SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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
incorporation 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)
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 such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 13, 1998 the registrant had 14,470,319 shares of Common
Stock outstanding.
<PAGE>
NEUROGEN CORPORATION
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements............................................... 1
Balance Sheets at September 30, 1998 and
December 31, 1997................................................. 1,2
Statements of Operations for the three-month and nine-month
periods ended September 30, 1998 and 1997 ........................ 3
Statements of Cash Flows for the nine-month periods ended
September 30, 1998 and 1997 ...................................... 4
Notes to Financial Statements...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 6-12
Part II - Other Information
Item 1. Legal Proceedings................................................. 13
Item 2. Changes in Securities............................................. 13
Item 3. Defaults upon Senior Securities................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............... 13-14
Item 5. Other Information................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................. 14
Signature ................................... ........................... 16
Exhibit Index ........................................................... 17-19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
BALANCE SHEETS
(In thousands)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
Assets (UNAUDITED) (AUDITED)
<S> <C> <C>
-------------- ---------------
Current assets:
Cash and cash equivalents $ 53,525 $ 66,924
Marketable securities 23,461 17,227
Receivables from corporate partners 184 1,192
Other current assets 958 1,122
------------- ---------------
Total current assets 78,128 86,465
Property, plant & equipment:
Land and land improvements 542 542
Building and building improvements 16,674 16,377
Leasehold improvements 4,026 4,026
Equipment 9,624 8,422
Furniture 528 484
--------------- ----------------
31,394 29,851
Less accumulated depreciation & amortization 6,670 4,950
--------------- ----------------
Net property, plant and equipment 24,724 24,901
Other assets, net 393 503
--------------- ----------------
$ 103,245 $ 111,869
=============== ================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
BALANCE SHEETS
(In thousands, except per share data)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
(UNAUDITED) (AUDITED)
----------------- -----------------
<S> <C> <C>
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,745 $ 4,418
Unearned revenue from corporate partners 260 200
Current portion of mortgage payable 128 205
----------------- ------------------
Total current liabilities 2,133 4,823
Mortgage payable, excluding current portion - 74
Other compensation 54 54
----------------- ------------------
Total liabilities 2,187 4,951
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.025 per share
Authorized 20,000 shares; none issued - -
Common stock, par value $.025 per share
Authorized 30,000 shares; issued and outstanding
14,431 shares at September 30, 1998 and 14,390 shares
at December 31, 1997 361 360
Additional paid-in capital 110,819 110,231
Accumulated deficit (9,318) (2,776)
Deferred compensation (976) (894)
Unrealized loss on marketable securities 172 (3)
----------------- ------------------
Total stockholders' equity 101,058 106,918
----------------- ------------------
$ 103,245 $ 111,869
================= ==================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Operating revenues:
License fees $ - $ - $ - $ 3,000
Research and development 2,340 3,378 8,740 11,305
---------------- --------------- ------------- -------------
Total operating revenues 2,340 3,378 8,740 14,305
Operating expenses:
Research and development 5,327 4,811 15,527 13,685
General and administrative 960 831 3,051 2,751
---------------- ---------------- ------------- -------------
Total operating expenses 6,287 5,642 18,578 16,436
---------------- ---------------- ------------- -------------
Operating income (loss) (3,947) (2,264) (9,838) (2,131)
Other income (expense):
Investment income 1,118 1,350 3,311 3,867
Interest expense (4) (8) (15) (28)
---------------- ---------------- ------------- -------------
Total other income, net 1,114 1,342 3,296 3,839
---------------- ---------------- ------------- -------------
Income (loss) before provision for income taxes (2,833) (922) (6,542) 1,708
Provision for income taxes - - - 35
---------------- ---------------- ------------- -------------
Net income (loss) $ (2,833) $ (922) $ (6,542) $ 1,673
================ ================ ============= =============
Earnings (loss) per share:
Basic $ (0.20) $ (0.06) $ (0.45) $ 0.12
================ ================ ============= =============
Diluted $ (0.20) $ (0.06) $ (0.45) $ 0.11
================ ================ ============= =============
Shares used in calculation of earnings (loss) per share:
Basic 14,424 14,362 14,404 14,332
================ ================ ============= =============
Diluted 14,424 14,398 14,404 15,390
================ ================ ============= =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
(UNAUDITED) (UNAUDITED)
------------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,542) $ 1,673
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization expense 2,078 1,226
Net gain on sale of assets - 4
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable and accrued expenses (2,673) 129
Increase (decrease) in unearned revenue from corporate partners 60 (3,900)
Decrease in other current assets 164 369
(Increase) decrease in receivable from corporate partners 1,008 (767)
Decrease in other assets, net 94 29
----------------- ---------------
Net cash (used in) operating activities (5,811) (1,237)
Cash flows from investing activities:
Purchase of plant and equipment (1,543) (7,712)
Purchases of marketable securities (27,575) (33,214)
Maturities and sales of marketable securities 21,516 44,981
Proceeds from sale of asset - 26
----------------- ---------------
Net cash used in investing activities (7,602) 4,081
Cash flows from financing activities:
Exercise of employee stock options 166 774
Principal payments under mortgage payable (151) (134)
----------------- ---------------
Net cash provided by financing activities 15 640
----------------- ---------------
Net decrease in cash and cash equivalents (13,398) 3,484
Cash and cash equivalents at beginning of period 66,924 62,823
----------------- ---------------
Cash and cash equivalents at end of period $ 53,526 $ 66,307
================= ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Neurogen Corporation
Notes to Financial Statements
September 30, 1998
(Unaudited)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements have been prepared from the books
and records of Neurogen Corporation (the "Company") in accordance with
generally accepted accounting principles for interim financial
information pursuant to Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Interim results are not necessarily
indicative of the results that may be expected for the fiscal year.
(2) EARNINGS (LOSS) PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", which became effective in 1997, requires presentation of two
calculations of earnings per common share. "Basic" earnings per common
share equals net income divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share
equals net income divided by the sum of weighted average common shares
outstanding during the period plus common stock equivalents, if
dilutive. Common stock equivalents are shares assumed to be issued if
outstanding stock options were exercised. The difference between the
shares used for the basic and dilutive calculation for the nine months
ended September 30, 1997 was the inclusion of 1,058,000 common
equivalent shares.
(3) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no material impact on the
Company's net income or shareholders' equity. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income.
For the three months ended September 30, 1998 and 1997, total
comprehensive loss was ($2,694,000) and ($1,005,000). For the nine
months ended September 30, 1998 and 1997, total comprehensive income
(loss) was ($6,367,000) and $1,695,000, respectively.
5
<PAGE>
Item 2. 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 certain license
fees of a non-recurring nature received in connection with entering
into research and development collaborations, expects to incur
significant losses in most years prior to deriving any such product
revenues. Revenues to date have come from three collaborative research
agreements entered into with Pfizer Inc. ("Pfizer"), one collaboration
with Schering-Plough Corporation ("Schering-Plough"), one license
agreement with American Home Products Corporation ("American Home
Products") 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 expanded research and
development activities are expected to increase for the foreseeable
future.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company's operating revenues decreased to $2.3 million for the
three months ended September 30, 1998 as compared to $3.4 million for
the same period in 1997. Research and development revenues decreased in
1998 $1.0 million, to $2.3 million due primarily to the scheduled
conclusion in June 1998 of the research phase of the Schering-Plough
Agreement (as defined below), a reduction in reimbursement of costs
under a cost sharing arrangement for certain expenses associated with
human clinical trials conducted by Neurogen under its NPY obesity
collaboration with Pfizer and the receipt in the third quarter of 1997
of a $0.3 million clinical development milestone under the 1992 Pfizer
agreement (as defined below). These matters were partially offset by an
increase in research funding received to support increased staff on the
Company's collaborations with Pfizer. The amount of the above-described
reimbursements may fluctuate significantly depending on the level of
clinical trials being conducted. The amount of scheduled research
funding the Company receives in its collaborations may also fluctuate
significantly depending on the level of funded staffing and the extent
to which Pfizer elects to extend the research programs.
6
<PAGE>
Research and development expenses increased 11 percent to $5.3 million
for the three-month period ended September 30, 1998 as compared to the
same period in 1997. The increase is primarily due to increases in
research and development personnel as well as the Company's further
expansion of its AIDD (Accelerated Intelligent Drug Design Program) for
the discovery of new drug candidates partially offset by a decrease in
clinical development activities and related costs. Research and
development expenses represented 85 percent of total operating expenses
in 1998 and 1997 respectively.
General and administrative expenses increased 16 percent to $1.0
million for the three-month period ended September 30, 1998 as compared
to $0.8 million for the same period in 1997. The increase is due to an
increased level of administrative expenses necessary to support a
growing research staff.
Other income, consisting primarily of interest income, and gains and
losses from invested cash and marketable securities, decreased 17
percent for the third quarter of 1998 as compared to the same period in
1997 due to a lower level of invested funds and slightly lower interest
rates.
The Company recognized a net loss of $2.8 million for the three months
ended September 30, 1998 as compared with a net loss of $0.9 million
for the same period in 1997. The decrease in earnings is primarily due
to a decrease in operating revenues, and an increase in research and
development expenses for the third quarter of 1998 due to the factors
described above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company's operating revenues decreased to $8.7 million for the nine
months ended September 30, 1998 from $14.3 million for the same period
in 1997, which included the recognition of a nonrecurring license fee
of $3.0 million and a $0.3 million clinical development milestone under
the 1992 Pfizer agreement. License fees in 1997 represented the
recognition of a previously unearned $3.0 million fee from
Schering-Plough for access to a portion of Neurogen's combinatorial
chemistry libraries. The decrease in operating revenues was due to the
impact of this nonrecurring license fee, together with the reduction of
research and development revenues described below. Research and
development revenues decreased $2.6 million, or 23 percent, to $8.7
million. This decrease is due primarily to the scheduled conclusion in
June 1998 of the research phase of the Schering-Plough Agreement, a
scheduled reduction in funding under the 1994 Pfizer Agreement and, in
the case of Neurogen's NPY obesity collaboration with Pfizer, a
reduction in reimbursement of costs under a cost sharing arrangement
for certain expenses associated with human clinical trials conducted by
Neurogen. These matters were partially offset by an increase in
research funding to support increased staff on the Company's
collaborations with Pfizer. The amount of the above described
reimbursements may fluctuate significantly depending on the level of
clinical trials being conducted. The amount of scheduled research
funding may also fluctuate significantly depending on the level of
funded staffing and the extent to which Pfizer extends the research
programs.
7
<PAGE>
Research and development expenses increased 13 percent to $15.5 million
for the nine months ended September 30, 1998 as compared to the same
period in 1997. This increase is primarily due to increases in research
and development personnel as well as the Company's further expansion of
its AIDD (Accelerated Intelligent Drug Design Program) for the
discovery of new drug candidates partially offset by a decrease in
clinical development activities and related costs. Research and
development expenses represented 83 percent of total operating expenses
for the nine-month period ended September 30, 1998 and 1997.
General and administrative expenses increased 11 percent to $3.1
million for the nine months ended September 30, 1998 as compared to the
same period in 1997. This increase is due to an increased level of
administrative expenses necessary to support a growing research staff.
Other income, consisting primarily of interest income, and gains and
losses from invested cash and marketable securities, decreased to $3.3
million for the nine months ended September 30, 1998 as compared to
$3.8 million for the same period in 1997, due to a lower level of
invested funds and slightly lower interest rates.
The Company recognized a net loss of $6.5 million for the nine months
ended September 30, 1998 as compared with net income of $1.7 million
for the same period in 1997. The change in earnings is primarily due to
the decrease in operating revenues, as explained above, and an increase
in research and development expenses for the nine months ended
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 and December 31, 1997, cash, cash equivalents and
marketable securities were in the aggregate $77.0 million and $84.2
million respectively. While the Company's aggregate level of cash, cash
equivalents and marketable securities decreased moderately during the
third quarter of 1998, these levels have fluctuated significantly in
the past and are expected to do so 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 equity financing activities, research funding, milestones and
reimbursements received pursuant to collaborative arrangements and
interest earned on invested funds. The Company's equity 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 and to American Home Products under the American
Home Products Agreement. Total funding received from these equity
financing activities was approximately $105.6 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 facilities.
8
<PAGE>
In the first quarter of 1992, the Company entered into a collaborative
agreement (the "1992 Pfizer Agreement") pursuant to which Pfizer made a
$13.8 million equity investment in the Company. Under this agreement,
the Company received $4.6 million in each of five years from 1992
through 1996. The Company has received and is receiving additional
funding pursuant to the December 1996 extension, as described below.
Neurogen could also receive milestone payments of up to $12.5 million
if certain development and regulatory objectives are achieved regarding
its products subject to the collaboration. 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 gamma-aminobutyric
acid, or GABA. Pfizer will pay Neurogen royalties based upon net sales
levels, if any, for such products. As of September 30, 1998, Pfizer had
provided $30.5 million of research funding to the Company pursuant to
the 1992 Pfizer Agreement, as extended, (as described below) and $0.3
million due to the completion of a clinical development milestone.
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 received approximately $7.4 million during
the three-year period which commenced July 1, 1994, to fund Neurogen's
sleep disorder program. The Company has received and is receiving
additional funding pursuant to the December 1996 extension, as
described below. Neurogen could also receive milestone payments of up
to $3.3 million if certain development and regulatory objectives are
achieved regarding its products subject to the collaboration. In
return, Pfizer received the exclusive rights to manufacture and market
GABA-based sleep disorder products for which it will pay Neurogen
royalties based upon net sales levels, if any. As of September 30,
1998, Pfizer had provided $9.9 million of research funding to the
Company pursuant to the 1994 Pfizer Agreement, as extended (as
described below).
In 1996 and 1997, Neurogen and Pfizer extended the 1992 and 1994
Agreements. Pursuant to the extension agreements, Neurogen received
$5.4 million in 1997 and has received or expects to receive an
aggregate of $6.1 million in 1998 for research and development funding
of the Company's anxiolytic, cognitive enhancer and sleep programs.
In the fourth quarter of 1998, Neurogen announced that it had agreed
with Pfizer to further extend the 1992 and 1994 Pfizer Agreements to
provide research funding of $6.2 million per year in both 1999 and
2000. Additionally, the companies agreed to expand the 1992 Agreement
to include depression or a new target. Pursuant to this agreement,
Neurogen will be eligible to receive certain milestone payments upon
the achievement of development and regulatory objectives and royalties
based on net sales levels, if any. Pfizer received the exclusive right
to manufacture and market GABA based drugs for depression from the
collaboration.
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.
9
<PAGE>
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 bringing Pfizer's ownership of the Company's common stock up to
approximately 21 percent and paid a $3.5 million license fee. The
Company has received approximately $2.4 million per year during the
three consecutive one-year periods which commenced November 1, 1995, to
fund Neurogen's neuropeptide Y (NPY) eating disorders research. Pfizer
has recently elected to extend this research program for an additional
one-year period through October 1999 for which it will pay Neurogen
$2.4 million to fund such research, and to pay an additional $1.0
million to expand the research program for the period of June 1998
through October 1999. Neurogen may also receive up to an additional
$2.4 million for a fifth year should Pfizer exercise its option to
further extend the research program. Neurogen could also receive
milestone payments of up to approximately $28 million if certain
development and regulatory objectives are achieved regarding its
products subject to the 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, 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 will pay Neurogen
royalties on drugs marketed in NAFTA countries and will 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 September 30, 1998, Pfizer had
provided $7.5 million in research funding pursuant to the 1995 Pfizer
Agreement.
In June 1995, Neurogen and 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 $14.0 million for rights relating to Neurogen's dopamine
program and $3.0 million in each of 1995 and 1996 for the right to test
certain of Neurogen's combinatorial chemistry libraries in selected
non-CNS assays. Neurogen received scheduled funding aggregating
approximately $9.8 million during the three-year period from June 1995
through June 1998, for research and development funding of the
Company's dopamine program. In July 1998, Neurogen announced that the
Company and Schering-Plough had concluded the research phase of the
collaboration and that Schering-Plough plans to continue the
development of drug candidates identified during such research.
Accordingly, Neurogen has reassigned personnel formerly conducting such
research to other Neurogen projects and the funding of $3.6 million per
year formerly being received from Schering- Plough has come to its
scheduled conclusion as of July 1, 1998.
10
<PAGE>
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. Neurogen retained the
rights to receive royalties based upon net sales levels, if any, and an
option to manufacture products for the United States market. As of
September 30, 1998, Schering-Plough had provided $10.8 million in
research funding 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.
In the fourth quarter of 1996, Neurogen entered into an agreement
pursuant to which it out-licensed to American Home Products acting
through its Wyeth-Ayerst Laboratories division Neurogen's commercial
rights to ADCI, a small molecule drug candidate for the treatment of
epilepsy and related disorders. Neurogen had previously in-licensed its
rights to ADCI from the National Institutes of Health ("NIH"). Under
the terms of Neurogen's agreement with American Home Products, Neurogen
received a $0.8 million license fee and $0.8 million for 37,442 shares
of common stock. Neurogen may also receive up to $11.0 million in
additional license fees and equity investments upon the achievement of
certain development and regulatory objectives. American Home Products
received the exclusive worldwide rights to manufacture and market ADCI.
Neurogen and the NIH have each retained the right to receive royalties
based on net sales levels, if any.
The Company plans to use its cash balance for its research and
development activities, working capital and general corporate purposes.
Neurogen anticipates that its current cash balance, as supplemented by
research funding pursuant to the Pfizer Agreements will be sufficient
to fund its current and planned operations through 2001. 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.
11
<PAGE>
As of December 31, 1997, the Company had approximately $13.5 million of
net operating loss carryforwards available for federal income tax
purposes which expire from the years 2004 through 2012. The Company had
approximately $11.4 million of Connecticut state tax net operating loss
carryforwards as of December 31, 1997 which expire in the years 1998
through 2002. Because of "change in ownership" provisions of the Tax
Reform Act of 1986, the Company's utilization of its net operating loss
and research and development credit carryforwards may be subject to an
annual limitation in future periods.
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue and is
implementing a plan to resolve the issue. The "Year 2000" problem is
the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system
failures or miscalculations using existing software and the need to
convert to new software. While the Company cannot accurately predict
any impact the Year 2000 problem may have on third parties with whom
the Company conducts business, the Company believes that the cost of
making its information systems "2000-ready" will not be material.
12
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
Not applicable for the third quarter ended September 30, 1998.
Item 2. Changes in Securities
Not applicable for the third quarter ended September 30, 1998.
Item 3. Defaults upon Senior Securities
Not applicable for the third quarter ended September 30, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable for the third quarter ended September 30, 1998.
Item 5. Other information
Not applicable for the third quarter ended September 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 11.
(b) None
13
<PAGE>
SAFE HARBOR STATEMENT
Statements which are not historical facts, including statements about the
Company's confidence and strategies, the status of various product development
programs, the sufficiency of cash to fund planned operations and the Company's
expectations concerning its development compounds, drug discovery technologies
and opportunities in the pharmaceutical marketplace are "forward looking
statements" within the meaning of the Private Securities Litigations Reform Act
of 1995 that involve risks and uncertainties and are not guarantees of future
performance. These risks include, but are not limited to, difficulties or delays
in development, testing, regulatory approval, production and marketing of any of
the Company's drug candidates, the failure to attract or retain scientific
management personnel, any unexpected adverse side effects or inadequate
therapeutic efficacy of the Company's drug candidates which could slow or
prevent product development efforts, competition within the Company's
anticipated product markets, the Company's dependence on corporate partners with
respect to research and development funding, regulatory filings and
manufacturing and marketing expertise, the uncertainty of product development in
the pharmaceutical industry, 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, risk that patents and
confidentiality agreements will not adequately protect the Company's
intellectual property or trade secrets, dependence upon third parties for the
manufacture of potential products, inexperience in manufacturing and lack of
internal manufacturing capabilities, dependence on third parties to market
potential products, lack of sales and marketing capabilities, potential
unavailability or inadequacy of medical insurance or other third-party
reimbursement for the cost of purchases of the Company's products, and other
risks detailed in the Company's Securities and Exchange Commission filings,
including its Annual Report on Form 10-K for the year ended December 31, 1997,
each of which could adversely affect the Company's business and the accuracy of
the forward-looking statements contained herein.
14
<PAGE>
Signature
Pursuant to the requirements 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/ STEPHEN R. DAVIS
------------------------
Stephen R. Davis
Vice President-Finance
and Chief Financial Officer
Date: November 13, 1998
15
<PAGE>
Exhibit Index
Exhibit
- -------
Number
- ------
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
(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).
16
<PAGE>
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 (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).
17
<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).
10.25 - Licensing Agreement dated as of November 25, 1996 between American
Home Products Corporation, acting through its Wyeth-Ayerst
Laboratories Division, and Neurogen Corporation (CONFIDENTIAL
TREATMENT REQUESTED) (incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K dated March 31, 1997).
10.26 - Stock Purchase Agreement dated as of November 25, 1996 between
American Home Products Corporation, acting through its Wyeth-Ayerst
Laboratories Division, and Neurogen Corporation (CONFIDENTIAL
TREATMENT REQUESTED) (incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K dated March 31, 1997).
27.1 - Financial Data Schedule
18
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