH AND LICENSING AGREEMENTS
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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, in July 1994 and again in November 1995,
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 the Company's Common Stock for $13.8
million. In addition, the Company has received approximately $4.6 million per
year since January 1, 1992 for research and development funding of the Company's
anxiolytic and cognition enhancement programs. The Company will also receive up
to $4.6 million in 1996 for a fifth year of research and development, pursuant
to Pfizer's extension of the research program under the collaboration for one
more year. Neurogen could also receive milestone payments of up to $12.5
million if certain development and regulatory objectives are achieved 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.
In July 1994, Neurogen and Pfizer entered into the 1994 Pfizer
Agreement. Under 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 the Company's 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 $3.8 million had been paid
as of December 31, 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 certain development
and regulatory objectives are achieved 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 each of the first two 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
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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.
In November 1995, Neurogen and Pfizer entered into the 1995 Pfizer
Agreement. Pursuant to this third agreement, Neurogen and Pfizer are
collaborating in the discovery and development of drugs for the treatment of
NPY-mediated disorders, including obesity and eating disorders. Pursuant to the
1995 Pfizer Agreement, Pfizer purchased 750,000 shares of the Company's Common
Stock for approximately $16.5 million and paid Neurogen a license fee of $3.5
million. The Company is entitled, subject to certain conditions, to receive
approximately $7.2 million during the three-year period which commenced November
1, 1995, of which approximately $600,000 had been paid (including $200,000 of
unearned revenues) as of December 31, 1995, for research and development funding
of the Company's eating disorder program and may receive additional research and
development funding of up to $2.4 million per year for two additional one-year
periods depending on whether and the extent to which Pfizer exercises its rights
to extend the research program under the collaboration beyond November 1998.
Neurogen could also receive milestone payments of up to approximately $28
million if certain development and regulatory objectives are achieved regarding
its eating disorder compounds. As part of this third collaboration, Pfizer
received the exclusive worldwide rights to products developed in the
collaboration subject to certain rights retained by Neurogen as described below.
While Pfizer is responsible for later stage clinical trials under this
collaboration, Neurogen will have primary responsibility for the preparation and
filing of INDs and for the conduct the Phase I studies. Pursuant to the 1995
Pfizer Agreement, Neurogen will fund a minority share of early stage development
costs and has retained the right to manufacture any products resulting from the
collaboration for markets in NAFTA countries and has retained a profit sharing
option with respect to future sales in NAFTA countries. If Neurogen exercises
this profit sharing option, it will fund a portion of the cost of late stage
clinical trials and marketing and in return share in any profit generated by
sales of products developed pursuant to the collaboration in NAFTA countries.
If Neurogen chose not to exercise its profit-sharing option, Pfizer would pay
Neurogen royalties on drugs marketed in NAFTA countries and would fund a
majority of early stage and all late stage development and marketing expenses.
In either case, Neurogen would be entitled to royalties on drugs marketed in
non-NAFTA countries.
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 a license fee of $14.0 million for rights relating to Neurogen's
dopamine program and $3.0 million 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 $3.0 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, of which
approximately $2.7 million has been paid has of December 31, 1995 (including
$900,000 of unearned revenues), 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 certain
development and regulatory objectives regarding its
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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.
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 nineteen 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. Three 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
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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 and for NAFTA countries pursuant to 1995 Pfizer 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. 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
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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, developed pursuant to the Schering-Plough Agreement for sales in the United
States and developed pursuant to the 1995 Pfizer Agreement for sales in NAFTA
countries. 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, except for Neurogen's option to
co-market products under the 1995 Pfizer Agreement.
GOVERNMENT REGULATION
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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
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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.
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.
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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 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:
NAME POSITION
---- --------
21
<PAGE>
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
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 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
22
<PAGE>
As of December 31, 1995, the Company had 88 full-time employees,
including 70 scientists and 18 administrative staff members. The Company's
staff includes 26 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.
ITEM 2. 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. In August 1995, the Company
entered into a ten-year lease agreement to lease 24,000 square feet of space,
which is adjacent to the Company's existing research facility and currently used
as a warehouse. Renovations of the new facility to convert it to laboratories
and offices are expected to be completed by the first quarter 1997. The Company
has an option to purchase the facility and to extend the lease for an additional
ten-year period. The Company expects that its expanded facility will
accommodate the anticipated administrative and research needs of the Company for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Neurogen knows of no material litigation or proceeding pending or
threatened to which the Company is, or may become, a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1995, no matter was submitted
to a vote of stockholders.
23
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
Except for historical matters, the matters discussed in this Form 10K are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 or any rules, regulations or releases of the
Securities and Exchange Commission with respect thereto. Forward-looking
statements in this Form 10K include, but are not limited to, statements in Item
1 under the caption "Business - Product Research and Development" with respect
to the Company's various product development programs and statements in Item 7
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" with respect to the sufficiency of the Company's cash
balance to fund planned operations. In addition, the Company may from time to
time make forward-looking statements in the future.
Neurogen wishes to caution readers, and others to whom forward-looking
statements are addressed, that any such forward-looking statements are not
guarantees of future performance and that actual results may differ materially
from estimates in the forward looking statements. In addition to the important
factors described elsewhere in this Form 10K and the Company's other filings
with the Securities and Exchange Commission, the following important factors,
among others, could affect Neurogen's actual future results and could cause such
results to differ materially from estimates expressed in any forward-looking
statements made by, or on behalf of, Neurogen:
. Difficulties or delays in development, testing, regulatory approval,
production and marketing of any of the Company's drug candidates, including
without limitation any unanticipated pre-clinical or clinical delays,
delays in regulatory approvals, the failure to attract or retain scientific
and management personnel, any unexpected adverse side effects or inadequate
therapeutic efficacy which could slow or prevent product development
efforts at any stage of product development by delaying or preventing
clinical trials, delaying or preventing regulatory approval for
commercialization or adversely affecting acceptance by the market.
. Vigorous competition within the Company's anticipated product markets,
including without limitation competition from fully-integrated
pharmaceutical companies with substantially greater capabilities,
experience and resources than the Company.
. Risk that competitors will succeed in developing technologies and
products that are more effective than those of the Company or that are
commercialized prior to similar technologies or products of the Company.
. Neurogen's dependence on its corporate partners with respect to
research and development funding, regulatory filings and manufacturing and
marketing expertise with respect to its most advanced compounds.
. Risk that Neurogen's interest will not coincide with those of its
collaborators with respect to the timing of clinical development of
compounds, the future productions of developed products and strategies with
respect to marketing such products.
. Risk that actual research and development costs may exceed budgeted
amounts for a variety of reasons linked to the uncertainty of product
development in the pharmaceutical industry.
24
<PAGE>
. Inability to obtain sufficient funds through future collaborative
arrangements, equity or debt financings or other sources to continue the
operation of the Company's business which may require the Company to reduce
substantially or eliminate expenditures for product development or to
relinquish rights to certain of its technologies or potential products.
. Risk that the company's patents and confidentiality agreements of the
Company with collaborators, employees, consultants or vendors will not
adequately protect the Company's intellectual property or trade secrets.
. The Company's dependence upon third parties for the manufacture of its
potential products and the Company's inexperience in manufacturing if the
Company establishes internal manufacturing capabilities, each of which
could adversely affect the Company's future profit margins, if any, and its
ability to develop and manufacture products on a timely and competitive
basis.
. Neurogen's dependence on third parties to market potential products and
Neurogen's lack of sales and marketing capabilities, each of which could
adversely affect the success of any sales and marketing efforts for the
Company's products.
. Unavailability or inadequacy of medical insurance or other third-party
reimbursement for the cost of purchases of the Company's products.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Neurogen is traded on The NASDAQ Stock Market under
the symbol NRGN. As of March 1, 1996, there were approximately 450 holders of
record of the Company's common stock. No dividends have been paid on the common
stock to date, and the Company currently intends to retain any earnings for
further development of the Company's business.
The following table sets forth the high and low closing bid prices for
the common stock as reported by NASDAQ.
High Low
---- ---
Fiscal 1995:
-----------
First Quarter............................................ 9 5/8 6 5/8
Second Quarter........................................... 17 9 1/4
Third Quarter............................................ 22 1/4 13 1/2
Fourth Quarter........................................... 27 5/8 18 3/4
Fiscal 1994:
-----------
First Quarter............................................ 9 7
Second Quarter........................................... 9 6 1/2
Third Quarter............................................ 6 7/8 4 3/4
Fourth Quarter........................................... 7 6
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 29,281,964 $ 6,362,460 $ 5,219,636 $ 5,330,828 $ 369,070
Total expenses $ 15,653,442 $13,013,655 $ 9,035,767 $ 6,924,114 $ 5,530,084
Net income (loss) $ 13,353,522 $(6,651,195) $(3,816,131) $(1,593,286) $(5,161,014)
Net income (loss) per
share-primary $ 1.07 $ (.70) $ (.43) $ (.18) $ (.77)
Total assets $104,856,362 $25,889,078 $22,704,168 $27,425,550 $14,695,238
Long-term debt $ 460,075 $ 619,887 $ 791,874 $ 1,265,265 $ 1,687,183
Stockholders' equity $ 98,076,241 $24,080,524 $20,770,672 $24,586,803 $12,064,882
Weighted average number
of shares outstanding 12,479,000 9,528,000 8,962,000 8,752,000 6,675,000
</TABLE>
26
<PAGE>
ITEM 7. 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 drugs. The Company has not derived any revenue from
product sales and, excluding the effect of $14 million in one-time license fees
received from Schering-Plough and $3.5 million in one-time license fees received
from Pfizer in 1995, expects to incur significant losses in most years prior to
deriving any such product revenues. Its revenues to date have come from three
collaborative research agreements entered into with Pfizer, one collaboration
with Schering-Plough, and from interest income.
RESULTS OF OPERATIONS
Results of operations may vary from period to period depending on
numerous factors, including the timing of income earned 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.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
In June and November 1995, the Company received, and recognized as
revenue, $14 million and $3.5 million in one-time license fees in connection
with entering into the Schering-Plough Agreement and the 1995 Pfizer Agreement,
respectively. Due primarily to these license fees, the Company's operating
revenues increased to $26.9 million for the year ended December 31, 1995
compared to $5.8 million in 1994 and $4.6 million in 1993. In addition, research
revenues increased by $3.6 million or 63 percent from 1994 to 1995 and by $1.2
million or 26 percent from 1993 to 1994. These increases are due to the
commencement of the 1994 Pfizer Agreement in the third quarter of 1994, the
Schering-Plough Agreement in the third quarter of 1995 and the 1995 Pfizer
Agreement in the fourth quarter of 1995. Research funding under the 1992 Pfizer
Agreement, which has represented $4.6 million per year for the last four years,
is scheduled to terminate at the end of 1996.
Research and development costs have increased substantially over the
past several years, rising 25 percent to $12.6 million in 1995 compared to 1994
and 57 percent to $10.1 million in 1994 compared to 1993. These increases are
due primarily to expansion of preclinical and clinical testing on the Company's
lead eating disorders and schizophrenia compounds. In addition, in each of these
years the Company has increased the size of its research staff and the amount of
related levels of equipment, materials and supplies. Research and development
costs represented 81 percent, 79
27
<PAGE>
percent and 72 percent of total operating expenses for the years ended
December 31, 1995, 1994 and 1993, respectively.
General and Administrative expenses increased 6 percent to $2.9 million
in 1995 and 12 percent to $2.8 million in 1994 as compared to 1993. The
increases in both years were due primarily to an increase in administrative
activities and the addition of related facilities to support the Company's
expanded research programs.
Other income, consisting primarily of interest income and gains and
losses from invested cash and marketable securities, was $2.3 million, $0.5
million and $0.5 million in 1995, 1994, and 1993, respectively. The increase of
$1.8 million in 1995 compared to 1994 was due primarily to a higher level of
invested funds.
The Company recognized net income of $13.4 million for the year ended
December 31, 1995 as compared with a net loss of $6.7 million in 1994 and a net
loss of $3.8 million in 1993. The change in earnings in 1995 is primarily due to
revenues resulting from the above-noted one-time license fees of $14 million
from Schering-Plough and $3.5 million from Pfizer and the $1.8 million increase
in investment income. The increase in net loss from 1993 to 1994 was due to
increased development and clinical costs of its lead antipsychotic compound,
additional staff and related laboratory supply costs of other non-Pfizer
projects.
In 1994, the Company adopted Financial Accounting Standards Board
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Adoption of SFAS 115 did not have a significant impact
on the Company's financial statements.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123 permits either the recording of the expense
of stock-based compensation over the service period or disclosing in the
footnotes to the financial statements the pro forma effects on net income and
on earnings per share. SFAS 123 will be effective for 1996. The Company
is evaluating the effect of this statement.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995 and 1994, cash, cash equivalents and marketable
securities were in the aggregate $91.6 million and $15.5 million, respectively.
The increase in 1995 was due primarily to the receipt of net proceeds of
approximately $43 million from the August 1995 sale of 2,875,000 shares of
common stock in an underwritten public offering, the receipt of $17 million
(including $3 million of unearned revenue) from Schering-Plough in connection
with entering into the Schering-Plough Agreement and the receipt of $20 million
from Pfizer (including $16.5 million for the sale of 750,000 shares of common
stock and a $3.5 million license fee) in connection with entering into the 1995
Pfizer Agreement. 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, amounts received pursuant to collaborative
arrangements and interest earned on invested funds. The Company's financing
activities include three private placement offerings of its common stock prior
to its initial public offering, underwritten public offerings of the Company's
common stock in 1989, 1991 and 1995, and the private sale of common stock to
Pfizer in connection with entering into the Pfizer Agreements. Total funding
received from these financing activities was approximately $104.9 million. The
Company's expenditures have been primarily to fund research and development and
general and administrative expenses and to construct and equip its research and
development facility.
In the first quarter of 1992, the Company entered into the 1992 Pfizer
Agreement pursuant to which Pfizer made a $13.8 million equity investment in the
Company. Under this agreement, the Company has received or is scheduled to
receive $4.6 million in each year from 1992 through 1996 to fund Neurogen's
research in its anxiolytic (anxiety-reducing drugs) and cognitive enhancer
programs. Neurogen could also receive milestone payments of up to $12.5 million
during the development and regulatory approval of its anxiolytic and cognition
enhancement products. In return, Pfizer received the exclusive rights to
manufacture and market collaboration anxiolytics and cognition enhancers that
act through the family of receptors which interact with the neuro-transmitter
gama-aminobutyric acid, or GABA, and for which it will pay Neurogen royalties
based upon net sales levels, if any, for such products. As of December 31, 1995,
Pfizer had provided $18.4 million of research funding to the Company pursuant to
the 1992 Pfizer Agreement, in addition to its $13.8 million equity investment in
1992.
Neurogen and Pfizer entered into their second collaborative agreement,
the 1994 Pfizer Agreement, in July 1994, pursuant to which Pfizer made an
additional $9.9 million equity investment in the Company. Under this agreement,
the Company has received or is scheduled to receive approximately $7.4 million
during the three-year period which commenced July 1, 1994, to fund Neurogen's
sleep disorder program and may receive up to an additional $2.4 million for a
fourth year should Pfizer exercise its option to extend the research program
under the collaboration. Neurogen could also receive milestone payments of up to
$3.3 million 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
for which it will pay Neurogen royalties depending upon net sales levels, if
any. As of December 31, 1995, Pfizer had provided $3.8 million of research
funding to the Company pursuant to the 1994 Pfizer Agreement, in addition to its
$9.9 million equity investment in 1994.
29
<PAGE>
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 the manufacturing and marketing, if any, of drugs developed from
the collaborations.
Neurogen and Pfizer entered into their third collaborative agreement,
the 1995 Pfizer Agreement, in November 1995, pursuant to which Pfizer made an
additional $16.5 million equity investment in the Company and paid a $3.5
million license fee. The Company has received or is scheduled to receive
approximately $7.2 million during the three-year period which commenced November
1, 1995, to fund Neurogen's neuropeptide Y (NPY) eating disorders program and
may receive up to an additional $2.4 million per year for a fourth and fifth
year should Pfizer exercise its option to extend the research program under the
collaboration. Neurogen could also receive milestone payments of up to
approximately $28 million during the development and regulatory approval of
products under the collaboration. As of December 31, 1995, Pfizer had provided
$600,000 in research funding (including $200,000 in unearned revenues) pursuant
to the 1995 Pfizer Agreement. As part of this third collaboration, Pfizer
received the exclusive worldwide rights to manufacture and market NPY-based
collaboration compounds, subject to certain rights retained by Neurogen.
Pursuant to the 1995 Pfizer Agreement, Neurogen will fund a minority share of
early stage development costs and has retained the right to manufacture any
collaboration products in NAFTA countries and has retained a profit sharing
option with respect to product sales in NAFTA countries. If Neurogen exercises
the profit sharing option, it will fund a portion of the cost of late stage
clinical trials and marketing costs and in return receive a specified percentage
of any profit generated by sales of collaboration products in NAFTA countries.
If Neurogen chooses not to exercise its profit-sharing option, Pfizer would pay
Neurogen royalties on drugs marketed in NAFTA countries and would fund a
majority of early stage and all late stage development and marketing expenses.
In either case Neurogen would be entitled to royalties on drugs marketed in non-
NAFTA countries.
In June 1995, Neurogen and Schering-Plough entered into the Schering-
Plough Agreement to collaborate in the discovery and development of drugs for
the treatment of schizophrenia and 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 million for rights relating to
Neurogen's dopamine program and $3 million 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 million in 1996 for the
right to test additional libraries. Neurogen expects 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 dopamine program. The Company
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 research
program under the collaboration. Neurogen could also receive milestone payments
of up to approximately $32 million if certain development and regulatory
objectives are achieved 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, and an option to
manufacture products for the United States market. As of December 31, 1995,
Schering-Plough had provided $2.7 million in research funding (including
$900,000 in unearned revenue) pursuant to the Schering-Plough Agreement. 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.
30
<PAGE>
The Company plans to use its cash balance for its research and
development activities, working capital and general corporate purposes. Neurogen
anticipates that its current cash balance, 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 1999. However,
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 may
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, 1995, the Company had approximately $12,240,000 of
net operating loss carryforwards available for federal income tax purposes which
expire from the years 2003 through 2009. The Company had approximately
$10,670,000 of Connecticut state tax net operating loss carryforwards as of
December 31, 1995 which expire in the years 1996 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Balance Sheets at December 31, 1995 and 1994 32
Statements of Operations for the years ended December 31, 1995
1994 and 1993. 33
Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 34
Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993 35
Notes to Financial Statements 36
Independent Auditors' Report 49
</TABLE>
31
<PAGE>
BALANCE SHEETS
Neurogen Corporation
- --------------------------------------------------------------------------------
December 31 1995 1994
- --------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 26,004,548 $ 9,439,727
Marketable securities - short term 39,881,172 6,040,434
Other current assets 1,517,543 398,542
------------ ------------
Total current assets 67,403,263 15,878,703
Marketable securities - long term 25,731,798 -
Property, plant & equipment (note 3)
Land 425,000 425,000
Building 8,415,766 8,379,703
Equipment 4,071,650 2,297,728
Furniture 166,072 110,668
Construction in progress 293,911 -
Equipment and furniture under capital lease - 1,200,000
------------ ------------
13,372,399 12,413,099
Less accumulated depreciation 2,146,482 2,588,476
------------ ------------
Net property, plant and equipment 11,225,917 9,824,623
------------ ------------
Other assets, net 495,384 185,752
------------ ------------
$104,856,362 $ 25,889,078
Liabilities and Stockholders' Equity
Current Liabilities:
Accrued expenses (note 9) $ 1,997,647 $ 949,717
Unearned revenue from corporate
partners (note 2) 4,100,000 -
Current portion of mortgage payable (note 3) 159,812 141,125
Current portion of capital lease obligation - 30,863
------------ ------------
Total current liabilities 6,257,459 1,121,705
Mortgage payable, excluding current
portion (note 3) 460,075 619,887
Other compensation 62,587 62,587
Deferred gain on sale of assets - 4,375
------------ ------------
Total liabilities 6,780,121 1,808,554
============ ============
Stockholders' equity (notes 2, 4, and 6)
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 13,949,064 shares in 1995
and 10,082,763 in 1994 348,727 252,069
Additional paid-in capital 106,039,959 45,607,590
Accumulated deficit (8,412,660) (21,766,182)
Unrealized gain (loss) on marketable
securities 100,215 (12,953)
------------ ------------
Total stocholders' equity 98,076,241 24,080,524
============ ============
$104,856,362 $ 25,889,078
See accompanying notes to financial statements
32
<PAGE>
STATEMENTS OF OPERATIONS
Neurogen Corporation
- --------------------------------------------------------------------------------
For the Year Ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
Operating revenues (note 2):
License fees $17,500,000 -- --
Research revenues 9,428,667 $5,789,333 $ 4,604,524
----------- ------------ -----------
Total operating revenues 26,928,667 5,789,333 4,604,524
Operating expenses:
Research and development 12,646,189 10,149,633 6,451,876
General and administrative 2,938,525 2,774,380 2,474,647
----------- ------------- -----------
Total operating expenses 15,584,714 12,924,013 8,926,523
Other income (expenses):
Investment income 2,353,297 573,127 615,112
Interest expense (68,728) (89,642) (109,244)
----------- ------------- -----------
Total other income, net 2,284,569 483,485 505,868
Income (loss) before provision for
income taxes $13,628,522 ($6,651,195) ($3,816,131)
Provision for income taxes 275,000 - -
----------- ------------- -----------
Net income (loss) $13,353,522 ($6,651,195) ($3,816,131)
=========== ============= ===========
Earnings (loss) per share:
Primary $1.07 ($ .70) ($ .43)
----------- ------------- -----------
Fully diluted $1.04 -- --
----------- ------------- -----------
Shares used in calculation of
earnings (loss) per share:
Primary 12,479,000 9,528,000 8,962,000
----------- ------------- -----------
Fully diluted 12,868,000 -- --
----------- ------------- -----------
See accompanying notes to financial statements
33
<PAGE>
Neurogen Corporation STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended Common Stock
--------------------- Additional Unrealized
December 31, 1995, 1994 and 1993 Shares Paid-in Accumulated gain (loss) on
Issued Amount Capital Deficit Marketable Securities Total
- -------------------------------- ---------- --------- ------------ ------------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 8,961,763 $ 224,044 $ 35,661,615 $ (11,298,856) $ - $ 24,586,803
Net Loss - - - (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
to Pfizer, Inc 1,096,000 27,400 9,836,600 - - 9,864,000
Exercise of warrants 25,000 625 109,375 - - 110,000
Net Loss - - - (6,651,195) - (6,651,195)
Unrealized loss on invested cash
and 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
Issuance of shares for cash
to Pfizer, Inc 750,000 18,750 16,481,250 - - 16,500,000
Issuance of shares for cash
in public offering 2,875,000 71,875 42,782,665 - - 42,854,540
Exercise of stock options 241,301 6,033 1,110,454 - - 1,116,487
Net Income - - - 13,353,522 - 13,353,522
Tax benefit relating to stock
option exercise - - 58,000 - - 58,000
Unrealized gain on invested cash
and marketable securities - - - - 113,168 113,168
---------- --------- ------------ ------------- --------------------- -------------
Balance at December 31, 1995 13,949,064 $348,727 $106,039,959 $ (8,412,660) $ 100,215 $ 98,076,241
---------- --------- ------------ ------------- --------------------- -------------
</TABLE>
See accompanying notes to financial statements
34
<PAGE>
Neurogen Corporation STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31 1995 1994 1993
- -------------------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $13,353,522 $(6,651,195) $ (3,816,131)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 779,883 889,307 877,944
Unrealized loss on invested cash and marketable securities - 76,209 -
Net (gain) loss on sale of assets 3,053 (26,250) (16,815)
Changes in operating assets and liabilities:
Increase (decrease) in accrued expenses 1,105,930 394,698 (457,084)
Increase in unearned revenue from corporate partners 4,100,000 - -
(Increase) decrease in other current assets (1,119,001) (198,978) 29,387
Increase in other assets, net (325,938) (131,783) (64,015)
----------- ----------- ------------
Net cash provided by (used in) operating activities 17,897,449 (5,647,992) (3,446,714)
=========== =========== ============
Cash flows from investing activities:
Purchase of plant and equipment (2,172,300) (589,067) (3,075,347)
Purchases of marketable securities (79,513,712) (14,957,765) (21,515,226)
Maturities and sales of marketable securities 20,054,346 14,749,954 18,839,865
----------- ----------- ------------
Net cash used in investing activities (61,631,666) (796,878) (5,750,708)
=========== =========== ============
Cash flows from financing activities:
Proceeds from sales of common stock, net 59,354,540 9,864,000 -
Exercise of stock options 1,116,486 - -
Exercise of warrants - 90,000 -
Principal payments under mortgage payable (141,125) (124,622) (110,050)
Principal payments under capital lease
obligations (30,863) (348,768) (311,867)
----------- ------------ ------------
Net cash provided by (used in) financing
activities 60,299,038 9,480,610 (421,917)
=========== =========== ============
Net increase (decrease) in cash and cash equivalents 16,564,821 3,035,740 (9,619,339)
Cash and cash equivalents at beginning of year 9,439,727 6,403,987 16,023,326
Cash and cash equivalents at end of year $26,004,548 $9,439,727 $6,403,987
=========== =========== ============
</TABLE>
See accompanying notes to financial statements
35
<PAGE>
NEUROGEN CORPORATION NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT BUSINESS Neurogen Corporation ( "Neurogen" or
ACCOUNTING POLICIES the "Company") is an emerging
neuropharmaceuticals Company engaged in the
discovery and development of drugs. Neurogen's
strategy is to discover and develop drugs which
modulate communications between cells in such a
way as to avoid or minimize the negative side
effects typically associated with many currently
prescribed medications. The Company has not
derived any revenue from product sales to date.
USE OF ESTIMATES The preparation of
financial statements in conformity with generally
accepted accounting principles requires management
to make estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at
the date of the financial statements and the
reported amounts of revenues and expenses during
the reporting period. Actual results could differ
from those estimates.
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 is furniture and equipment
leased under a capitalized lease of $1,200,000
with related accumulated depreciation of
$1,150,000. The lease expired in 1995 at which
time the Company exercised its option to purchase
the equipment.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist primarily of debt
securities with a maturity from date of purchase
of three months or less. The carrying values of
cash equivalents at December 31, 1995 and 1994
were approximately $25,710,000 and $9,291,000,
respectively.
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
invested cash and 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 was approximately
$76,000.
In the fourth quarter of 1994, the Company
transferred invested cash and marketable
securities from the trading category to the
available
36
<PAGE>
for sale category and for that quarter
recorded a $13,000 unrealized loss as a separate
component of stockholders' equity. During the
fourth quarter of 1994, the Company received
proceeds from maturities and 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, 1995 consist of debt securities with
maturities of three months to five years. The
aggregate cost of marketable securities at
December 31, 1995 and 1994 was approximately
$65,580,000 and $6,138,000, respectively. The
Company recognized gross realized gains of $96,000
and $6,000 in 1995 and 1994, respectively. Gross
realized losses were $65,000 and $87,000 in 1995
and 1994, respectively.
REVENUE RECOGNITION Payments under corporate
partner agreements are recorded as earned based on
the performance requirements of the agreements,
while related costs are expensed as incurred.
EARNINGS (LOSS) PER SHARE Primary earnings
(loss) per share are based on the weighted average
number of shares outstanding during the year and
the assumed exercise of dilutive stock options and
warrants, if any, less the number of treasury
shares assumed to be purchased from the proceeds
using the average market price during the
relevant period of the Company's common stock.
Fully diluted earnings per share is calculated in
the same manner, but utilizes the closing price at
the end of a period rather than the average price.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's
invested cash and marketable securities
approximate fair value as estimated based on
quoted market prices. The carrying value of long
term debt approximates its fair value based upon
currently available debt instruments having
similar interest rates and maturities. The
carrying amounts of the Company's other
financial instruments approximate their fair
value.
37
<PAGE>
2. CORPORATE PARTNER In 1992, the Company entered into a
AGREEMENTS 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 has received an aggregate of
$18,400,000 and expects to receive an additional
$4,600,000 in 1996 for research and development
funding of the Company's anxiolytic and cognitive
enhancer projects. Neurogen could also receive
additional milestone payments totaling $12,500,000
during the development and regulatory approval of
collaboration 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 1995, 1994 and 1993, Neurogen received
approximately $4,600,000 in research funding,
which approximates the collaboration research
costs it incurred in such years.
The Company entered into its second
collaborative agreement (the "1994 Pfizer
Agreement") with Pfizer in June 1994 pursuant to
which Pfizer made an additional equity investment
in the Company of $9,864,000. Pursuant to the
1994 Pfizer Agreement, the Company has received or
is scheduled to receive an aggregate of
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. The Company may also receive
additional funding of $2,379,000 for a fourth year
should Pfizer exercise its option to extend the
research program under this collaboration.
Neurogen could also receive additional milestone
payments totaling $3,250,000 during the
development and regulatory approval of
collaboration compounds. As part of the 1994
Pfizer Agreement, 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 each of 1995 and
1994 the Company received and earned research
funding of $2,629,000 and $1,189,000,
respectively, which approximates the collaboration
research costs it incurred in such years under the
second collaboration.
Neurogen and Pfizer entered into their third
collaborative agreement (the "1995 Pfizer
Agreement") in November 1995, pursuant to which
Pfizer paid $3,500,000 in one-time license fees
and made an additional equity investment in the
Company of $16,500,000, bringing Pfizer's
ownership of the Company's common stock up to 21%.
Under such agreement, the Company has received or
is scheduled to receive an aggregate of
approximately $7,200,000 during the three-year
period which commenced November 1, 1995, to fund
Neurogen's neuropeptide Y (NPY) eating disorders
program and may receive up to $2,400,000 per year
for two additional one-
38
<PAGE>
year periods, should Pfizer exercise its option
to extend the research program under the
collaboration. Neurogen could also
receive milestone payments of up to approximately
$28 million during the development and regulatory
approval of products under the collaboration. As
part of this third collaboration, Pfizer received
the exclusive worldwide rights to manufacture and
market NPY-based collaboration compounds, subject
to certain rights retained by Neurogen. Pursuant
to the 1995 Pfizer Agreement, Neurogen will fund a
minority share of early stage development costs
and has retained the right to manufacture any
collaboration products in NAFTA countries and has
retained a profit sharing option with respect to
product sales in NAFTA countries. If Neurogen
exercises the profit sharing option, it will fund
a portion of the cost of late stage clinical
trials and marketing costs and in return receive a
share of any profit generated by sales of
collaboration products in NAFTA countries. If
Neurogen chooses not to exercise its profit
sharing option, Pfizer would pay Neurogen
royalties on drugs marketed in NAFTA countries and
would fund a majority of early stage and all late
stage development and marketing expenses. In
either case Neurogen would be entitled to
royalties on drugs marketed in non-NAFTA
countries. As of December 31, 1995 Neurogen had
received $600,000 under the 1995 Pfizer Agreement,
of which $400,000 was recorded as revenue and
$200,000 as unearned revenue.
In June 1995, Neurogen and Schering
Corporation and Schering-Plough Ltd. (together,
"Schering-Plough") entered into an Agreement (the
"Schering-Plough Agreement") to collaborate in the
discovery and development of drugs for the
treatment of schizophrenia and 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 in exchange for rights
relating to Neurogen's dopamine program and
$3,000,000 (which was included in unearned
revenues at December 31, 1995) 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. Neurogen expects to receive
approximately $7,200,000 during the two-year
period which commenced June 28, 1995, of which
$2,700,000 had been received and $1,800,000
recognized as revenue as of December 31, 1995, for
research and development funding of the Company's
dopamine 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 research program under the
collaboration. Neurogen could also receive
milestone payments of up to approximately
$32,000,000 if certain development and regulatory
objectives are achieved regarding its products
subject to
39
<PAGE>
the Schering-Plough Agreement. 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, and an option to manufacture products for the
United States market.
40
<PAGE>
3. LONG-TERM DEBT AND At December 31, 1995, the Company had a $619,887
LEASE OBLIGATIONS 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, 1995, the
prime rate was 8.5%.
Aggregate annual principal payments
applicable to the mortgage payable for the years
subsequent to December 31, 1995 are:
1996 $ 159,812
1997 180,974
1998 204,937
1999 74,164
---------
$ 619,887
In the third quarter of 1995, the Company
entered into a ten year operating lease agreement
to lease 24,000 square feet of space in a building
adjacent to the Company's existing research
facility. The Company has a renewal option to
extend the lease for an additional ten year
period. The Company may also exercise an option
to purchase the building after the sixth year of
the lease. The Company anticipates that the
renovation of the leased facility into laboratory
and office space will be completed by or near the
end of 1996. Rent expense for 1995 totaled
$15,969.
Future minimum rental lease payments
subsequent to December 31, 1995 are:
1996 $ 126,000
1997 126,000
1998 126,000
1999 126,000
2000 130,200
Thereafter 730,800
-----------
Total minimum lease payments $1,365,000
4. STOCK OPTIONS AND The Neurogen Corporation Stock Option
WARRANTS Plan (the "Plan") originally adopted
in 1988 and amended in 1992, provided
for the issuance of incentive
and non-qualified stock options for up to
1,200,000 shares of common stock.
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
41
<PAGE>
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 Company's shareholders
approved its 1993 Omnibus Incentive Plan which
makes a total of 3,000,000 shares available for
grant and its 1993 Non-Employee Directors Stock
Option Program which makes a total of 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>
SHARES OPTION PRICE
<S> <C> <C> <C> <C>
Outstanding at December 31, 1992 668,450 $2.38 - 13.00
Granted 1,240,525 6.00 - 8.38
Canceled (423,250) 3.38 - 13.00
---------
Outstanding at December 31, 1993 1,485,725 2.38 - 13.00
Granted 530,250 5.38 - 9.00
Canceled (13,890) 3.38 - 6.50
---------
Outstanding at December 31, 1994 2,002,085 2.38 - 13.00
Granted 748,152 6.50 - 26.88
Exercised (241,301) 2.38 - 9.00
Canceled (31,287) 2.38 - 6.50
---------
Outstanding at December 31, 1995 2,477,649 2.38 - 26.88
---------
</TABLE>
At December 31, 1995, 882,981 options were
exercisable at prices ranging from $2.38 - $13.00.
As of December 31, 1995, a total of 47,058
shares of common stock were issuable under
outstanding warrants. Such warrants were issued
to a prior lessor in connection with a sale and
lease back of certain of the Company's furniture
and equipment and expire in the year 2001.
During the year ended December 31, 1994,
warrants to purchase 25,000 shares of common stock
were exercised at an average price of $3.60 per
share and deferred compensation of $20,000 was
credited to additional paid in capital.
In February 1995, the Board of Directors
approved the conversion of 112,000 warrants
granted to the Company's scientific advisory board
at $6.50 per share to options under the 1993
Omnibus Incentive Plan. The new options have
substantially the same terms as the warrants which
they replaced and are included in the table above
as options granted.
42
<PAGE>
The Financial Accounting Standards Board
recently issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123 permits
either the recording of the expense of stock-based
compensation over the service period or disclosing
in the footnotes to the financial statements, the
pro forma effects on net income and earnings per
share. SFAS 123 will be effective for 1996. The
Company is evaluating the effect of this
statement.
43
<PAGE>
5. INCOME TAXES Total current income tax expenses (benefits) for
the year ended December 31, 1995
were allocated as follows:
Income from continuing operations $275,000
Stockholders' equity, for
compensation expense for tax
purposes in excess of amounts
recognized for financial
reporting purposes (58,000)
--------
$217,000
--------
The difference between the Company's "expected"
tax expense (benefit), as computed by applying the
U.S. federal corporate tax rate of 34% to income
(loss) before provision for income taxes, and
actual tax is reconciled below:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ------------ -----------
<S> <C> <C> <C>
Expected tax expense
(benefit) at 34% $4,633,697 $(2,945,421) $(1,297,484)
State tax expense (benefit)
net of federal benefit 1,035,768 (504,826) (289,644)
Change in beginning of
year balance of the
valuation allowance
for deferred tax assets
allocated to income
tax expense (5,940,056) 3,450,247 1,587,128
R&D credit (136,000) - -
Adjustment for state tax
rate 677,195 - -
Nondeductible expense 4,396 -
---------- ---------- -----------
$ 275,000 $ - $ -
---------- ---------- -----------
</TABLE>
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.
44
<PAGE>
The tax effect of temporary differences that
give rise to significant portions of the deferred
tax assets and deferred tax liabilities at
December 31, 1995 and 1994, are presented below:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred compensation $ 26,036 $ 26,036
Contribution carryforward 46,249 46,249
Research & development credit 640,555 490,957
Alternative minimum tax credit
carryover 274,957 -
Federal tax operating loss
carryforwards 4,163,437 7,679,462
State tax operating loss carryforwards 810,700 2,386,555
Other miscellaneous 117,805 58,327
----------- -----------
Gross deferred asset 6,079,739 10,687,586
Valuation allowance (5,652,065) (10,389,107)
----------- ----------
Net deferred asset 427,674 298,479
----------- -----------
DEFERRED TAX LIABILITY:
Depreciation (427,674) (298,479)
----------- -----------
Net asset/liability $ - $ -
----------- -----------
</TABLE>
A valuation allowance in the amount of $5,652,065
and $10,389,107 has been established at December
31, 1995 and 1994, 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.
Any subsequently recognized tax benefits relating
to the valuation allowance for deferred tax assets
as of December 31, 1995 would be allocated as
follows:
<TABLE>
<CAPTION>
<S> <C>
Income tax benefit that would be
reported in the statement of
operations $4,391,214
Additional paid-in capital 1,260,851
----------
$5,652,065
----------
</TABLE>
As of December 31, 1995, the Company had
approximately $12,240,000 of net operating loss
carryforwards available for federal income tax
purposes which expire in the years 2003 through
2009. The Company also had approximately
$10,670,000 of Connecticut state tax operating
loss carryforwards as of December 31, 1995 which
expire in the years 1996 through 1999. Because of
"change in
45
<PAGE>
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.
46
<PAGE>
6. 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 consulting
services to the Company for a minimum of 15 days
per year. The agreements expire in July 1998. The
Company paid $120,000 under these agreements in
each of 1995 and 1994.
The Company has granted Pfizer certain
registration rights with respect to 2,846,000
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 to Allen & Company Incorporated and certain
other persons in connection with the purchase of
1,131,583 shares of Common Stock from a prior
stockholder in 1994.
The Company has also granted certain registration
rights to a prior 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 warrants held by such lessor.
47
<PAGE>
7. 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. 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 $49,000 in
1995, $36,000 in 1994 and $29,000 in 1993.
The Company has made loans to certain officers
subject to various compensation agreements. The
loans will be forgiven and recognized as
compensation expense ratably over service periods
of five to seven years. The amount of loans
outstanding at December 31, 1995 was $478,000.
8. SUPPLEMENTAL CASH The Company made interest payments of
INFORMATION approximately $69,000 in 1995, $90,000 in 1994
and $109,000 in 1993. The Company made income tax
payments of $256,000 in 1995.
9. ACCRUED EXPENSES Accrued expenses at December 31 are summarized as
follows:
<TABLE>
<CAPTION>
---------- --------
1995 1994
---------- --------
<S> <C> <C>
Accrued compensation $ 716,282 $323,995
Accounts payable 1,281,365 625,722
---------- --------
$1,997,647 $949,717
</TABLE>
48
<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, 1995 and 1994, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 12, 1996
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has not been any change of accountants or any disagreements with
the Company's accountants on any matter of accounting practice or financial
disclosure in the last fiscal year.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information relating to directors and executive officers of the
Company, reference is made to pages 2 through 5 and 8 through 12 of the
Company's Proxy Statement delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held on June 4, 1996, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information relating to executive compensation, reference is made to
pages 8 through 12 of the Company's Proxy Statement delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on June 4, 1996,
which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information relating to the security ownership of certain beneficial
owners and management, reference is made to pages 6 and 7 of the Company's Proxy
Statement delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 4, 1996, which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information relating to certain relationships and related transactions,
reference is made to page 5 and pages 8 through 12 of the Company's Proxy
Statement delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 4, 1996, which information is incorporated
herein by reference.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Reference is made to the Index to Financial Statements under Item 8
Part II hereof, where these documents are listed.
(2) Financial Statement Schedule
The Schedule supporting the Financial Statements which is filed as
part of this report on Form 10-K are as follows:
Independent Auditor's Report
Schedule II - Valuation and Qualifying Accounts
NOTE: Schedules other than that listed above are omitted as not
applicable, not required, or the information is included in the financial
statements or notes thereto.
(3) Executive Compensation Plans and Arrangements
The following executive compensation plans or arrangements are required
to be filed, and are filed, as exhibits to this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 - Neurogen Corporation Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.1 to the
Company's Form 10-K for the fiscal year ended December 31,
1991).
10.2 - Form of Stock Option Agreement currently used in connection
with the grant of options under Neurogen Corporation Stock
Option Plan (incorporated by reference to Exhibit 10.2 to
the Company's Form 10-K for the fiscal year ended December
31, 1992).
10.3 - Neurogen Corporation 1993 Omnibus Incentive Plan, as amended
(incorporated by reference to Exhibit 10.3 to the
Company's Form 10-K for the fiscal year ended December 31,
1993).
10.4 - Form of Stock Option Agreement currently used in connection
with the grant of options under Neurogen Corporation 1993
Omnibus Incentive Plan (incorporated by reference to
Exhibit 10.4 to the Company's Form 10-K for the fiscal
year ended December 31, 1993).
51
<PAGE>
10.5 - Neurogen Corporation 1993 Non-Employee Directors Stock
Option Program (incorporated by reference to Exhibit 10.5
to the Company's Form 10-K for the fiscal year ended
December 31, 1993).
10.6 - Form of Stock Option Agreement currently used in connection
with the grant of options under Neurogen Corporation 1993
Non-Employee Directors Stock Option Program (incorporated
by reference to Exhibit 10.6 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.7 - Employment Contract between the Company and Harry H. Penner,
Jr., dated as of October 12, 1993 (incorporated by
reference to Exhibit 10.7 to the Company's Form 10-K for
the fiscal year ended December 31, 1993).
10.8. - Employment Contract between the Company and John F. Tallman,
dated as of December 1, 1993 (incorporated by reference to
Exhibit 10.25 to the Company's Form 10-Q for the quarterly
period ended September 30, 1994).
52
<PAGE>
(4) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 - Restated Certificate of Incorporation, filed June 17,
1994.
3.2 - 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).
10.1 - Neurogen Corporation Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.1 to the
Company's Form 10-K for the fiscal year ended December
31, 1991).
10.2 - Form of Stock Option Agreement currently used in
connection with the grant of options under Neurogen
Corporation Stock Option Plan (incorporated by reference
to Exhibit 10.2 to the Company's Form 10-K for the fiscal
year ended December 31, 1992).
10.3 - Neurogen Corporation 1993 Omnibus Incentive Plan, as
amended (incorporated by reference to Exhibit 10.3 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.4 - Form of Stock Option Agreement currently used in
connection with the grant of options under Neurogen
Corporation 1993 Omnibus Incentive Plan (incorporated by
reference to Exhibit 10.4 to the Company's Form 10-K for
the fiscal year ended December 31, 1993).
10.5 - Neurogen Corporation 1993 Non-Employee Directors Stock
Option Program (incorporated by reference to Exhibit 10.5
to the Company's Form 10-K for the fiscal year ended
December 31, 1993).
10.6 - Form of Stock Option Agreement currently used in
connection with the grant of options under Neurogen
Corporation 1993 Non-Employee Directors Stock Option
Program (incorporated by reference to Exhibit 10.6 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.7 - Employment Contract between the Company and Harry H.
Penner, Jr., dated as of October 12, 1993 (incorporated
by reference to Exhibit 10.7 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.8 - Employment Contract between the Company and John F.
Tallman, dated as of December 1, 1993 (incorporated by
reference to Exhibit 10.25 to the Company's Form 10-Q for
the quarterly period ended September 30, 1994).
10.9 - Open-End Mortgage Deed and Security Agreement between the
Company and Orion Machinery & Engineering Corp., dated
March 16, 1989
53
<PAGE>
(incorporated by reference to Exhibit 10.15 to
Registration Statement No. 33-29709 on Form S-1).
10.10 - Form of Proprietary Information and Inventions Agreement
(incorporated by reference to Exhibit 10.31 to
Registration Statement No. 33-29709 on Form S-1).
10.11 - Warrant to Purchase 47,058 Shares of Common Stock to
MMC/GATX Partnership No. I, dated February 20, 1991
(incorporated by reference to Exhibit 10.34 to the
Company's Form 10-K for the fiscal year ended
December 31, 1990).
10.12 - Collaborative Research Agreement and License and Royalty
Agreement between the Company and Pfizer Inc, dated as of
January 1, 1992 (confidential treatment requested)
(incorporated by reference to Exhibit 10.35 to the
Company's Form 10-K for the fiscal year ended December
31, 1991).
10.13 - License Agreement between the Company and the National
Technical Information Service, dated as of January 1,
1992 (incorporated by reference to Exhibit 10.36 to the
Company's Form 10-K for the fiscal year ended December
31, 1991).
10.14 - Cooperative Research and Development Agreement between
the Company and the National Institutes of Health, dated
as of January 21, 1993 (incorporated by reference to
Exhibit 10.37 to the Company's Form 10-K for the fiscal
year ended December 31, 1991).
10.15 - Letter Agreement between the Company and Barry M. Bloom,
dated January 12, 1994 (incorporated by reference to
Exhibit 10.25 to the Company's Form 10-K for the fiscal
year ended December 31, 1993).
10.16 - Letter Agreement between the Company and Robert H. Roth,
dated April 14, 1994 (incorporated by reference to
Exhibit 10.26 to the Company's Form 10-K for the fiscal
year ended December 31, 1994).
10.17 - Collaborative Research Agreement and License and Royalty
Agreement between the Company and Pfizer Inc, dated as of
July 1, 1994 (confidential treatment requested)
(incorporated by reference of Exhibit 10.1 to the
Company's Form 10-Q for the quarterly period ended June
30, 1994).
10.18 - Stock Purchase Agreement between the Company and Pfizer
dated as of July 1, 1994 (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended June 30, 1994).
10.19 - Registration Rights and Standstill Agreement among the
Company and the Persons and Entities listed on Schedule I
thereto, dated as of July 11, 1994
54
<PAGE>
(incorporated by reference to Exhibit 10.29 to the
Company's Form 10-Q for the quarterly period ended
September 30, 1994).
10.20 - Collaboration and License Agreement and Screening
Agreement between the Company and Schering-Plough
Corporation (confidential treatment requested)
(incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K dated July 28, 1995)
10.21 - Lease Agreement between the Company and Commercial
Building Associates dated as of August 30, 1995
(incorporated by reference to Exhibit 10.27 to the
Company's Form 10-Q for the quarterly period ended
September 30, 1995).
10.22 - Collaborative Research Agreement between the Company and
Pfizer dated as of November 1, 1995 (confidential
treatment requested) (incorporated by reference to
Exhibit 10.1 of the Company's Form 8-K dated
November 1, 1995)
10.23 - Development and Commercialization Agreement between the
Company and Pfizer dated as of November 1, 1995
(confidential treatment requested) (incorporated by
reference to Exhibit 10.2 of the Company's Form 8-K dated
November 1, 1995)
10.24 - Stock Purchase Agreement between the Company and Pfizer
dated as of November 1, 1995 (incorporated by reference
to Exhibit 10.3 of the Company's Form 8-K dated November
1, 1995)
11.1 - Computation of Earnings per Common Share.
24.1 - Consent of KPMG Peat Marwick LLP, Independent Auditors.
25.1 - Powers of Attorney of Frank C. Carlucci, Robert H. Roth,
John Simon, John F. Tallman, Robert M. Gardiner, Robert
N. Butler, Jeffrey J. Collinson, Richard D. Harrison,
Mark Novitch and Barry M. Bloom.
99.1 - Proxy Statement for the Annual Meeting of Stockholders to
be held on June 4, 1996 (to be filed with the Commission
before April 29, 1996).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the fourth quarter of fiscal year 1995.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NEUROGEN CORPORATION
By: /s/ HARRY H. PENNER, JR.
-----------------------------
Harry H. Penner, Jr.
President and Chief Executive Officer
Date: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------- ----- --------------
<S> <C> <C>
* Chairman of the Board and Director March 29, 1996
- -------------------------------
Frank C. Carlucci
/s/ HARRY H. PENNER, JR. President, Chief Executive Officer and March 29, 1996
- -------------------------------
Harry H. Penner, Jr. Director (Principal Executive Officer)
* Executive Vice President, Secretary and Director March 29, 1996
- -------------------------------
John F. Tallman, Ph.D.
/s/ STEPHEN R. DAVIS Vice President-Finance, Chief Financial March 29, 1996
- ------------------------------- Officer and Treasurer
Stephen R. Davis (Principal Financial and Accounting Officer)
* Director March 29, 1996
- -------------------------------
Robert H. Roth, Ph.D.
* Director March 29, 1996
- -------------------------------
Jeffrey J. Collinson
* Director March 29, 1996
- -------------------------------
John Simon
* Director March 29, 1996
- -------------------------------
Robert M. Gardiner
* Director March 29, 1996
- -------------------------------
Robert N. Butler, M.D.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
* Director March 29, 1996
- -------------------------------
Richard D. Harrison
* Director March 29, 1996
- -------------------------------
Barry M. Bloom
* Director March 29, 1996
- -------------------------------
Mark Novitch
</TABLE>
* By: /s/ HARRY H. PENNER, JR.
Harry H. Penner, Jr., Attorney-in-Fact
57
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Neurogen Corporation:
Under the date of February 12, 1996, we reported on the balance sheets of
Neurogen Corporation as of December 31, 1995 and 1994, and the related
statements of operations, stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1995 as contained in
the Annual Report on Form 10-K for the year 1995. In connection with our
audits of the aforementioned financial statements, we also audited the related
financial statement schedule as listed in Item 14(a)(2) of the accompanying
Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 12, 1996
58
<PAGE>
SCHEDULE II
NEUROGEN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------ ----------- ---------- -----------
BALANCE BALANCE
AT BEGINNING AT END
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
1995
Deferred Tax Assets $10,389,107 - $4,737,042 $ 5,652,065
Valuation Allowance
1994
Deferred Tax Assets $ 7,443,686 $2,945,421 - $10,389,107
Valuation Allowance
1993
Deferred Tax Assets
Valuation Allowance $ - $7,443,686 (1) - $ 7,443,686
</TABLE>
(1) Represents offset of deferred tax assets established under Statement of
Accounting Standards No. 109 "Accounting for Income Taxes" which was adopted
effective January 1, 1993.
59
<PAGE>
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------------ ---------------------------
3.1 - Restated Certificate of
Incorporation, filed June
17, 1994.
3.2 - 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).
10.1 - Neurogen Corporation Stock
Option Plan, as amended
(incorporated by reference
to Exhibit 10.1 to the
Company's Form 10-K for
the fiscal year ended
December 31, 1991).
10.2 - Form of Stock Option
Agreement currently used
in connection with the
grant of options under
Neurogen Corporation Stock
Option Plan (incorporated
by reference to Exhibit
10.2 to the Company's Form
10-K for the fiscal year
ended December 31, 1992).
10.3 - Neurogen Corporation 1993
Omnibus Incentive Plan, as
amended (incorporated by
reference to Exhibit 10.3
to the Company's Form 10-K
for the fiscal year ended
December 31, 1993).
10.4 - Form of Stock Option
Agreement currently used
in connection with the
grant of options under
Neurogen Corporation 1993
Omnibus Incentive Plan
(incorporated by reference
to Exhibit 10.4 to the
Company's Form 10-K for
the fiscal year ended
December 31, 1993).
10.5 - Neurogen Corporation 1993
Non-Employee Directors
Stock Option Program
(incorporated by reference
to Exhibit 10.5 to the
Company's Form 10-K for
the fiscal year ended
December 31, 1993).
10.6 - Form of Stock Option
Agreement currently used
in connection with the
grant of options under
Neurogen Corporation 1993
Non-Employee Directors
Stock Option Program
(incorporated by reference
to Exhibit 10.6 to the
Company's Form 10-K for
the fiscal year ended
December 31, 1993).
10.7 - Employment Contract
between the Company and
Harry H. Penner, Jr.,
dated as of October 12,
1993 (incorporated by
reference to Exhibit 10.7
to the Company's Form 10-K
for the fiscal year ended
December 31, 1993).
10.8 - Employment Contract between the
Company and John F.
Tallman, dated as of December 1,
1993 (incorporated by
reference to Exhibit 10.25 to the
Company's Form 10-Q
or the quarterly period ended
September 30, 1994).
10.9 - Open-End Mortgage Deed and
Security Agreement between
the Company and Orion
Machinery & Engineering
Corp., dated March 16,
1989 (incorporated by
reference to Exhibit 10.15
to Registration Statement
No. 33-29709 on Form S-1).
10.10 - Form of Proprietary
Information and Inventions
Agreement (incorporated by
reference to Exhibit 10.31
to Registration Statement
No. 33-29709 on Form S-1).
60
<PAGE>
10.11 - Warrant to Purchase 47,058
Shares of Common Stock to
MMC/GATX Partnership No.
I, dated February 20, 1991
(incorporated by reference
to Exhibit 10.34 to the
Company's Form 10-K for
the fiscal year ended
December 31, 1990).
10.12 - Collaborative Research
Agreement between
the Company and Pfizer
Inc, dated as of January
1, 1993 (Confidential
Treatment requested)
(incorporated by reference
to Exhibit 10.35 to the
Company's Form 10-K for
the fiscal year ended
December 31, 1991).
10.13 - License Agreement between
the Company and the
National Technical
Information Service, dated
as of January 1, 1992
(incorporated by reference
to Exhibit 10.36 to the
Company's Form 10-K for
the fiscal year ended
December 31, 1991).
10.14 - Cooperative Research and
Development Agreement
between the Company and
the National Institutes of
Health, dated as of
January 21,
1993(incorporated by
reference to Exhibit 10.37
to the Company's Form 10-K
for the fiscal year ended
December 31, 1991).
10.15 - Letter Agreement between
the Company and Barry M.
Bloom dated January 12,
1994 (incorporated by
reference to Exhibit 10.25
to the Company's Form 10-K
for the fiscal year ended
December 31, 1993).
10.16 - Letter Agreement between
the Company and Robert H.
Roth, dated April 14, 1994
(incorporated by reference
to Exhibit 10.26 to the
Company's Form 10-K for
the fiscal year ended
December 31, 1994).
10.17 - Collaborative Research
Agreement between the
Company and Pfizer
Inc, dated as of
July 1, 1994 (confidential
treatment requested)
(incorporated by reference
to Exhibit 10.1 to the
Company's Form 10-Q for
the quarterly period ended
June 30, 1994).
10.18 - Stock Purchase Agreement
between the Company and
Pfizer dated as of July 1,
1994 (incorporated by
reference to Exhibit 10.2
to the Company's Form 10-Q
for the quarterly period
ended June 30, 1994).
10.19 - Registration Rights and
Standstill Agreement among
the Company and the
Persons and Entities
listed on Schedule I
thereto, dated as of July
11, 1994 (incorporated by
reference to Exhibit 10.29
to the Company's Form 10-Q
for the quarterly period
ended September 30, 1994).
10.20 - Collaboration and License
Agreement and Screening
Agreement between the
Company and
Schering-Plough
Corporation (incorporated
by reference to Exhibit
10.1 to the Company's
Form 8-K dated July 28,
1995).
10.21 - Lease Agreement between
the Company and Commercial
Building Associates dated
as of August 30, 1995
(incorporated by reference
to Exhibit 10.27 to the
Company's Form 10-Q for
the quarterly period ended
September 30, 1995).
10.22 - Collaborative Research
Agreement between the
Company and Pfizer dated
as of November 1, 1995
(confidential treatment requested)
(incorporated by reference
to Exhibit 10.1 of the
Company's Form 8-K dated
November 1, 1995).
61
<PAGE>
10.23 - Development and Commercialization
Agreement between the Company
and Pfizer dated as of November
1, 1995 (confidential treatment
requested) (incorporated by
reference to Exhibit 10.2
of the Company's Form 8-K
dated November 1, 1995).
10.24 - Stock Purchase Agreement
between the Company and
Pfizer dated as of
November 1, 1995
(incorporated by reference
to Exhibit 10.3 of the
Company's Form 8-K dated
November 1, 1995).
11.1 - Computation of Earnings
per Common Share.
24.1 - Consent of KPMG Peat
Marwick LLP, Independent
Auditors.
25.1 - Powers of Attorney of
Frank C. Carlucci, Robert
H. Roth, John Simon, John
F. Tallman, Robert M.
Gardiner, Robert N.
Butler, Jeffrey J.
Collinson, Richard D.
Harrison, Mark Novitch and
Barry M. Bloom.
99.1 - Proxy Statement for the
Annual Meeting of
Stockholders to be held on
June 4, 1996 (to be filed
with the Commission before
April 30, 1996).
62
<PAGE>
EXHIBIT 11.1
NEUROGEN CORPORATION
COMPUTATION OF NET EARNINGS (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT NET EARNINGS (LOSS) PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1995 1994 1993
------ ---- ----
Fully-
Primary diluted
------- -------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 11,267 11,267 9,528 8,962
Dilutive effect of:
Warrants 39 43 - (1) - (1)
Stock Options 1,173 1,558 - (1) - (1)
------- ------ ------- -------
Common and Common Equivalent Shares 12,479 12,868 9,528 8,962
======= ====== ======= =======
Net Income (Loss) $13,354 $13,354 $(6,651) $(3,816)
======= ======= ======= =======
Net (Income) Loss per Common Share $ 1.07 $ 1.04 $ (.70) $(.43)
======= ======= ======= =======
</TABLE>
__________________________
(1) The Common Stock Equivalents have not been included as their inclusion
would be antidilutive.
63
<PAGE>
EXHIBIT 24.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Neurogen Corporation:
We consent to incorporation by reference in the registration statements
(Nos. 33-43441, 33-48541 and 33-81268) on Form S-8 of Neurogen Corporation of
our report dated February 12, 1996, relating to the balance sheets of Neurogen
Corporation as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995 which report appears in the December
31, 1995 annual report on Form 10-K of Neurogen Corporation.
KPMG Peat Marwick LLP
Hartford, Connecticut
March 29, 1996
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEUROGEN CORPORATION
By:
-------------------------
Harry H. Penner, Jr.
President and Chief Executive Officer
Date: March 30, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------ ----- -------
<S> <C> <C>
* Chairman of the Board and Director March __, 1996
- ------------------------
Frank C. Carlucci
- ------------------------ President, Chief Executive Officer and March __, 1996
Harry H. Penner, Jr. Director (Principal Executive Officer)
* Executive Vice President, Secretary and Director March __, 1996
- ------------------------
John F. Tallman, Ph.D.
- ------------------------ Vice President-Finance, Chief Financial March __, 1996
Stephen R. Davis Officer and Treasurer
(Principal Financial and Accounting Officer)
* Director March __, 1996
- ------------------------
Robert H. Roth, Ph.D.
* Director March __, 1996
- ------------------------
Jeffrey J. Collinson
* Director March __, 1996
- ------------------------
John Simon
* Director March __, 1996
- ------------------------
Robert M. Gardiner
* Director March __, 1996
- ------------------------
Robert N. Butler, M.D.
* Director March __, 1996
- ------------------------
Richard D. Harrison
* Director March __, 1996
- ------------------------
Barry M. Bloom
</TABLE>
65
<PAGE>
<TABLE>
<S> <C> <C>
* Director March __, 1996
- ------------------------
Mark Novitch
</TABLE>
*By: ____________________________________
Harry H. Penner, Jr., Attorney-in-Fact
66
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEUROGEN
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 26,004,548
<SECURITIES> 39,881,172
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 67,403,263
<PP&E> 13,372,399
<DEPRECIATION> 2,146,482
<TOTAL-ASSETS> 104,856,362
<CURRENT-LIABILITIES> 6,257,459
<BONDS> 0
348,727
0
<COMMON> 0
<OTHER-SE> 100,215
<TOTAL-LIABILITY-AND-EQUITY> 104,856,362
<SALES> 0
<TOTAL-REVENUES> 26,928,667
<CGS> 0
<TOTAL-COSTS> 15,584,714
<OTHER-EXPENSES> (2,284,569)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,728
<INCOME-PRETAX> 13,628,522
<INCOME-TAX> 275,000
<INCOME-CONTINUING> 13,353,522
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,353,522
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.04
</TABLE>
