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 September 30, 1996
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to _______
Commission File No. 0-18728
INTERNEURON PHARMACEUTICALS, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 043047911
- -------- ---------
(State or other jurisdiction of (I.R.S. Employer
Identification incorporation or organization) Number)
One Ledgemont Center, 99 Hayden Avenue, Lexington, MA 02173
- ----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 861-8444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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 twelve (12) months (or for such shorter period that the registrant
was required to file such report(s)), and (2) has been subject to the filing
requirements for the past ninety (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 aggregate market value of the voting stock (excluding preferred stock
convertible into and having voting rights on certain matters equivalent to
622,222 shares of common stock) held by non-affiliates of the registrant was
approximately $477,000,000, based on the last sales price of the Common Stock as
of December 13, 1996.
As of December 13, 1996, 41,017,875 shares of Common Stock, $.001 par value, of
the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See Part III hereof with respect to incorporation by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 and the Exhibit Index hereto.
PART I
Statements in this Form 10-K that are not descriptions of historical
facts are forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth under "Risk
Factors" and including, in particular, risks relating to the commercialization
of Redux, such as marketing, safety, regulatory, patent, product liability,
supply and other risks; uncertainties relating to clinical trials; the early
stage of products under development; risks relating to product launches and
managing growth; government regulation, patent risks, dependence on third
parties and competition.
Item 1. Business.
(a) General Development Of Business
Interneuron Pharmaceuticals, Inc. (the "Company") is a diversified
biopharmaceutical company engaged in the development and commercialization of a
portfolio of products and product candidates primarily for neurological and
behavioral disorders, including obesity, stroke, anxiety and insomnia. The
Company focuses primarily on developing products that mimic or affect
neurotransmitters, which are chemicals that carry messages between nerve cells
of the central nervous system ("CNS") and the peripheral nervous system. The
Company is also developing products and technologies, generally outside the CNS
field, through four subsidiaries (the "Subsidiaries"): Intercardia, Inc.
("Intercardia") focuses on cardiovascular disease; Progenitor, Inc.
("Progenitor") focuses on functional genomics using developmental biology;
Transcell Technologies, Inc. ("Transcell") focuses on carbohydrate-based drug
discovery; and InterNutria, Inc. ("InterNutria") focuses on dietary supplement
products.
Unless the context indicates otherwise, "Interneuron" refers to
Interneuron Pharmaceuticals, Inc., the "Company" refers to Interneuron and its
subsidiaries, Intercardia refers to Intercardia, Inc. and its subsidiaries, and
"Common Stock" refers to the common stock, $.001 par value, of Interneuron.
The Company was originally incorporated in New York in October 1988 and
in March 1990 was reincorporated in Delaware. The Company's executive offices
are located at One Ledgemont Center, 99 Hayden Avenue, Suite 340, Lexington,
Massachusetts 02173. The Company's telephone number is (617) 861-8444, and its
fax number is (617) 861-3830.
(b) Financial Information About Industry Segments
The Company operates in only one business segment.
(c) Narrative Description Of Business
- -----------------------------
Redux(TM) is a trademark of Les Laboratoires Servier, licensed to the
Company and American Home Products Corp. ("AHP"). Melzone(TM), PMS Escape(TM),
Boston Sports Supplement(TM), and Transphores(TM) are trademarks of the Company.
All other trademarks or trade names referred to in this report are the property
of their respective owners.
2
<TABLE>
<CAPTION>
PRINCIPAL PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
INTERNEURON:
COMMERCIAL
PRODUCT INDICATION/USE STATUS* RIGHTS
- ------- -------------- ------- ------
<S> <C> <C> <C>
Redux Obesity FDA approval U.S. rights only; sublicensed
(dexfenfluramine) in April 1996; to AHP; Interneuron
launched by retains co-promotion and
AHP in June 1996 manufacturing rights
and co-promoted by
Interneuron
Citicoline Stroke Second Phase 3 U.S. and Canada
trial initiated
June 1996
Pagoclone Anxiety/Panic Phase 2/3 trial Worldwide, except for
disorders initiated France, where Rhone-
November 1996 Poulenc Rorer Pharmaceuticals,
Inc. ("RPR") retains rights
Melzone Dietary Supplement Regional test launch Worldwide
(low-dose for restful sleep initiated in December
melatonin) 1996
</TABLE>
3
SUBSIDIARIES
<TABLE>
<CAPTION>
INTERCARDIA:
POTENTIAL COMMERCIAL
PRODUCT INDICATION STATUS* RIGHTS
- ------- ---------- ------- ------
<S> <C> <C> <C>
Bucindolol Congestive Phase 3 Worldwide; twice-daily
heart failure formulation licensed
in U.S. to Astra Merck
Inc. ("Astra Merck")
Antioxidant Diseases Preclinical Worldwide
small molecules associated with
excess oxygen
free radicals
PROGENITOR:
RESEARCH AND
DEVELOPMENT POTENTIAL PRODUCT/ COMMERCIAL
PROGRAMS APPLICATION STATUS* RIGHTS
- -------- ----------- ------- ------
Novel growth factors B219 leptin receptor genes Research Worldwide
and receptors and protein variants: drug
development targets for
blood disorders,
reproduction and obesity
del-1 blood vessel gene Research Worldwide
and del-1 protein: cancer
therapy, diagnosis and
imaging
BFU-e red blood cell growth Research Worldwide; licensed
activity for blood and certain uses to Novo Nordisk
immune system disorders
Nonviral gene delivery Nonviral gene vector: Preclinical Worldwide; licensed 11
systems treatment of solid tumors, potential constructs to Chiron
immunization Corporation ("Chiron"),
certain rights retained by
Progenitor
Stem cells Developmentally-early Research Worldwide
endothelial cells:
cardiovascular diseases,
cell and gene therapies,
functional genomic research
</TABLE>
* "See Government Regulation"
4
<TABLE>
<CAPTION>
TRANSCELL:
POTENTIAL COMMERCIAL
APPLICATION CORE TECHNOLOGY STATUS * RIGHTS
- ----------- --------------- -------- ------
<S> <C> <C> <C>
Drug discovery Combinatorial Research Worldwide
carbohydrate
chemistry method
for synthesis and
library development
of oligosaccharides
and glycoconjugates
Transphores Compounds for Preclinical Worldwide
trans-membrane Research
drug transport
Novel non-viral Preclinical Worldwide
compounds for Research
transporting
DNA across cell
membrane
INTERNUTRIA:
COMMERCIAL
USE PRODUCT STATUS RIGHTS
- --- ------- ------ ------
Dietary supplement PMS Escape Regional Worldwide
for pre-menstrual test launch
syndrome initiated in
March 1996
Dietary supplement Boston Sports Regional Worldwide
for enhancement of Supplement test launch
athletic performance anticipated fiscal
and reduction of 1997
fatigue
</TABLE>
* "See Government Regulation"
5
INTERNEURON PRODUCTS
Redux:
General: On April 29, 1996, the Company's first pharmaceutical product,
Redux (dexfenfluramine hydrochloride capsules) C-IV received clearance by the
Food and Drug Administration ("FDA") for marketing as a twice daily prescription
therapy to treat obesity. The approved indication is for the management of
obesity, including weight loss and maintenance of weight loss in patients on a
reduced calorie diet who have a body mass index ("BMI") of greater than or equal
to 30 kg/m2 or greater than or equal to 27 kg/m2 in the presence of other risk
factors, such as hypertension, diabetes and elevated cholesterol. Under license
and co- promotion agreements, Redux is being marketed in the U.S. by
Wyeth-Ayerst Laboratories ("Wyeth-Ayerst"), a division of AHP, and co-promoted
by the Company. BMI, a relationship between height and weight, is a widely-used
measure of obesity. For an individual with a height of five feet five inches, a
BMI of 30 corresponds to a weight of approximately 170 pounds and a BMI of 27
corresponds to a weight of approximately 162 pounds. These amounts exceed "ideal
body weight" of a person of such height by approximately 36% and 22%,
respectively.
The Company's revenues relating to Redux are derived from: (1)
royalties paid by AHP to the Company based on the net sales of Redux capsules by
AHP to distributors; (2) profit sharing between the Company and AHP on Redux
sales by the Company's sales force and financial support of the Company's sales
force provided by AHP; and (3) sales of Redux capsules to AHP.
Royalties: The Company's license agreement with AHP provides for
royalties to the Company consisting of (i) "base" royalties equal to 11.5% of
AHP's net sales, (an amount equal to the royalty required to be paid by the
Company to Les Laboratoires Servier ("Servier"), a French pharmaceutical company
from which the Company obtained U.S. rights to Redux to treat abnormal
carbohydrate craving and obesity), and (ii) "additional" royalties based on net
sales of Redux by AHP. The percentage of "additional" royalties varies depending
upon (x) the status of Redux as a scheduled or descheduled drug and (y) whether
or not the Company supplies the finished dosage formulation of Redux to AHP.
Redux is currently scheduled as a controlled substance, and the Company
manufactures the finished dosage formulation of the drug. The Company recognizes
royalty revenue and associated expense in the fiscal quarter when AHP reports to
Interneuron AHP's shipments to distributors. Accordingly, such revenue is
expected to be reported by the Company in the quarter following actual shipments
by AHP. See "Agreements - Redux Agreements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The following sets forth the currently applicable additional annual
royalties on net sales payable to the Company on an annual basis, based on (i)
the status of dexfenfluramine as a scheduled drug and (ii) the Company supplying
Redux to AHP:
First $50,000,000 5.0%
Next $100,000,000 8.0%
Over $150,000,000 10.0%
In the event the drug is descheduled, the following sets forth the
"additional" annual royalties that would then be applicable, assuming the
Company continues to supply Redux to AHP (instead of the "additional" royalties
set forth above):
First $150,000,000 8.0%
Next $50,000,000 10.0%
Over $200,000,000 11.0%
Royalty rates are subject to a 50% reduction if generic drug
competition exceeds a 10% market share in two consecutive quarters. See
"Agreements - Redux Agreements" and "Proprietary Rights - Redux."
Co-promotion, profit sharing and sales force support: Under a
three-year co-promotion agreement entered into in June 1996 with Wyeth-Ayerst
Laboratories, a division of AHP ("Wyeth-Ayerst"), and to supplement AHP's
marketing efforts, the Company has developed an approximately 30- person sales
force that is promoting Redux to selected diabetologists, endocrinologists,
bariatricians, nutritionists and weight management specialists, subject to
certain restrictions, in return for a percentage of resulting revenues less
certain expenses. Under the agreement, total payments to the Company in
connection with sales force support and profit sharing will not exceed
$10,000,000 per year. Although a portion of the Company's co-promotion costs
related to the sales force will be funded by AHP for approximately two years
from launch, the Company is incurring substantial additional costs relating to
its sales force and in connection with the promotion of Redux. See "Agreements -
Redux Agreements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
6
Manufacturing: The Company has a manufacturing agreement with
Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer") under which Boehringer
manufactures finished dosage formulation of Redux capsules on behalf of the
Company for sale to AHP. The Company recognizes revenue from the sale of these
capsules upon acceptance by AHP, typically 45 days after shipment. The Company
is using significant amounts of working capital relating to Redux inventories
and accounts receivable. See "Manufacturing and Marketing.
Regulatory Approval, Labeling and Safety Risks: Marketing clearance of
Redux by the FDA followed a meeting of the Endocrinologic and Metabolic Advisory
Committee (the "Advisory Committee") of the FDA on November 16, 1995 at which
the Advisory Committee recommended, by a vote of 6 to 5, the approval of Redux
to treat obesity. The Advisory Committee also recommended, and the Company
agreed, that Phase 4, or post-marketing, studies be conducted and that certain
labeling guidelines be implemented. Included in the FDA-approved labeling for
Redux are references to certain risks that may be associated with
dexfenfluramine and which were highlighted during the FDA's review of the drug.
One issue relates to whether there is an association between appetite
suppressants, including dexfenfluramine, and the development of primary
pulmonary hypertension ("PPH"), a rare but serious lung disorder estimated to
occur in the general population at one to two cases per million adults per year.
An epidemiologic study conducted in Europe known as IPPHS (International Primary
Pulmonary Hypertension Study) examined risk factors for PPH and showed that
among other factors, weight reduction drugs, including dexfenfluramine, and
obesity itself were associated with a higher risk of PPH. In the final report of
IPPHS, published in the New England Journal of Medicine (August 29, 1996), the
authors re-classified and included certain previously excluded cases of PPH,
resulting in an increase in the estimated yearly occurrence of PPH for patients
taking appetite suppressants for greater than three months duration to be
between 23 and 46 cases per million patients per year. The revised labeling for
Redux discloses this revised estimate.
The FDA-approved labeling for Redux also includes discussion as to
whether dexfenfluramine is associated with certain neurochemical changes in the
brain. Certain studies conducted by third parties related to this issue purport
to show that very high doses of dexfenfluramine cause prolonged serotonin
depletion in certain animals, which some researchers believe is an indication of
neurotoxicity. The Company has presented data relating to the lack of
neurocognitive effects in patients taking Redux to the FDA and believes that, as
demonstrated in human trials, these animal studies are clinically irrelevant to
humans because of pharmacokinetic differences between animals and humans and
because of the high dosages used in the animal studies. The Company and
Wyeth-Ayerst have agreed with the FDA to conduct a Phase 4, or post marketing,
study of Redux. The Company expects that the Phase 4 study may be a double-
blind, placebo-controlled trial involving approximately 200 patients to further
evaluate long-term neurocognitive function, using standard neuro-psychological
tests, in patients taking Redux. Approximately 50% of the costs of the Phase 4
study, which is expected to be conducted over an approximately two to three year
period, is expected to be paid by AHP. See "Risk Factors - Risks Relating to
Redux."
Descheduling Petition: An earlier meeting of a joint committee of the
Advisory Committee and the Drug Abuse Advisory Committee of the FDA resulted in
a recommendation to remove, or deschedule, fenfluramine and its isomers,
including dexfenfluramine, from Schedule IV of the Controlled Substances Act.
Controls imposed upon Schedule IV substances include record-keeping procedures
for dispensing pharmacists and procedural mandates for prescribing physicians.
Although the Company's petition to deschedule fenfluramine and dexfenfluramine
is under review by several federal agencies, the Company is unable to predict
whether or when the descheduling of dexfenfluramine will occur. In addition to
marketing factors which may be influenced by dexfenfluramine's status as a
controlled substance, descheduling has and will continue to affect the timing or
availability of certain milestone and equity payments which may be received by
the Company under its agreements with AHP, as well as the royalty rate. Certain
states will deschedule the drug automatically upon federal descheduling while
other states have varying procedures for descheduling. See "Risk Factors - Risks
Relating to Redux."
Competition: Redux may be subject to substantial competition. AHP also
sells fenfluramine (under the brand name Pondimin). Although the combination is
not approved by the FDA, fenfluramine is often prescribed in combination with
phentermine to treat obesity. AHP also has an anti-obesity compound that the
Company believes is in Phase 2 clinical trials. In addition, an affiliate of
BASF AG has filed a New Drug Application ("NDA") for sibutramine, a serotonin
and noradrenaline re-uptake inhibitor, to treat obesity. Although an FDA
advisory committee recommended against approval of sibutramine, it has been
reported that the FDA subsequently issued an approvable letter for the drug.
Further, an affiliate of Roche Holdings Ltd. is developing Orlistat, a drug to
block fat absorption for which an
7
NDA was recently filed with the FDA, and Neurogen Corporation is conducting
Phase 1 safety studies of its anti-obesity drug, NGD-95-1, under co-development
with Pfizer Inc. The Company is also aware of other drugs and technologies
relating to the treatment of obesity which are in earlier stages of development.
See "Competition" and "Risk Factors - Risks Relating to Redux."
Proprietary Rights: Under the Servier Agreements, the Company has an
exclusive license to sell dexfenfluramine in the U.S. under a patent covering
the use of dexfenfluramine to treat abnormal carbohydrate craving, which has
been sublicensed by the Company to AHP. This use patent expires in 2000,
although the Company has applied for an extension of the expiration date by an
amount of time relating to the FDA regulatory review process (but in any event
no longer than five additional years). However, there can be no assurance of
receipt of such extension on a timely basis or at all or as to the period of any
such extension. Upon expiration of the patent, generic drugs claiming the same
use previously covered by the patent may become available. Fenfluramine is
already available in the United States for the treatment of obesity. See
"Competition", "Patents and Proprietary Rights" and "Government Regulation."
Citicoline:
Cytidyl diphosphocholine ("citicoline") is under development by the
Company as a potential treatment for ischemic stroke. An ischemic stroke occurs
when brain tissue dies or is severely damaged as the result of interrupted blood
flow caused by a clogged artery which deprives an area of the brain (the
"infarct") of blood and oxygen. This loss of blood flow and oxygen causes among
other events, a breakdown of brain cell membranes and puts the surrounding
tissue (the "penumbra") at risk for death, resulting in an extension of the size
of infarct probably from the release and oxidation of such compounds as free
fatty acids. This release is likely caused in part by the inappropriate release
of glutamate and other neurotransmitters.
Citicoline appears to have multiple mechanisms of action in diminishing
the effects of stroke. Citicoline is believed to remove fatty acids, which would
otherwise yield toxic oxidation products, by incorporating them into membrane
constituents. Citicoline is also believed to promote the formation of additional
membrane elements needed by damaged neurons to restore functional activity by
raising blood levels of choline and cytidine, substrates believed to be
essential for the formation of the nerve cell membrane. Citicoline is thereby
believed to help stabilize the cell membrane and, as a result, decrease edema,
or brain swelling, caused when blood flow to brain cells is stopped, and
reestablish normal neurochemical function in the brain. Finally citicoline also
increases levels of acetylcholine, a neurotransmitter believed to be associated
with learning and memory functions.
During fiscal 1996, the Company completed its first Phase 3 clinical
trial in the U.S. to treat patients suffering from ischemic stroke. The results
of the double blind placebo control, dose-ranging trial were presented at the
48th Annual Meeting of the American Academy of Neurology on March 28, 1996, and
indicated a statistically significant improvement in the recovery of patients
suffering from ischemic stroke who were treated with certain doses of citicoline
compared with patients who received placebo.
In the trial, 259 patients with ischemic stroke were enrolled within 24
hours following the onset of symptoms. The average time from onset of symptoms
to initiation of treatment was approximately 14 hours. Patients were randomly
assigned to receive placebo or one of three oral doses of citicoline (500
milligrams, 1000 milligrams or 2000 milligrams daily) for six weeks and were
monitored for an additional six weeks. The primary efficacy outcome in the study
was improved neurologic function, as assessed by the Barthel Index, which
utilizes a 100-point rating scale. It was found that 53% of patients who
received 500 milligrams daily of citicoline achieved a score of 95 or greater on
the Barthel Index, indicative of complete or near-complete recovery from stroke,
compared with 33% of placebo-treated patients (p less than 0.04). This
significantly greater improvement can also be expressed as the probability that
for every 100 stroke patients treated with 500 milligrams of citicoline within
24 hours of symptom onset, at least 20 more would achieve complete or
near-complete recovery than if treated with placebo.
Patients in both the 500 milligram or 2000 milligram groups exhibited
significantly greater (p less than 0.05) improvement on the Barthel Index at
week 12 than placebo-treated patients. Data showed that the rate of improvement
was significantly faster for these treatment groups than for the placebo group
(p less than 0.02), with patients receiving 500 or 2000 milligrams per day
achieving complete or near-complete recovery two weeks faster than
placebo-treated patients.
8
In addition, patients in the 500 milligram and 2000 milligram groups exhibited
significantly greater improvement in mental function (p less than 0.04), as
measured by the NIH Stroke or Rankin scales which grade the cognitive state of
patients.
Results of this study also showed that patients who received 500
milligrams of citicoline daily were more than twice as likely to manifest
minimal or no disability at 12 weeks following stroke as patients who received
placebo, as measured by the NIH Stroke Scale. The NIH Stroke Scale analysis
showed that 34% of all citicoline-treated patients compared to 16% of
placebo-treated patients achieved complete or near-complete normalization of
function, as indicated by scores 0 to 1, at 12 weeks following stroke (p less
than 0.04). In addition, global neurologic status, assessed by another
well-known measurement, the Rankin Scale, was significantly improved (p less
than 0.04) with citicoline treatment compared to placebo. There was no
significant difference in the incidence of death among the four treatment groups
in the trial. The safety profile of all citicoline groups differed minimally
from placebo; only the rate of dizziness and accidental injuries (falls)
differed significantly from placebo. The 500 mg dose was deemed to be optimal,
although all doses appeared to be well tolerated.
Efficacy outcome measures for the 1000 milligram daily group did not
reach statistical significance in this trial. Patients in the 1000 milligram
group had statistically significantly higher body weight on baseline entry into
the study compared to the other treatment groups and a higher prevalence of
co-morbid medical conditions. The Company believes that this and other
confounding variables may explain the performance of the 1000 milligram group in
the trial, although there can be no assurance that this interpretation is
correct. See "Risk Factors - Uncertainties Relating to Clinical Trials."
In 12 patients studied in this trial at one center, a specialized
imaging technique was used to measure the size of the infarct. Analysis of this
group of patients suggests that citicoline treatment limited the size of infarct
following interrupted blood flow in connection with stroke.
In June 1996, the Company initiated a second Phase 3 trial with
citicoline to treat patients suffering from ischemic stroke. The double-blind,
placebo controlled trial will involve several hundred patients, take place on a
national, multi-center basis and test 500 milligrams of citicoline administered
daily against placebo. The primary efficacy outcome of the study will be
improved neurologic function at three months after stroke onset. In October
1996, the Company initiated a supportive Phase 3 study with citicoline to study
its effect in limiting the size of infarct caused by stroke. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In January 1993, the Company licensed exclusive marketing and
manufacturing rights based on certain patent rights relating to the use of
citicoline, including certain patent and know-how rights in the U.S. and
know-how rights in Canada, from Grupo Ferrer, a Spanish pharmaceutical company
("Ferrer"). See "Agreements - Citicoline." The compound citicoline is not
covered by a composition of matter patent. The licensed U.S. patent covering the
administration of citicoline to treat patients afflicted with certain conditions
associated with the inadequate release of brain acetylcholine expires in 2003.
As described in the licensed U.S. patent, the inadequate release of
acetylcholine may be associated with several disorders, including the behavioral
and neurological syndromes seen after brain traumas and peripheral
neuro-muscular disorders including myasthenia gravis and post-stroke
rehabilitation. The claim of the licensed patent, while being broadly directed
to the treatment of inadequate release of brain acetylcholine, does not
specifically recite the indications for which the Investigational New Drug
("IND") application has been filed. In addition to any proprietary rights
provided by this patent, the Company expects to rely on certain marketing
exclusivity regulations of the FDA. In March 1995, the Company filed a patent
application relating to the use of citicoline to reduce infarct size. Additional
domestic and international applications were filed by the Company in 1996. See
"Patents and Proprietary Rights," "Government Regulation" and "Risk Factors -
Uncertaintity of Patent Position and Proprietary Rights."
In June 1996, Genentech, Inc. announced that its clot-dissolving agent,
Activase, a genetically engineered version of the naturally occurring tissue
plasminogen activator (t-PA), was cleared for marketing by the FDA for treatment
of acute ischemic stroke within three hours of symptom onset. Activase is the
first therapy to be indicated for the management of stroke. A number of other
drugs in clinical trials are also being developed for this indication, including
compounds under development by Janssen Pharmaceutical NV and Boehringer
Ingelheim GmbH. Based on citicoline clinical data to date, however, the Company
believes citicoline may be an attractive post-stoke therapy, particularly due to
its potentially broader, 24-hour post-stroke therapeutic window and its possible
use in combination with other therapies.
9
Supplies of citicoline used for clinical purposes have been produced on
a contract basis by a third party manufacturer. Ferrer has the right to
manufacture commercial supplies, subject to certain conditions. The Company is
evaluating marketing options for the drug and may expand its sales force and
develop a marketing organization to market or co-promote citicoline to
neurologists and related specialists, and/or seek to enter into a collaboration
with a large pharmaceutical company for marketing of the drug, assuming
succesful development and regulatory approval of the drug.
Pagoclone:
Pagoclone is under development by the Company as a drug to treat
panic/anxiety disorders. These disorders are believed to be related to excess
activity of certain neurons, resulting from the decreased action of the
neurotransmitter GABA (gamma amino butyric acid). The Company believes that
pagoclone increases the action of GABA, thus reducing excess neuronal activity
and alleviating symptoms of panic and anxiety.
Current pharmacological treatments for anxiety and panic disorders
include serotonin agonists such as BuSpar, and benzodiazepines, such as Valium
and Xanax, as well as the serotonin reuptake inhibitor, Paxil, approved for the
treatment of panic disorders. Serotonin agonists have been shown to have limited
effectiveness in treating anxiety and are generally not effective in treating
panic disorders. Although benzodiazepines help to regulate GABA in the brain,
they may cause side effects such as sedation, hangover, dizziness and tolerance
with continuing use and have the potential for addiction. In addition, the
sedative/hypnotic effects of benzodiazepines are increased by alcohol intake,
which may lead to serious side effects that may include coma.
In November 1996, the Company initiated its first Phase 2/3 trial of
pagoclone in patients suffering from panic disorder. This national, multi-center
dose-response trial will include an estimated 300 patients and will compare the
effects of three doses of pagoclone to placebo in treating panic disorder during
a 10-week period. Primary outcome measures will include the frequency and
severity of panic attacks experienced by patients. The Company submitted an IND
application for this trial in September 1996, following the completion of a
multiple-dose tolerability trial in the United Kingdom. Pre-clinical and early
clinical data suggest that pagoclone may offer advantages over traditional
benzodiazepine anti-anxiety agents, including reduced drowsiness, lower
addiction and withdrawal potential and less potential for alcohol interactions.
In 1994, the Company licensed from RPR exclusive worldwide rights to
pagoclone, in exchange for licensing, milestone and royalty payments to RPR. See
"Patents and Proprietary Rights." The Company currently intends to seek to
sublicense marketing rights to this product.
Melzone and Melatonin Related Compounds:
The Company has developed Melzone, a dietary supplement which contains
a low dose form of melatonin, a naturally occurring hormone produced by the
pineal gland that may play a key role in regulating the body's circadian rhythm,
or biologic clock. Research has shown that when a person's melatonin level
mimics normal nighttime levels produced by the body, sleep is induced, and when
it is low, wakefulness and vigilance are enhanced. Melzone contains the amount
of melatonin believed to be appropriate to raise blood melatonin levels to
normal nighttime levels following which, these levels fall again each morning
consistent with a normal day-night rhythm in blood melatonin levels.
Melatonin is believed to induce restful sleep while offering advantages
over currently available sleeping aids, many of which may have undesirable side
effects, such as amnesia or "hangover". Although melatonin is available,
generally at much higher strengths, as a dietary supplement in health food
stores and other outlets, the Company believes that lower strengths, which are
intended to mimic normal nighttime levels, and which are manufactured in
accordance with good manufacturing practices, can offer an innovative inducement
of sleep with a reduced risk of adverse side effects that may be associated with
higher doses.
The Company initiated regional test-marketing of Melzone in December
1996 in the greater Boston area as a dietary supplement containing 0.3 milligram
of melatonin for normal restful sleep. This product is based upon research
leading to a patent licensed by the Company from MIT in September 1995 that
covers the use of very low amounts (less
10
than one milligram) of melatonin for the induction of sleep, in exchange for
royalties based on sales.
A patent was also issued to the Company in April 1995 for a class of
melatonin analogs that includes IP-100-9, under limited pre-clinical development
as a novel prescription sleeping aid. The analogs, compounds with chemical
structures similar to melatonin, were synthesized through rational drug design
computer modeling techniques, using naturally occurring melatonin as a lead
compound.
THE SUBSIDIARIES
INTERCARDIA, INC.
General
Through Intercardia, the Company is developing bucindolol, a
cardiovascular drug in Phase 3 clinical trials for the treatment of congestive
heart failure ("CHF"), a syndrome of progressive degeneration of cardiac
function which is generally defined as the inability of the heart to pump
sufficient volume of blood for proper functioning of vital organs. CHF is caused
by a number of conditions that produce a primary injury or stress to the heart
muscle. Regardless of the cause of the primary damage, the body will activate
compensatory mechanisms in an attempt to maintain cardiac output. These
mechanisms include activation of the cardiac adrenergic systems resulting in
stimulation of beta-adrenergic receptors on cells located in the heart and
vascular system. Chronic stimulation of these receptors is believed to
contribute to the continual worsening of cardiac function and high mortality.
Intercardia licensed worldwide rights to bucindolol through its 80%
owned subsidiary, CPEC, Inc. ("CPEC") of which the remaining 20% is owned by
Interneuron. Originally developed by Bristol-Myers Squibb Company ("BMS") and
licensed by BMS to CPEC in exchange for royalties based on sales, bucindolol is
a non-selective beta-blocker with mild vasodilating properties that works by
blocking beta-adrenergic receptors on cells located in the heart and vascular
system. The Company believes that vasodilating beta-blockers such as bucindolol
possess potential advantages over earlier beta blockers (which are
contra-indicated for CHF) and represent a promising approach to the treatment of
CHF. Bucindolol is expected to be used in addition to other drugs for the
treatment of CHF.
The Company is aware that carvedilol, also a vasodilating non-selective
beta-blocker, owned by Boehringer Mannheim GmbH and licensed in the U.S. and
certain other countries to SmithKline Beecham PLC, is under review by the FDA.
Although an advisory committee of the FDA recommended against the approval of
carvedilol as a treatment for congestive heart failure, the Company believes
that SmithKline Beecham is continuing to attempt to gain FDA approval of
carvedilol as a treatment for CHF and it is possible that carvedilol could
receive approval by the FDA for marketing as a treatment for CHF prior to
bucindolol. The Company is aware that carvedilol has been approved for the
treatment of CHF in seven countries, including Canada. See "Competition."
The U.S. composition of matter patent on bucindolol expires in 1997,
prior to the anticipated launch of the product. Intercardia intends to pursue up
to five years' market exclusivity under the Drug Price Competition and Patent
Term Restoration Act of 1984 (commonly referred to as the Waxman-Hatch Act) by
developing a once-daily formulation. See "Government Regulation" and "Risk
Factors - Uncertainty Regarding Waxman Hatch Act." Intercardia intends to seek
partners for the development and marketing of this formulation.
BEST Study
A Phase 3 clinical trial began in June 1995 among patients with CHF, to
test whether the addition of bucindolol to optimal therapy for CHF will reduce
mortality in patients with moderate to severe CHF. Known as BEST (Beta- blocker
Evaluation of Survival Trial), the bucindolol study is being conducted by the
National Institutes of Health ("NIH") and the Department of Veterans Affairs
("VA"). The BEST study is designed to include up to 2,800 patients (of which at
least 33% are recommended to be female), having moderate to severe symptons
(NYHA classes III and IV), at approximately 90 clinical centers throughout the
U.S. As of November 30, 1996, 1,350 patients have been enrolled in the BEST
study. All patients are expected to receive a minimum follow-up of 18 months or
more, giving a potential maximum duration for the study of four and one half
years. The study is designed so that in the event that significant
11
mortality improvement is evident to an independent Data and Safety Monitoring
Board during the course of the study, the study could be stopped early.
The NIH and VA have committed up to $15,750,000 primary funding for
BEST, with specific levels of NIH/VA funding to be based upon patient enrollment
milestones. Intercardia has agreed to commit up to $2,000,000 over the course of
the study (of which $1,250,000 has been paid as of September 30, 1996), in
addition to supplying the drug and providing monitoring services estimated to
cost an additional $2,250,000.
Marketing
In December 1995, Intercardia entered into an agreement with Astra
Merck for the development, commercialization and marketing in the U.S. of a
twice-daily formulation of bucindolol for the treatment of CHF. Under the
agreement, Astra Merck made a $5,000,000 initial payment to Intercardia and
agreed to fund up to $15,000,000 of U.S. development costs for the twice-daily
formulation of bucindolol, including Intercardia's costs related to the BEST
study. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Astra Merck agreed to market bucindolol, with
Intercardia retaining certain co-promotion rights, and agreed to make milestone
payments to Intercardia upon FDA approval and the achievement of specified
levels of sales. Intercardia is entitled to royalties of 15% of the first
$110,000,000 of net sales and 30% of yearly net sales above $110,000,000,
adjusted for inflation, and Astra Merck agreed to pay royalties due BMS.
Intercardia is committed to reimburse Astra Merck $10,000,000 in December 1997
and to reimburse one-third of the launch costs through the first 12 months of
commercial sales, up to a total launch cost reimbursement of $11,000,000. In the
event Intercardia does not make either of these payments, the royalty rate
declines to 7% of net sales. Intercardia retained U.S. rights to a once-daily
formulation of bucindolol as well as rights for all formulations of bucindolol
outside the U.S.
Intercardia Initial Public Offering
In February 1996, Intercardia completed its initial public offering
(the "Intercardia IPO"), resulting in net proceeds of approximately $35,000,000,
including approximately $5,000,000 from Interneuron's purchase of Intercardia
Common Stock in the Intercardia IPO.
CPEC Acquisition
In September 1994, Intercardia acquired 80% of the outstanding capital
stock of CPEC and in January 1996, Interneuron acquired the remaining 20% of
CPEC not owned by Intercardia. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Early-Stage Programs
Intercardia's pre-clinical research and development activities,
conducted through its 61% owned subsidiary, Aeolus Pharmaceuticals, Inc.
("Aeolus") are focused currently in the area of antioxidant small molecules.
These compounds may have potential to address diseases involving toxicities
associated with excess oxygen free radicals and regulation of nitric oxide
levels. These diseases include cardiomyopathy, neonatal respiratory distress
syndrome, adult respiratory distress syndrome and stroke. Intercardia may
implement its expansion strategy by establishing additional subsidiaries for
targeted development programs.
12
Clayton I. Duncan is President and Chief Executive Officer of
Intercardia, which had 16 full-time employees as of September 30, 1996. As of
September 30, 1996, Interneuron owned approximately 60% of the outstanding
securities of Intercardia, and 51% on a fully diluted basis. In certain
circumstances, Interneuron has the right to purchase additional shares of
Intercardia common stock at fair market value so that Interneuron's equity
ownership in Intercardia does not fall below 51%.
PROGENITOR, INC.
Progenitor, formed in February 1992, focuses on functional genomics
using developmental biology and is engaged in the discovery, characterization
and validation of novel genes, receptors and related proteins. Progenitor's
functional genomic approach combines developmental biology expertise and
proprietary technology with gene sequencing and other molecular biology
techniques to accelerate the discovery process. Using its developmental biology
approach to functional genomics, Progenitor has made several discoveries,
including the discovery of the B219 leptin receptor, for which it filed several
patent applications. Progenitor believes leptin may have important roles in
blood cell formation ("hematopoiesis"), reproduction and obesity. Progenitor has
entered into a collaboration with Chiron for the development and
commercialization of Progenitor's T7T7 gene delivery system, and a collaboration
with Novo Nordisk for the isolation, development and commercialization of blood
cell growth factors.
Developmental biology is the study of the genetic and cellular events
that control the transformation of a fertilized egg into a full-formed, complex
organism. Many genes involved in the process of cell growth and differentiation
may be expressed exclusively, or at enhanced levels, during certain stages of
early development and may become inactive in the normal cells of full-formed
organisms. By comparing the sequential expression of genes from one stage of
early development to the next, Progenitor believes it can identify, isolate and
sequence specific genes, receptors and other proteins which play key roles in
cell growth and differentiation. Progenitor believes that early developmental
cells and tissues are a rich and largely unexploited source for genes and
proteins that may lead to the development of treatments for diseases
characterized by aberrant cell growth and differentiation, such as cancer, blood
and immune system disorders and degenerative diseases associated with aging.
Progenitor possesses a number of proprietary technologies that it uses
in its discovery programs. Progenitor has developed proprietary methods and cell
lines using mouse (murine) embryonic stem cells for studying the differentiation
of cells in the early development of tissues and organs. Progenitor also has
developed proprietary techniques to isolate, grow, maintain in culture and
differentiate cells from the murine yolk sac. The yolk sac contains the earliest
cells in development that are committed to differentiate into the blood, immune
and vascular systems. In addition, Progenitor has developed proprietary gene
cloning and screening techniques to identify genes that encode receptors for
growth factors believed to be important in hematopoiesis and cancer therapy, as
well as the growth and development of neural and other tissues.
Progenitor has used its functional genomics approach to make three
principal discoveries. In addition to its ob-r, or B219, leptin receptor
discovery, Progenitor has discovered, in collaboration with Vanderbilt
University ("Vanderbilt"), the developmentally-regulated endothelial cell locus
("del-l") gene. The del-l gene is involved in the early growth and development
of blood vessels and bone. Progenitor believes that del-l may have potential
applications in diseases accompanied by excessive blood vessel formation, such
as cancer, and in cardiovascular and other disorders that may be treatable by
stimulating blood vessel growth. Progenitor also has identified a murine burst
forming units-erythroid ("BFU-e") red blood cell growth factor activity.
Progenitor believes that a BFU-e factor may be useful in the development of
treatments for a variety of blood disorders.
Progenitor currently is focusing its efforts and resources on the
discovery, characterization and validation process and intends to seek to enter
into corporate collaborations for the development and commercialization of any
drugs or other products developed based on its discoveries. In March 1995,
Progenitor entered into an agreement with Chiron for the development and
commercialization of Progenitor's T7T7 gene delivery system for selected
applications. In May 1995, Progenitor entered into a development and
commercialization agreement with Novo Nordisk relating to the BFU-e red blood
cell growth factor. See "Agreements--Progenitor Agreements".
13
Progenitor's research is at a very early stage, and Progenitor requires
significant additional funds to complete development, conduct pre-clinical and
clinical testing and pursue regulatory review of any potential products.
Progenitor is seeking to enter into additional collaborations or business
combinations to pursue development of its technologies and/or to obtain
independent equity financing. There can be no assurance that Progenitor's
efforts to obtain such additional funding or collaborations will be successful,
in which case Progenitor would be required to reduce or eliminate certain
operations.
Douglass B. Given, M.D., Ph.D. is President and Chief Executive Officer
of Progenitor, which had 25 full-time employees as of September 30, 1996. As of
September 30, 1996 Interneuron owned approximately 76% of the outstanding
capital stock of Progenitor.
TRANSCELL TECHNOLOGIES, INC.
Transcell is engaged in developing new pharmaceutical products using
core technologies in the field of carbohydrate chemistry. Transcell's primary
core technology is directed toward drug discovery based on the chemical
synthesis of complex carbohydrate compounds known as oligosaccharides and
glycoconjugates. Transcell also has technology relating to the development of
new carrier compounds for transport and/or targeted delivery of a wide variety
of drugs, including gene-based therapeutics, directly into cells. Transcell has
exclusive, worldwide licenses to its core technologies from Princeton
University, where Daniel Kahne, Ph.D., and Suzanne Walker-Kahne, Ph.D.,
consultants to Transcell, performed Transcell's founding scientific research.
Combinatorial Chemistry
Transcell's efforts are focused primarily on its drug discovery
technology which involves methods of synthesizing oligosaccharides, which are
carbohydrate molecules, for therapeutic use. Oligosaccharides are present on all
cell surfaces and, in different configurations, are integral to virtually all
inter-cellular reactions, including viral, bacterial and immune system
interactions. Transcell's technology is also directed toward adding carbohydrate
components to existing molecules to make glycoconjungates to improve the overall
efficacy and toxicity profile of the parent compound. Transcell believes its
novel carbohydrate synthesis technology may reduce the obstacles associated with
traditional methods for making carbohydrates, such as lack of specificity, low
yields and relatively long production periods producing unique libraries of
oligosaccharide compounds and glycoconjugates more efficiently and in fewer
steps, with both solution and the solid phase methods.
Transcell is applying this technology to produce libraries of
carbohydrates and glycoconjugates for screening as drug candidates. Transcell's
combinatorial chemistry approach in this area is based upon investigating the
synthesis of both random libraries of carbohydrates and carbohydrates directed
to a specific therapeutic target. Transcell has rights under several patent
applications that are currently pending in the U.S. and several foreign
jurisdictions and which cover various aspects of the synthesis of
oligosaccharides. Notices of Allowance have been received in three of such
patent applications.
Drug Transport
Transcell's second core technology is focused on utilizing a series of
"carrier" compounds (Transphores) to deliver therapeutic compounds across
various membranes. Biological membranes are essentially impermeable to many
molecules, including proteins and oligonucleotides, thereby decreasing the
efficacy of diagnostics or therapeutics based on such compounds. Two patents and
one notice of allowance in the United States have been issued on this
technology. Corresponding foreign patent applications are pending.
Gene therapy
Transcell has synthesized a series of novel compounds that may permit
the transport (transfection) of DNA or antisense molecules into cells without
the use of a viral-based delivery mechanism. Patent applications, including
foreign counterparts, covering these compounds and their uses are pending or are
being filed.
14
Transcell's research is at a very early stage and requires significant
additional funds to complete development, conduct pre-clinical and clinical
testing and pursue regulatory review of any potential products. Transcell is
seeking to enter into collaborations or business combinations to pursue
development of its technologies but has no agreements with respect to any
significant collaborations. There can be no assurance that Transcell's efforts
to obtain such additional funding or collaborations will be successful, in which
case Transcell would be required to reduce or eliminate certain operations.
Glenn L. Cooper, M.D., is the Acting President and Chief Executive
Officer of Transcell, which had 30 full-time employees as of September 30, 1996.
At September 30, 1996, Interneuron owned approximately 78% of Transcell's
outstanding capital stock.
INTERNUTRIA, INC.
In April 1995, Interneuron formed InterNutria to develop and market
non-prescription, nutritional products for the dietary management of medical and
non-medical conditions. InterNutria's product strategy is based on initial
research conducted at MIT by scientific founder Judith Wurtman, Ph.D., which
examined the connection between food, behavior and the brain, and how
modifications of food intake can enhance the synthesis and release of certain
neurotransmitters and thus enhance control over behavior, performance and
disease states.
InterNutria's strategy is to acquire, develop and commercialize
proprietary nutritional products that are clinically evaluated, regulated by the
Dietary Supplement Health Education Act of 1994 ("DSHEA") for the dietary
management of physiological processes, and manufactured in a well-controlled
environment. Under the provisions of DSHEA, these are "foods or beverages which
have been uniquely developed to provide medical, health or performance benefit,
including the management of disease states." The marketing of InterNutria's
products is expected to be consumer-oriented. See "Government Regulation."
In November 1995, InterNutria acquired technology, including a patent
application and know-how, from Walden Laboratories, Inc., relating to
InterNutria's first potential product, PMS Escape, in exchange for $2.4 million
payable in two installments of Interneuron Common Stock, the first in late 1996
and the second in late 1997, at the then-prevailing market price. Certain
affiliates of Interneuron are or were stockholders of Walden but will not
receive any of the purchase price. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PMS Escape, a dietary supplement for women with pre-menstrual syndrome,
is a powdered beverage mix that contains a special formulation of natural
carbohydrates specifically designed to increase serotonin levels. In October
1996, InterNutria expanded a regional test launch of PMS Escape in New England,
where the product is available at certain retail outlets, while continuing
clinical evaluation of the product. Depending upon the results of the test
launch, ongoing clinical evaluation and the availability of sufficient funds,
the Company will determine whether to commence commercial launch of PMS Escape
beyond the New England region. InterNutria currently has a six-person sales
force, retained on a contract basis, targeting obstetricians and gynecologists,
as well as retail accounts. Any broader commercial marketing, including
distribution and order fulfillment, is similarly expected to be conducted on a
contract basis.
InterNutria is also developing a sports drink as a dietary supplement
for enhancement of athletic performance and reduction of fatigue which
InterNutria expects to test launch on a regional basis in fiscal 1997.
James F. Pomroy is Chairman and Lewis D. Lepene is President and Chief
Executive Officer of InterNutria, which had five full-time employees as of
September 30, 1996. As of September 30, 1996, Interneuron owned 100% of the
outstanding capital stock of InterNutria.
MANUFACTURING AND MARKETING
General
The Company has no manufacturing facilities and limited marketing
capabilities. In general, the Company intends to rely primarily on third parties
for manufacturing and for marketing products requiring broad marketing
capabilities and for overseas marketing. For certain products, including Redux,
citicoline, Melzone and InterNutria's
15
dietary supplements and medical foods, the Company is conducting and may conduct
certain marketing or co- promotional activities in the United States directly.
Such activities may include a combination of educational programs to
professional audiences, sales force activities or direct advertising and
promotion.
To the extent the Company enters into collaborative arrangements with
pharmaceutical and other companies for the manufacturing or marketing of
products, these collaborators are generally expected to be responsible for
funding or reimbursing all or a portion of the development costs, including the
costs of clinical testing necessary to obtain regulatory clearances, and for
commercial-scale manufacturing. These collaborators are expected to be granted
exclusive or semi-exclusive rights to sell specific products on a disease
application or market specific basis in exchange for a royalty, joint venture,
equity investments, co-marketing or other financial interest. Such collaborative
arrangements could result in lower revenues than if the Company marketed a
product itself.
In the event the Company determines to establish its own manufacturing
or marketing capabilities, it will require additional funds for manufacturing,
facilities, equipment and personnel. For example, the Company may seek to market
certain products by developing its internal sales force or through contract
sales representatives, directly to selected groups of physician specialists
likely to prescribe the product. In such event, the Company would be responsible
for all costs associated with developing, manufacturing and marketing the
product. For ongoing or planned regional test launches of Melzone, PMS Escape
and Boston Sports Supplement, the Company is or will be responsible for these
costs. Depending upon the results of the test launches, ongoing clinical
evaluation and the availability of sufficient funds, the Company will determine
whether to commence commercial launch of PMS Escape and Boston Sports Supplement
beyond the regional test launch areas.
Redux
With respect to the marketing and manufacture of Redux, the Company has
sublicensed its exclusive U.S. marketing rights to AHP, while retaining
co-promotion rights. The Company will rely on AHP to target the obesity market
and for distribution and advertising and promotional activities. The Company's
approximately 30-person sales force is promoting Redux to selected
diabetologists, endocrinologists, bariatricians, nutritionists and weight
management specialists, subject to certain restrictions. Under the Servier
Agreements, the Company is required to purchase from a designee of Servier for
five years from commercial introduction all requirements of dexfenfluramine bulk
chemical for incorporation into the finished dosage formulation. Under a
contract manufacturing agreement expiring in December 1998 Boehringer is
producing on behalf of Interneuron commercial scale quantities of the finished
dosage formulation of Redux in capsule form. See "Agreements - Redux
Agreements."
Citicoline
Supplies of citicoline used for clinical purposes have been produced on
a contract basis by a third party manufacturer. Ferrer has the right to
manufacture commercial supplies, subject to certain conditions. The Company is
evaluating marketing options for the drug and may expand its sales force and
develop a marketing organization to market or co-promote citicoline to
neurologists and related specialists, and/or seek to enter into a collaboration
with a large pharmaceutical company for marketing of the drug.
Bucindolol
Intercardia has an agreement with Astra Merck for the U.S. development
and marketing of bucindolol. A steering committee consisting of representatives
of Intercardia and Astra Merck will select a third party manufacturer for
bucindolol for the U.S. Astra Merck agreed to conduct sales and marketing of
bucindolol in the U.S., with Intercardia retaining co-promotion rights. See
"Agreements - Intercardia Agreements."
Progenitor
Progenitor has an agreement with Chiron to collaborate in the
development and commercialization of Progenitor's gene delivery technology in
selected cancer fields, and for certain cardiovascular disorders and infectious
16
diseases, for which Chiron gains certain exclusive manufacturing and marketing
rights. Chiron agreed to supply clinical and commercial manufacturing for any
products resulting from the collaboration and would be a preferred manufacturer
for the product fields retained by Progenitor. See "Agreements - Progenitor
Agreements."
Progenitor and Novo Nordisk have a research, development and
commercialization agreement under which Novo Nordisk will gain access to one
proprietary therapeutic growth factor project that addresses early development
of the hematopoietic (blood-cell formation) system and may be valuable in cancer
therapy and as treatments for diseases of the blood and immune systems. Novo
Nordisk has the right to manufacture and market, on an exclusive worldwide
basis, any products developed from this collaboration. See "Agreements -
Progenitor Agreements."
COMPETITION
General
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies, including
major pharmaceutical companies and specialized biotechnology companies, are
engaged in research and development of technologies and therapies similar to
those being pursued by the Company. Many of the Company's competitors have
substantially greater financial and other resources, larger research and
development staffs and, unlike the Company, have significant experience in
pre-clinical testing, human clinical trials and other regulatory approval
procedures.
The Company does not have the resources and does not intend to compete
directly with major pharmaceutical companies in drug manufacturing and
marketing, except for certain neuropharmaceutical and nutritional products and
food related products which the Company may directly market in the United
States. In the event the Company seeks to market any products directly, it will
compete with companies with well-established distribution networks and market
position. See "Manufacturing and Marketing" and "Government Regulation".
Redux
The marketing of Redux may be subject to substantial competition.
Dexfenfluramine is an isomer of fenfluramine, which is sold under the brand name
Pondimin by AHP for approximately the same use as dexfenfluramine, although
indicated only for "short-term (a few weeks) use." Although dexfenfluramine is
distinguishable from fenfluramine, there can be no assurance that Redux, which
is priced higher than Pondimin, will achieve greater market acceptance than
Pondimin or any other prescription drug used to treat obesity. AHP also has an
anti-obesity compound which the Company believes is in Phase 2 clinical trials.
The Company is aware of other drugs under development for the treatment of
obesity, including sibutramine, for which an affiliate of BASF AG has filed an
NDA. Although an FDA advisory committee has recommended against its approval,
it has been reported that the FDA has issued an approvable letter for the drug.
An affiliate of Roche Holdings Ltd. is developing a drug, Orlistat, to block fat
absorption that has completed Phase 3 clinical trials, and Neurogen Corporation
is conducting Phase 1 clinical trials with an anti-obesity drug, NGD 95-1. The
introduction of additional competitive obesity drugs may adversely affect Redux
sales. Other drugs and technologies relating to the treatment of obesity are in
earlier stages of development and, due to the limited period of marketing
exclusivity, Redux may eventually be subject to competition from generic
versions of dexfenfluramine. These drugs can be expected to be available at a
significantly lower price than Redux, especially due to the minimum royalties
due to Servier and fixed price provisions for the purchase of dexfenfluramine to
which the Company is subject. Competitive factors will also include the relative
price of competitive drugs as well as their perceived safety and effectiveness.
See "Risk Factors - Risks Relating to Redux - and - Competition."
Citicoline
In June 1996, Genentech, Inc. announced that its clot-dissolving agent,
Activase, a genetically engineered version of the naturally occurring tissue
plasminogen activator (t-PA), was cleared for marketing by the FDA for the
treatment of acute ischemic stroke within three hours of symptom onset. Activase
is the first therapy to be indicated for the management of stroke. A number of
other drugs in clinical trials are also being developed for this indication,
including compounds under development by Janssen Pharmaceutical NV and
Boehringer Ingelheim GmbH. Based on
17
existing clinical data on citicoline, however, the Company believes citicoline
may be an attractive post-stroke therapy, particularly due to its potentially
broader, 24-hour post-stroke therapeutic window.
Bucindolol
The cardiovascular drug market is highly competitive with many drugs
marketed by major multi-national and integrated pharmaceutical companies having
substantially greater technical, marketing and financial resources than
Intercardia. In particular, carvedilol, a non-selective beta-blocker with
vasodilating properties is owned by Boehringer Mannheim GmbH and licensed in the
U.S. and certain other countries to SmithKline Beecham. Since 1991, carvedilol
has been approved as a treatment for hypertension in several European countries,
and in September 1995, it was approved by the FDA for commercial marketing in
the U.S. as a twice-daily treatment for hypertension. In February 1995, the
Phase 3 studies of carvedilol for treatment of congestive heart failure were
stopped early due to carvedilol's unexpected effect in reducing mortality. In
November 1995, SmithKline Beecham submitted data to the FDA to supplement its
hypertension NDA for carvedilol to cover the treatment of congestive heart
failure. Although an FDA advisory committee recommended against carvedilol as a
treatment for congestive heart failure in May 1996, the Company believes that
SmithKline Beecham is continuing to attempt to gain FDA approval for carvedilol
as a treatment for CHF and there can be no assurance that carvedilol will not be
approved for treatment of congestive heart failure, possibly prior to
bucindolol. The Company is aware that carvedilol has been approved for the
treatment of CHF in at least seven countries, including Canada. In addition,
beta-blockers have not historically been accepted by the medical community to
treat congestive heart failure, and substantial educational efforts may be
required to convince physicians of the therapeutic benefits of bucindolol
notwithstanding its action as a beta-blocker. The Company is also aware of other
drugs and devices under development for the treatment of heart failure. E. Merck
is testing bisoprolol, a beta-1 selective beta-blocker marketed in the U. S. by
a division of AHP for hypertension, as a treatment in CHF patients in Europe.
The Company believes that Astra AB has initiated or plans to initiate shortly a
large mortality study for the beta-1 selective beta-blocker metoprolol.
Pagoclone
Current therapy for anxiety generally includes the prescription of
benzodiazepine-class and serotonergic compounds. In addition, the Company is
aware of competitors which market certain prescription drugs for indications
other that anxiety who are planning to seek an expansion of labelling to include
anxiety as an indication. The Company believes it is likely there are also
several compounds for anxiety that are in an early stage of preclinical or
clinical development.
There can be no assurance that products under development or introduced
by others will not render the Company's products or potential products obsolete
or uneconomical or result in treatments or cures superior to any therapy
developed by the Company or that any therapy developed by the Company will be
preferred to any existing or newly developed products or technologies. Other
companies may succeed in developing and commercializing products earlier than
the Company which are safer and more effective than those proposed for
development by the Company. Further, it is expected that competition in these
fields will intensify. Colleges, universities, governmental agencies and other
public and private research organizations continue to conduct research and are
becoming more active in seeking patent protection and licensing arrangements to
collect royalties for use of technology that they have developed, some of which
may be directly competitive with those of the Company. In addition, these
institutions may compete with the Company in recruiting highly qualified
scientific personnel. The Company expects technological developments in its
fields of research and development to occur at a rapid rate and expects
competition to intensify as advances in these fields are made. Accordingly, the
Company will be required to continue to devote substantial resources and efforts
to research and development activities.
AGREEMENTS
Redux Agreements:
AHP Agreements
In November 1992, the Company entered into a series of agreements (the
"AHP Agreements") which granted American Cyanamid Company the exclusive right to
manufacture and market dexfenfluramine in the U.S. for use in treating obesity
associated with abnormal carbohydrate craving, with the Company retaining
co-promotion rights. In 1994 AHP acquired American Cyanamid Company. The
agreement is for a term of 15 years commencing on the date dexfenfluramine is
first commercially introduced by AHP, subject to earlier termination.
18
Under the AHP Agreements, through September 30, 1996, the Company
received $5,000,000 in milestone payments, $3,500,000 in equity investments and
approximately $1,700,000 in research and development funding. As of December 13,
1996, AHP owned shares of Interneuron Preferred Stock convertible into an
aggregate of 622,222 shares of Common Stock. AHP is obligated to make additional
payments and purchase additional shares of Preferred Stock pursuant to the AHP
Agreements upon the achievement of specified milestones, including descheduling
of dexfenfluramine prior to April 1997 or the achievement of specified levels of
net sales if dexfenfluramine is not descheduled. AHP is also responsible for
reimbursing the Company for 50% of certain expenditures related to clinical
development, Phase 4 studies and market surveillance for abuse potential.
The AHP Agreements provide for "base" royalties to the Company of 11.5%
of AHP's net sales (equal to the royalty required to be paid by the Company to
Servier) and for "additional royalties", ranging from a minimum of 5% of the
first $50,000,000 of net sales if dexfenfluramine is not descheduled to a
maximum of 12% of net sales over $200,000,000 if dexfenfluramine is descheduled
and the Company does not manufacture the finished dosage formulation of
dexfenfluramine (subject to 50% reduction if generic drug competition exceeds a
market share of 10% or greater of total new Redux prescriptions in two
consecutive quarters); if the finished dosage formulation is manufactured by the
Company (which the Company currently does under an agreement with Boehringer),
the maximum additional royalty is 11%.
The Company also agreed to sell to AHP and AHP agreed to purchase from
the Company for five years from commercial introduction of dexfenfluramine all
of AHP's requirements for dexfenfluramine in bulk chemical form at a purchase
price equal to the price required to be paid by the Company to Servier.
The Company and AHP agreed to confer with respect to the allocation of
the obligation to manufacture Redux capsules between themselves and third
parties and AHP approved Boehringer as a third party supplier.
AHP has the right to terminate its sublicense upon 12 months notice to
the Company. See "Risk Factors - Risks Relative to Redux." The AHP Agreements
provide that Servier has the right to withdraw its consent to the sublicense in
the event that any entity acquires stock in AHP sufficient to elect a majority
of AHP's Board of Directors or otherwise obtains control of AHP, provided that
no such termination shall occur if AHP or its successor achieves minimum net
sales of $75,000,000 in the first marketing year or $100,000,000 thereafter or
pays Servier amounts it would have been entitled to if AHP had achieved such
minimum net sales. Servier consented to the AHP acquisition of American Cyanamid
Company.
AHP may continue to market Pondimin but agreed that so long as Redux
remains commercially viable, AHP will differentiate Redux for promotional and
marketing purposes and will not promote or market Pondimin or any other product
for the anti-obesity indication which competes directly with Redux in a manner
which negatively affects the future market for Redux.
Effective June 1996 the Company entered into a three year co-promotion
agreement with Wyeth-Ayerst. The agreement provides for Interneuron to promote
Redux to certain diabetologists, endocrinologists, bariatricians and weight
management specialists , subject to certain restrictions, and receive payments
from AHP for a portion of the Company's actual costs for up to 33 salespersons
during the first and second years. In addition, Interneuron is entitled to
varying percentages of profit derived from sales generated by its sales force,
after deducting costs, including cost of product revenue, royalties to
Interneuron, and Interneuron's proportionate share of advertising and promotion
costs. Total payments to Interneuron for sales force payments and profit sharing
will not exceed $10,000,000 per year. Interneuron has agreed, if requested by
AHP, to promote other products of Wyeth-Ayerst that fit within the physician
specialists targeted by Interneuron's sales force. Interneuron's Redux sales
force cannot promote another company's products except under certain conditions.
The co-promotion agreement may be terminated by Wyeth-Ayerst under certain
conditions including if sales generated by Interneuron do not exceed a specified
level per year. Interneuron is able to terminate the agreement at any time on
six month's notice.
Servier Agreements
The Servier Agreements, entered into in February 1990 and as
subsequently amended, grant the Company an exclusive right to market
dexfenfluramine in the U.S. to treat obesity associated with abnormal
carbohydrate craving for a term of 15 years from the date dexfenfluramine is
first marketed in the U.S. The agreements provide for royalties
19
of 11.5% of net sales, with minimum royalties based on the achievement of
specified net sales. The license includes rights to Servier's Redux trademark.
Servier has the right to terminate the license agreement upon the
occurrence of certain events, including a sale or transfer of a substantial part
of the Company's assets or a majority of its stockholdings (other than in
connection with a public offering), an acquisition by any party (other than
existing stockholders or their affiliates as of the date of the Servier
Agreements) of a 20% beneficial interest in the Company, or if the Company
manifests an intent to market a substantially similar pharmaceutical product.
An affiliate of Servier has agreed to supply the Company with, and the
Company has agreed to purchase, all of the Company's bulk chemical requirements
for dexfenfluramine for incorporation into the finished dosage formulation,
subject to provisions for alternate supply if the Company's requirements cannot
be satisfied. The purchase price is fixed, subject to annual increases to cover
production costs. The supply agreement is for a term expiring five years from
the date of commercial introduction of dexfenfluramine and is automatically
extended for an additional five-year term, subject to provisions for termination
for a third party supplier under certain conditions.
Boehringer Ingelheim Agreement
In November 1995, the Company entered into an exclusive manufacturing
agreement with Boehringer under which Boehringer agreed to supply, and the
Company agreed to purchase all of its requirements for Redux capsules from
Boehringer. The contract, which expires December 31, 1998, contains certain
minimum purchase and insurance commitments by the Company and requires
conformance by Boehringer to the FDA's Good Manufacturing Practices regulations.
The agreement provides for the Company to be able to qualify a second source
manufacturer under certain conditions.
Citicoline
In January 1993, the Company entered into a license and supply
agreement with Ferrer (the "Ferrer Agreement") granting the Company the
exclusive right to make, use and sell any products or processes developed under
patent rights relating to certain uses of citicoline in exchange for an up-front
license fee to be credited against royalties based on sales. The Company's
license includes patent and know-how rights in the U.S. and know-how rights in
Canada, and is for a period coextensive with Ferrer's license from MIT. The
underlying U.S. patent expires in 2003. See "Patents and Proprietary Rights".
The Ferrer Agreement also provides that Ferrer shall, subject to certain
limitations, be the exclusive supplier at a fixed price of raw materials
required for the manufacture of any product developed under such patent rights.
The agreement provides that Ferrer may terminate the agreement under certain
circumstances, including failure to obtain FDA approval prior to January 1999 or
in the event more than 50% of the ownership of Interneuron is transferred to a
non-affiliated third party.
Pagoclone
In February 1994, the Company licensed from RPR exclusive worldwide
rights to pagoclone, a patented compound, for use as an anti-anxiety drug,
together with related know-how, in exchange for license fees, milestone payments
and royalties based on sales.
MIT Licenses
In March 1994, the Company entered into a license agreement with MIT
granting the Company an exclusive worldwide license to a number of patent rights
and related technology, including a patent covering a low-dose formulation of
melatonin for use in inducing sleep, in exchange for an initial license fee and
royalties based on sales.
The Company also licensed from MIT in February 1992, a number of other
patent rights with respect to which Dr. Richard Wurtman was the inventor or
co-inventor in exchange for a license fee and royalties based on sales (the "MIT
License"). The Company's license is exclusive for the longer of the first 12
years following commercialization of an individual licensed product or 2007. The
patents underlying the MIT License expire at various times commencing in 1997.
20
The MIT License includes a patent covering the use of a choline source
to reduce fatigue caused by intense exercise. This license is subject to, and
limited by, a license previously granted by MIT to another company, which
licensed two U.S. patents relating to the use of lecithin in capsule, granular
or liquid form (but not in food form or as part of a prescription drug) for
raising blood choline levels. As the Company's choline sports drink (Boston
Sports Supplement) is in a food form (e.g., a drink), it does not believe this
license will materially restrict its ability to market this proposed product.
Although the Company believes this product will be considered a food or a
dietary supplement, there can be no assurance that the FDA will not regulate it
as a drug, thereby requiring the filing and approval of an NDA.
Intercardia Agreements
Astra Merck Agreement
In December 1995, Intercardia entered into the Astra Merck
Collaboration, a development and marketing collaboration and license agreement
with Astra Merck which provides for the development, commercialization and
marketing of a twice-daily formulation of bucindolol for the treatment of
congestive heart failure in the U.S. Astra Merck made a $5,000,000 payment to
Intercardia and agreed to fund up to $15,000,000 of development costs, including
Intercardia's obligations relating to the BEST study and to pay royalties to
BMS. Astra Merck agreed to market bucindolol in the U.S., with Intercardia
retaining certain co-promotion rights. Astra Merck may terminate the Astra Merck
Collaboration at any time in order to enter into a contract relating to, or to
launch, a competing product if it first makes a payment to Intercardia. If a
termination occurs more than five years after FDA approval of an NDA for
bucindolol, no payment would be required.
The agreement calls for Intercardia to receive additional payments
based upon milestones related to FDA approval and the achievement of specified
levels of sales. Astra Merck agreed to pay the Company $5,000,000 within 10 days
of the grant by the FDA of marketing approval for a twice-daily formulation of
bucindolol, unless such an approval has previously been granted for another
beta-blocker based upon a reduction in heart failure mortality claims.
Intercardia is entitled to royalties of 15% of the first $110,000,000 per year
in net sales and 30% of yearly net sales above $110,000,000, adjusted for
inflation, Intercardia is committed to reimburse Astra Merck $10,000,000 in
December 1997 and to reimburse one-third of the launch costs through the first
12 months of commercial sales, up to $11,000,000. In the event Intercardia does
not make either of these payments, the royalty rate declines to 7% of net sales.
Intercardia retained U.S. rights to a once-daily formulation of bucindolol, as
well as rights for all formulations of bucindolol outside of the U.S.
Bristol-Myers Squibb Agreement
Through CPEC, Intercardia has an exclusive worldwide license to
bucindolol from BMS for pharmaceutical therapy for congestive heart failure and
left ventricular function. The license requires Intercardia to conduct all
appropriate and necessary clinical trials and to take all actions that are
reasonably necessary for the preparation and filing of an NDA and a comparable
application in at least one Western European country. Intercardia is obligated
to pay royalties on net product sales. Unless earlier terminated, the bucindolol
license continues, with respect to each country, until the later of patent on
bucindolol issued expiration, or 15 years after first commercial sale of
bucindolol (subject to two five-year renewals at Intercardia's option).
Duke License
In July 1995, Aeolus, Intercardia's 61% subsidiary, obtained from Duke
University ("Duke") an exclusive worldwide license (the "Duke License") to
products using catalytic antioxidant small molecule technology and compounds.
The Duke License also provides the Company a 180-day option and negotiation
period to license certain future discoveries in the field of antioxidant
research.
21
The Duke License requires Aeolus to use its best efforts to diligently
pursue development of products using the licensed technology and compounds and
to have the licensed technology cleared for marketing in the U.S. by the FDA and
other countries. Duke was issued 6.7% of the outstanding shares of Aeolus common
stock in connection with the Duke License. Aeolus will pay royalties to Duke on
net product sales and milestone payments upon the occurrence of certain events.
Progenitor Agreements
Chiron Agreement
In March 1995, Progenitor entered into an agreement with Chiron to
collaborate in the development and commercialization of Progenitor's T7T7 gene
delivery technology. The agreement licenses to Chiron Progenitor's T7T7 delivery
system for various fields. All rights to product applications of the technology
that are not specifically included in the agreement are retained by Progenitor.
Chiron would supply clinical and commercial manufacturing for any collaboration
products and would be a preferred manufacturer for the product fields retained
by Progenitor. Under the agreement, Progenitor has received payments of
$3,000,000, of which $750,000 was then paid by Progenitor to Chiron as
Progenitor's share in certain start-up nonviral gene therapy manufacturing costs
at Chiron, and Progenitor may receive additional payments based upon the
achievement of defined, mostly late-stage clinical development and regulatory
milestones. The agreement encompasses a minimum of eleven potential products
subject to the research and development collaboration that Chiron may take
forward for clinical development. Progenitor also would receive royalties from
commercial sales of any products resulting from the collaboration.
Novo Nordisk/ZymoGenetics Agreement
In May 1995, Progenitor and ZymoGenetics, a subsidiary of Novo Nordisk,
entered into a research, development and commercialization agreement. Under the
agreement, ZymoGenetics obtained an exclusive, worldwide license to any rights
of Progenitor relating to the BFU-e red blood cell growth factor activity
identified by Progenitor for use in all human therapeutic and small molecule
drug design uses. The development effort is divided into two stages. One project
was terminated at the first stage by Progenitor. If the first stage of the
second project, which is ongoing, is completed successfully, and ZymoGenetics
decides to proceed to the second stage, Progenitor could also receive license
fees and additional payments contingent on achieving late stage development and
regulatory approval milestones for each product. Progenitor would also receive
royalties from commercial sales. ZymoGenetics has the right to manufacture and
market, on an exclusive worldwide basis, products developed from this
collaboration.
Other Progenitor Agreements
Progenitor entered into a license agreement and a sponsored research
agreement with Ohio University in January 1992, as amended in October 1993. The
license agreement grants Progenitor the exclusive worldwide rights to yolk sac
stem cells, gene delivery technologies, and related technologies in exchange for
royalties based on net sales and an equity investment in Progenitor. One United
States patent and several foreign patents have been issued, and three patent
applications are pending in the U.S. and certain foreign countries.
In connection with the foregoing agreements, Progenitor issued 5% of
its original equity and sold for $350,000 an additional 117,000 shares of
Progenitor common stock to the Ohio University Foundation. In the event an
initial public offering, merger or similar corporate transaction of Progenitor
is consummated, the Ohio University Foundation is entitled to purchase 25,000
shares of Progenitor common stock at a price equal to 50% of the anticipated
public offering price or merger or other consideration (subject to adjustment in
the event of stock splits or similar transactions). At September 30, 1996, the
Ohio University Foundation owned approximately 4.5% of Progenitor's outstanding
capital stock.
22
The license agreement also contains certain requirements relating to
the management and operations of Progenitor, including the nomination of two
Ohio University designees to the Board of Directors of Progenitor.
In July 1995, Progenitor obtained from Vanderbilt University exclusive
worldwide rights to Vanderbilt's rights under a jointly owned patent application
utilizing technology relating to a gene, del-1, that may play a role in the
development and growth of blood vessels. The gene was co-discovered by
Progenitor and Vanderbilt. The license was granted in exchange for royalties
based on sales. Vanderbilt may terminate the license after three years if
Progenitor has not made adequate efforts to commercialize products based on the
gene.
In September 1996, Progenitor entered into sponsored research
agreements with the National Jewish Center for Immunology and Respiratory
Medicine and with Vanderbilt University. Under the separate agreements,
Progenitor will fund genomic research to characterize the genes that are active
early in the formation of blood and immune cells and in the development of blood
vessels. Each agreement provides Progenitor first rights to license discoveries
and technologies arising from the research programs.
Transcell Agreements
In January 1992 and October 1993, Transcell entered into license
agreements with Princeton pursuant to which Transcell was granted exclusive
worldwide licenses to specified patent applications and any patents that issue
therefrom, including any derivative patent applications or patents that issue,
relating to certain technology funded by Transcell and any licensed products, in
exchange for an upfront license fee and royalties based on sales. The license
agreements provide for Transcell to use its best efforts to commercialize the
licensed products or processes, including satisfying milestones.
PATENTS AND PROPRIETARY RIGHTS
Redux
Under the Servier Agreements, the Company has an exclusive license to
sell dexfenfluramine in the U.S. under a patent covering the use of
dexfenfluramine to treat abnormal carbohydrate craving, which has been
sublicensed by the Company to AHP. The compound patent on dexfenfluramine, which
was discovered by Servier, has expired. Use of dexfenfluramine for the treatment
of abnormal carbohydrate craving was patented by Drs. Richard Wurtman and Judith
Wurtman, consultants to the Company and directors of Interneuron and
InterNutria, respectively. This use patent was assigned to MIT and licensed by
MIT to Servier, and pursuant to the Servier Agreements was licensed to the
Company. The Drs. Wurtman have advised the Company that, in accordance with MIT
policy, they are entitled to 50% of the royalties received by MIT in connection
with MIT's licensing of dexfenfluramine to Servier.
This use patent expires in 2000, although the Company has applied for
an extension of the expiration date by an amount of time relating to the FDA
regulatory review process (but in any event no longer than five additional
years). However, there can be no assurance of receipt of such extension on a
timely basis or at all or as to the period of any such extension. Upon
expiration of the patent, generic drugs claiming the same use previously covered
by the patent may become available. Fenfluramine is already available in the
United States for the treatment of obesity. See "Competition" and "Government
Regulation."
Citicoline
The compound citicoline is not covered by a composition of matter
patent. The licensed U.S. patent covering the administration of citicoline to
treat patients afflicted with conditions associated with the inadequate release
of brain acetylcholine expires in 2003. As described in the licensed patent, the
inadequate release of acetylcholine may be associated with several disorders,
including the behavioral and neurological syndromes seen after brain traumas and
peripheral neuro-muscular disorders including myasthenia gravis and post-stroke
rehabilitation. The claim of the licensed patent, while being broadly directed
to the treatment of inadequate release of brain acetylcholine, does not
specifically recite the indications for which the IND has been filed. In
addition to any proprietary rights provided by this patent, the Company expects
to rely on certain marketing exclusivity regulations of the FDA. In March 1995,
the Company filed a patent application relating to the use of citicoline to
reduce the size of the area damaged by the stroke, or infarct size. Additional
domestic and international applications were filed by the Company in 1996.
23
Pagoclone
Interneuron licensed from RPR on a worldwide basis patents and patent
applications covering a composition of matter, processes, and metabolites of
pagoclone. A U.S. composition of matter patent was issued in October 1990 and
related U.S. patents were issued in February and March 1996.
Melzone
Interneuron licensed from MIT a patent issued in September 1995 that
covers the use of low-doses of melatonin for the induction of sleep, in exchange
for royalties based on sales.
Bucindolol
CPEC has licensed from BMS a compound patent on bucindolol which
expires in 1997, prior to the anticipated launch of the product. Intercardia
intends to pursue up to five years' market exclusivity under the Waxman-Hatch
Act, although there can be no assurance such exclusivity will be obtained, and
to develop a once-daily formulation of the drug. See "Government Regulation."
Progenitor
Progenitor has filed several U.S. patent applications relating to
leptin receptors (including various isoforms of the leptin receptors). The
Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights relating to the leptin
receptor or receptors. If the Company becomes involved in such litigation, it
could consume a substantial portion of the Company's managerial and financial
resources. The Company is aware that Millennium Pharmaceuticals, Inc.
("Millennium") has filed a patent application relating to a receptor for leptin
and its use in obesity applications, and has licensed to Hoffman-LaRoche, Inc.
rights to develop certain therapeutics for obesity using Millennium's discovery
of a leptin receptor. Millennium has filed a "Protest" in the United States
Patent and Trademark Office in connection with certain Progenitor applications
relating to leptin receptors. A Protest is an available procedure sometimes used
by a third party to provide the patent examiner who is reviewing the involved
application or applications with what the third party believes to be relevant
information. The Protest procedure does not afford any right to the third party
to participate in the patent prosecution process beyond the filing of its
written Protest. Millennium's Protest primarily argues that any claims allowed
to Progenitor should not be so broad as to cover Millennium's own leptin
receptor. There can be no assurance that Millennium's patent application, or
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor, the leptin protein or other ligands,
or any of their respective uses. There can be no assurance that the invention by
Millennium will be accorded an invention date later than Progenitor's invention
date, that any patent will issue to Progenitor or that any such patent issued to
Progenitor would be broad enough to cover leptin receptors of Millennium or
others. Progenitor's failure to obtain a patent on a leptin receptor, or its
failure to obtain a patent that covers the leptin receptors of Millennium or
others, or the issuance of a patent to a third party covering a leptin receptor,
the leptin protein or other ligands, or any of their respective uses, could have
a material adverse effect on Progenitor. Any legal action against the Company
claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting the Company to
potential liability for damages, require the Company or any strategic partner to
obtain a license in order to continue to manufacture or market the affected
products and processes. There can be no assurance that the Company would prevail
in any such action or that any license required under any such patent would be
made available on commercially acceptable terms, if at all.
Progenitor has licensed from Ohio University one U.S. patent and
several pending U.S. patent applications relating to stem cell technology and
gene delivery technology (T7T7), along with certain corresponding foreign
patents and applications.
Transcell
Transcell has exclusive licenses under two U.S. patents assigned to
Princeton University relating to Transcell's drug transport technology.
Transcell also has exclusive rights under domestic patent applications and their
foreign counterparts relating to oligosaccharide synthesis/combinatorial
chemistry, drug transport and gene therapy technologies.
24
Notices of Allowance have been received on various aspects of Transcell's
oligosaccharide synthesis/combinatorial chemistry.
There can be no assurance that patent applications filed by the Company
or others, in which the Company has an interest as assignee, licensee or
prospective licensee, will result in patents being issued or that, if issued,
any of such patents will afford protection against competitors with similar
technology or products, or could not be designed around or challenged. If the
Company is unable to obtain strong proprietary rights protection of its products
after obtaining regulatory clearance, competitors may be able to market
competing products by obtaining regulatory clearance, through showing
equivalency to the Company's product, without being required to conduct the
lengthy clinical tests required of the Company. The patent situation in the
field of biotechnology generally is highly uncertain and involves complex legal,
scientific and factual questions. To date, there has emerged no consistent
policy regarding the breadth of claims allowed in biotechnology patents.
Products being developed by the Company may conflict with patents which
have been or may be granted to competitors, universities or others. Third
parties could bring legal actions against the Company claiming patent
infringement and seeking damages or to enjoin clinical testing, manufacturing
and marketing of the affected product or process. If any such actions are
successful, in addition to any potential liability for damages, the Company
could be required to obtain a license, which may not be available, in order to
continue to manufacture or market the affected product or use the affected
process. The Company also relies upon unpatented proprietary technology and may
determine in some cases that its interest would be better served by reliance on
trade secrets or confidentiality agreements rather than patents. No assurance
can be made that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to such
proprietary technology or disclose such technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology. The
Company also intends to conduct research on other pharmaceutical compounds or
technologies, the rights to which may be held by, or be subject to, patent
rights of third parties and accordingly, if products based on such technologies
are commercialized, they may infringe such patents or other rights.
GOVERNMENT REGULATION
Therapeutics
Most of the Company's products will require regulatory clearance by the
FDA prior to commercialization. The nature and extent of regulation differs with
respect to different products. In order to test, produce and market certain
therapeutic products in the United States, mandatory procedures and safety
standards, approval processes, and manufacturing and marketing practices
established by the FDA must be satisfied.
An IND application is required before human clinical use in the United
States of a new drug compound or biological product can commence. The IND
application includes results of pre-clinical (animal) studies evaluating the
safety and efficacy of the drug and a detailed description of the clinical
investigations to be undertaken.
Clinical trials are normally done in three phases. Phase 1 trials are
concerned primarily with the safety and preliminary effectiveness of the
product. Phase 2 trials are designed primarily to demonstrate effectiveness in
treating the disease or condition for which the product is limited, although
short-term side effects and risks in people whose health is impaired may also be
examined. Phase 3 trials are expanded clinical trials intended to gather
additional information on safety and effectiveness needed to clarify the
product's benefit-risk relationship, discover less common side effects and
adverse reactions, and generate information for proper labeling of the drug. The
FDA receives reports on the progress of each phase of clinical testing and may
require the modification, suspension or termination of clinical trials if an
unwarranted risk is presented to patients. When data is required from long-term
use of a drug following its approval and initial marketing, the FDA can require
Phase 4, or post-marketing, studies to be conducted. The Company expects that a
Phase 4 study may be initiated with Redux.
With certain exceptions, once clinical testing is completed, the
sponsor can submit an NDA for approval of a drug or Product License Application
("PLA") for approval of a biologic. The FDA's review of an NDA or PLA is
lengthy. In addition, an establishment license application is required to be
filed with and approved by the FDA for the manufacturing facility for a
biologic.
25
Patent Term Extension and Market Exclusivity
Under the Drug Price Competition and Patent Term Restoration Act of
1984 (commonly referred to as the "Waxman-Hatch Act"), a patent which claims a
product, use or method of manufacture covering drugs and certain other products
may be extended for up to five years to compensate the patent holder for a
portion of the time required for research and FDA review of the product.
Although Interneuron has applied for such protection for the use patent covering
dexfenfluramine, the Company cannot predict whether it will receive such an
extension. The Waxman-Hatch Act also establishes periods of market exclusivity,
which are various periods of time following approval of a drug during which the
FDA may not approve, or in certain cases even accept, applications for certain
similar or identical drugs from other sponsors unless those sponsors provide
their own safety and effectiveness data. Under present regulatory
interpretations, the longest period of market exclusivity (five years) may not
be available to isomers, such as dexfenfluramine, of a previously approved drug
(fenfluramine) whose active ingredient is a mixture of related isomers. The
Company is asking the FDA to reconsider this interpretation and it is possible,
but not likely, that dexfenfluramine may qualify for this five year period of
exclusivity. However, it is probable that the FDA would recognize at least three
years of marketing exclusivity for dexfenfluramine such that generic drugs would
not be eligible to compete in the marketplace for the first three years after
the FDA's approval of marketing of dexfenfluramine.
The Company believes that citicoline and bucindolol may be entitled to
patent extension and to five years of market exclusivity, respectively, under
the Waxman-Hatch Act. However, there can be no assurance that the Company will
be able to take advantage of either the patent term extension or marketing
exclusivity provisions or that other parties will not challenge the Company's
rights to such exclusivity.
Medical Foods and Dietary Supplements
Foods with health-related claims will be subject to regulation by the
FDA as foods, medical foods, dietary supplements or drugs, and a product's
classification will depend, in part, on its intended use as reflected in the
claims for the product. InterNutria's products are expected to be clinically
evaluated and regulated by the Dietary Supplement Health Education Act of 1994
("DSHEA") for the dietary management of physiological processes.
If represented for use in the cure, mitigation, treatment or prevention
of disease, a product will be regulated as a drug. If no such claims are made,
the product may be regulated as a food, a medical food, or a dietary supplement.
No explicit or implicit claim that "characterizes the relationship" of a
nutrient to a "disease or health-related condition" is permitted in food
labeling unless the FDA has authorized that claim by regulation. Any food
product that bears an unauthorized health claim is considered misbranded.
Dietary supplements may bear claims describing the role of nutrient or
dietary ingredient intended to affect the structure or function of the body,
provided certain requirements (such as substantiation for the claims) are met.
These claims need not be authorized by the FDA in a regulation. Medical foods
are specifically exempted from the restrictions of making health claims for
foods. FDA regulations define a medical food, in part, as "a food which is
formulated to be consumed or administered internally under the supervision of a
physician and which is intended for the specific dietary management of a disease
or condition for which distinctive nutritional requirements, based on recognized
scientific principles, are established by medical evaluation." Medical foods
occupy an intermediate position between a "food" and a "drug." While a medical
food is not now subject to regulation as a drug or to any type of prior approval
under the federal food and drug laws, the FDA is in the process of reevaluating
its regulation of medical foods and there is no assurance that the FDA's
regulatory policies on medical foods will not change.
Although the Company believes that Melzone, PMS Escape and Boston
Sports Supplement are considered dietary supplements, there can be no assurance
that the FDA will not attempt to regulate them as drugs, thereby requiring the
filing of NDAs and review and approval by the FDA prior to marketing. In
addition, classification of these three products as dietary supplements limits
the types of claims that can be made in marketing.
The FDA also regulates the substances that may be included in food
products. A substance intended for use as a food or to be added to a food may be
marketed only if it is generally recognized among qualified experts as safe for
its intended use or if it has received FDA approval for such use in the form of
a food additive regulation. If the Company
26
develops a food which is, or which contains, a substance that is not generally
recognized as safe or approved by the FDA in a food additive regulation for its
intended use, then such approval must be obtained prior to the marketing of the
product. The Company will be required to present studies showing, among other
things, that the substance is safe, and that its use will not promote deception
of the consumer or otherwise violate the Federal Food, Drug, and Cosmetic Act.
Dietary ingredients used in dietary supplements need not be generally recognized
as safe, but they may not present a significant or unreasonable risk of illness
or injury.
Progenitor
The precise regulatory standards to which Progenitor's proposed
products eventually will be held are uncertain due to the uniqueness of the
therapies under development and the lack of regulatory policy associated with
bone marrow transplantation. The Company assumes that Progenitor's therapeutic
products will be subjected to clinical testing similar to that of a drug, in
addition to other FDA and international approval processes. The Company expects
that the majority, if not all, of the therapeutic products developed by
Progenitor will be classified by the FDA as biological products.
It is possible that certain of the products being developed by
Progenitor will be regulated by the FDA as drugs or as medical devices. The FDA
approval process for medical devices differs from that for drugs or biologics
but may also be expensive and time-consuming. Progenitor's activities may also
be subject to guidelines established by the NIH relating to the transfer of
recombinant DNA into humans. All such research, including clinical trials, must
be approved by the NIH Recombinant DNA Advisory Committee.
Gene Therapy Regulation
The NIH has established the NIH Recombinant DNA Advisory Committee (the
"RAC") to advise the NIH concerning approval of NIH-supported research involving
the use of recombinant DNA. A proposal will be considered by the RAC only after
the protocol has been approved by the local Institutional Review Board and
Institutional BioSafety Committee of the institution where the trial is to be
conducted, which address issues such as the provision of informed consent by
human research subjects and the risks to human subjects in relationship to
anticipated benefits of the research. All meetings of the RAC are open to the
press and public and therefore could subject Progenitor to unfavorable public
sentiment regarding human gene therapy products. Although the jurisdiction of
the NIH currently applies only when NIH-funded research or facilities are
involved in any aspect of the protocol, the RAC encourages all gene transfer
protocols to be submitted for its review. The NIH and FDA are currently
considering a revision to the RAC review process to make it applicable only to
specific protocols that raise novel issues. Progenitor intends to comply with
RAC and NIH guidelines even when, under present policy, it may not be subject to
them. In addition, the FDA, which has jurisdiction over drug and biological
products intended for use in patients, also must review and authorize human
trials involving gene therapy, whether or not the research is federally funded,
before such human trials can proceed. The FDA requires the submission of an IND
application before human trials with new biological drugs can be conducted.
Because gene therapy is a novel therapeutic approach, the approval process for
clinical trials involving gene therapy is not yet clearly defined. There can be
no assurance that Progenitor will be able to comply with future requirements or
that its products will be approvable.
New human gene therapy products are expected to be subject to extensive
regulation by the FDA and comparable agencies in other countries. The precise
regulatory requirements that will have to be complied with are uncertain at this
time due to the novelty of the human gene therapies under development.
Currently, each protocol is reviewed by the FDA on a case by case basis. The FDA
has published a "Points to Consider" guidance document with respect to the
development of gene therapy protocols. The Company believes that certain
products developed by Progenitor will be regulated as biological products. In
addition, each vector containing a particular gene is expected to be regulated
as a separate biological product or new drug, depending upon its intended use
and FDA policy. New drugs are subject to regulation under the Federal Food, Drug
and Cosmetic Act, and biological products, in addition to being subject to
certain provisions of that Act, are regulated under the Public Health Service
Act. One or both statutes and the regulations promulgated thereunder govern,
among other things, the testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, advertising and other promotional practices involving
biologics or new drugs. FDA approval or other clearances must be obtained before
clinical testing, and before manufacturing and marketing, of new biologics or
other new drug products. At the FDA, the Center for Biologics Evaluation and
Research ("CBER") is responsible
27
for the regulation of new biological drugs. CBER has a Division of Cell and Gene
Therapy, which is the primary group within the FDA to oversee gene therapy
products
Other
The Federal Food, Drug, and Cosmetic Act, the Public Health Service
Act, the Federal Trade Commission Act, and other federal and state statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of drug,
biological, medical device and food products. Noncompliance with applicable
requirements can result, among other things, in fines, recall or seizure of
products, refusal to permit products to be imported into the U.S., refusal of
the government to approve product approval applications or to allow Interneuron
to enter into government supply contracts, withdrawal of previously approved
applications and criminal prosecution. The FDA may also assess civil penalties
for violations of the Federal Food, Drug, and Cosmetic Act involving medical
devices. The Federal Trade Commission may assess civil penalties for violations
of the requirement to rely upon a "reasonable basis" for advertising claims for
non-prescription and food products.
Employees
As of September 30, 1996, Interneuron and its Subsidiaries had 139
full-time employees, including 63 at Interneuron, 25 at Progenitor, 30 at
Transcell, 16 at Intercardia, five at InterNutria and a number of part-time
consultants, including Richard Wurtman, M.D., Judith Wurtman, Ph.D., and Lindsay
Rosenwald, M.D., Interneuron's Chairman. None of the Company's employees is
represented by a labor union and Interneuron believes its employee relations are
satisfactory.
Item 2. Properties
The Company leases an aggregate of approximately 10,200 square feet of
office space in Lexington, MA. The lease expires in December 1996, provides for
annual rent of approximately $356,000, and grants the Company a right of first
refusal for an additional 8,100 square feet of laboratory space, subject to the
present tenant electing not to remain in such space. The Company intends to
renew its current lease and/or lease additional space at its present location or
similar space in another location in the Boston, MA area. The Subsidiaries are
parties to office leases providing for aggregate annual rental of approximately
$987,000. The Company has guaranteed certain Subsidiaries' obligations under
these leases.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
EXECUTIVE OFFICERS AND KEY PERSONNEL
The following table sets forth the names and positions of the
executive officers and key personnel of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Executive Officers
Lindsay A. Rosenwald, M.D. 41 Chairman of the Board of Directors
Glenn L. Cooper, M.D. 43 President, Chief Executive Officer
and Director
28
Mark S. Butler 50 Executive Vice President, Chief
Administrative Officer and General
Counsel
Thomas F. Farb 40 Executive Vice President, Finance,
Chief Financial Officer and
Treasurer
Bobby W. Sandage, Jr., Ph.D. 43 Executive Vice President, Research
and Development and Chief Scientific Officer
Key Personnel
Brian R. Anderson 50 Senior Vice President, Marketing
and Commercial Development of
Interneuron
Clayton I. Duncan 47 President, Chief Executive Officer
and Director of Intercardia
Douglass B. Given, M.D., Ph.D. 44 President, Chief Executive Officer
and Director of Progenitor
James F. Pomroy 62 Chairman of InterNutria
</TABLE>
Executive Officers
Lindsay A. Rosenwald, M.D. was a co-founder and since February 1989 has
been Chairman of the Board of Directors of the Company. Dr. Rosenwald has been
the Chairman and President of The Castle Group, Ltd., a biotechnology and
biopharmaceutical venture capital firm, since October 1991, the Chairman and
President of Paramount Capital Investment, LLC, a merchant banking firm, since
1995 and the Chairman and President of Paramount Capital, Inc., an investment
banking firm, since February 1992. In June 1994, Dr. Rosenwald founded Paramount
Capital Asset Management, Inc. a money management firm specializing in the
biotechnology and health sciences industry. From 1987 until 1991, Dr. Rosenwald
was a Managing Director, Corporate Finance at D.H. Blair & Co., Inc., an
investment banking firm. Dr. Rosenwald received his M.D. from Temple University
School of Medicine and his B.S. in Finance from Pennsylvania State University.
Dr. Rosenwald is also a director of the following publicly -traded
pharmaceutical or biotechnology companies: Titan Pharmaceuticals, Inc., Ansan,
Inc., Atlantic Pharmaceuticals, Inc., Avigen, Inc.,VimRx Pharmaceuticals, Inc.,
Xenometrix, Inc., BioCryst Pharmaceuticals, Inc., Sparta Pharmaceuticals, Inc.,
and Neose Technologies, Inc. and is Chairman of the Board or a director of a
number of privately held companies in biotechnology or pharmaceutical fields.
Glenn L. Cooper, M.D. has been President, Chief Executive Officer and a
director of the Company since May 1993. Dr. Cooper was also Progenitor's
President and Chief Executive Officer from September 1992 to June 1994, is a
director of each of the Subsidiaries and currently serves as acting President
and Chief Executive Officer of Transcell. Prior to joining Progenitor, Dr.
Cooper was Executive Vice President and Chief Operating Officer of Sphinx
Pharmaceuticals Corporation from August 1990. Dr. Cooper had been associated
with Eli Lilly since 1985, most recently, from June 1987 to July 1990, as
Director, Clinical Research, Europe, of Lilly Research Center Limited; from
October 1986 to May 1987 as International Medical Advisor, International
Research Coordination of Lilly Research Laboratories; and from June 1985 to
September 1986 as Medical Advisor, Regulatory Affairs, Chemotherapy Division at
Lilly Research Laboratories. Dr. Cooper received his M.D. from Tufts University
School of Medicine, performed his postdoctoral training in Internal Medicine and
Infectious Diseases at the New England Deaconess Hospital and Massachusetts
General Hospital and received his A.B. from Harvard College.
Mark S. Butler joined the Company in December 1993 as Senior Vice
President (and in December 1995 was appointed Executive Vice President), Chief
Administrative Officer and General Counsel. Prior to joining the Company, Mr.
Butler was associated with the Warner-Lambert Company since l979, serving as
Vice President, Associate General
29
Counsel since 1990, as Associate General Counsel from 1987 to 1990, Assistant
General Counsel from 1985 to 1987 and in various other legal positions from 1979
to 1985. From 1975 to 1979, Mr. Butler was an attorney with the law firm of
Shearman & Sterling.
Thomas F. Farb joined the Company in April 1994 as Senior Vice
President (and in December 1995 was appointed Executive Vice President) Finance,
Chief Financial Officer and Treasurer. Prior to joining the Company, from
October 1992, Mr. Farb was the Vice President of Finance and Corporate
Development of Cytyc Corporation, a public medical device and diagnostics
company. From 1989 to October 1992, he was Senior Vice President, Chief
Financial Officer and a Director of Airfund Corporation, a commercial aircraft
leasing company, and from October 1983 to April 1989, he held various positions
at Symbolics, Inc., a computer and software manufacturer, including General
Manager of Eastern Operations, Vice President, Finance and Corporate Development
and Chief Financial Officer. Mr. Farb received an A.B. from Harvard College. He
is a director of HNC Software, Inc. and Redwood Trust, Inc., both public
companies.
Bobby W. Sandage, Jr., Ph.D. joined the Company in November 1991 as
Vice President - Medical and Scientific Affairs and was appointed Vice President
- - Research and Development in February 1993, Senior Vice President - Research
and Development in February 1994 and Executive Vice President - Research and
Development and Chief Scientific Officer in December 1995. From February 1989 to
November 1991 he was Associate Director, Project Management for the
Cardiovascular Research and Development division of DuPont Merck Pharmaceutical
Company. From May 1985 to February 1989 he was affiliated with the Medical
Department of DuPont Critical Care, most recently as associate medical director,
medical development. Dr. Sandage is an adjunct professor in the Department of
Pharmacology at the Massachusetts College of Pharmacy. Dr. Sandage received his
Ph.D. in Clinical Pharmacy from Purdue University and his B.S. in Pharmacy from
the University of Arkansas. He is a director of Aeolus, a subsidiary of
Intercardia.
Key Personnel
Brian Anderson joined the Company in September 1995 as Senior Vice
President, Marketing and Commercial Development. Prior to joining Interneuron,
Mr. Anderson was associated with Bristol-Myers Squibb since August 1987. Most
recently, since January 1994, he was Senior Director, CNS Marketing, U.S.
Pharmaceuticals of Bristol-Myers Squibb Pharmaceutical Group; from April 1990 to
December 1993 he was Senior Director, CNS Business Planning and from August 1987
to April 1990 he was Director, Business Development of Bristol-Myers
International Group. Prior to joining Bristol-Myers, Mr. Anderson was associated
with the Upjohn Company of Canada since 1971.
Clayton I. Duncan joined Intercardia as its President, Chief Executive
Officer and director in January 1995. Mr. Duncan served as President and Chief
Executive Officer of Sphinx Pharmaceuticals Corporation from April 1989 to
December 1993, and was a member of the Board of Directors of Sphinx from August
1988 to September 1994. From 1987 to 1990, Mr. Duncan was Chairman of the Board
of CRX Medical, Inc., a medical products company founded by him. From 1987 to
1989, Mr. Duncan was General Partner of InterSouth Partners, a venture capital
fund and, from 1979 to 1987, was Executive Vice President and a director of
Carolina Securities Corporation, a regional investment banking firm. Mr. Duncan
is also a director of Transcell.
Douglass B. Given, M.D., Ph.D. joined Progenitor in January 1993 as
Executive Vice President and was appointed President, Chief Executive Officer
and a director of Progenitor in June 1994. From March 1989 to January 1993, Dr.
Given was Vice President for U.S. Regulatory Affairs at the Schering-Plough
Research Institute. From August 1986 to March 1989, Dr. Given was Vice President
of Project Management and Worldwide Regulatory Affairs at G.D. Searle. From
August 1983 to August 1986, he held clinical investigation positions at Eli
Lilly. Dr. Given received his M.D. and Ph.D. from the University of Chicago,
performed his postdoctoral training in Internal Medicine and Infectious Diseases
at Harvard Medical School and Massachusetts General Hospital, and received an
M.B.A. from the Wharton School at the University of Pennsylvania.
James F. Pomroy was named Chairman of InterNutria in April 1995. From
January 1994 to February 1995, Mr. Pomroy was President and Chief Executive
Officer of Nutriceutical Products Corporation, and from January 1992 to January
1994, he served as Chairman and Chief Executive Officer of Everfresh Beverages.
Previously, Mr. Pomroy was President and Chief Executive Officer of Drake
Bakeries, Inc. from June 1989 to December 1991, and Chairman
30
and Chief Executive Officer of Sundor Brands from April 1983 to March 1989. From
November 1976 to March 1983, Mr. Pomroy was Executive Vice President of Iroquois
Brands, and from 1972 to 1976 he was Senior Vice President of the Kitchens of
Sara Lee. Mr. Pomroy holds an M.B.A. from Harvard University Graduate School of
Business.
COMPLIANCE WITH SECTION l6(a) OF THE SECURITIES EXCHANGE ACT OF l934.
To the Company's knowledge, there were no reports required under
Section 16(a) of the Securities Exchange Act of l934 which were not timely filed
during fiscal 1995.
31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Price Range of Securities
Interneuron's Common Stock trades on the Nasdaq National Market under
the symbol "IPIC". The table below sets forth the high and low sales prices of
Interneuron's Common Stock as reported by the Nasdaq National Market for the
periods indicated. These prices are based on quotations between dealers, do not
reflect retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions.
High Low
---- ---
Fiscal Year Ended September 30, 1995:
October 1 through December 31, 1994 $6 1/4 $4
January 1 through March 31, 1995 8 4 1/8
April 1 through June 30, 1995 10 3/4 6 3/4
July 1 through September 30, 1995 19 1/4 9 1/8
Fiscal Year Ended September 30, 1996:
October 1 through December 31, 1995 $31 1/4 $11 5/8
January 1 through March 31, 1996 38 22 1/2
April 1 through June 30, 1996 44 1/2 29 1/2
July 1 through September 30, 1996 35 1/2 19 3/4
(b) Approximate Number of Equity Security Holders
The number of record holders of the Company's Common Stock as of
December 13, 1996 was approximately 700. The Company believes that the number of
beneficial owners exceeds 16,000.
(c) Dividends
The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends. Any dividends will be subject to the preferential dividend of $0.1253
per share payable on the outstanding Series B Preferred Stock ($30,000 per
annum), $1.00 per share payable on the outstanding Series C Preferred Stock
($5,000 per annum) and dividends payable on any other preferred stock issued by
the Company.
32
Item 6. Selected Financial Data
The selected financial data presented below summarizes certain
financial data which has been derived from and should be read in conjunction
with the more detailed financial statements of the Company and the notes thereto
which have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report thereon is included elsewhere in this Annual Report on Form 10-K
along with said financial statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
33
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
(Amounts in thousands except per share data)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Revenues:
Product revenue $ --- $ --- $ --- $ --- $ 14,162
Contract & license fee revenue 67 11,584 101 3,463 8,335
Investment income 759 938 505 1,039 4,465
--------- ---------- ------- ------- --------
Total revenues 826 12,522 606 4,502 26,962
========= ======== ======= ======= =========
Cost of product revenue --- --- --- --- 11,617
Research and development expenses 10,235 20,014 17,737 15,168 17,824
Selling, general and
administrative expenses 2,863 5,242 8,403 7,878 17,497
Purchase of in-process research
and development --- --- 1,852 --- 8,584
Net loss (12,272) (12,734) (27,386) (17,981) (27,986)
Net loss per common share $ (.57) $ (.50) $ ( .98) $ (.59) $ (.76)
Weighted average common
shares outstanding 21,428 25,492 27,873 30,604 37,004
</TABLE>
<TABLE>
<CAPTION>
******************************
September 30,
Balance Sheet Data: (Amounts in thousands)
- -------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $16,025 $19,444 $ 8,577 $25,755 $155,246
Total assets 18,244 23,689 18,278 37,516 186,438
Capital lease obligations
long-term portion ---- ---- 1,025 782 526
Total liabilities 1,472 2,462 8,501 10,486 22,303
Accumulated deficit (20,692) (33,426) (60,811) (78,792) (106,778)
Stockholders' equity 16,771 21,227 9,777 21,392 144,762
</TABLE>
34
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
At September 30, 1996, the Company had cash, cash equivalents and
marketable securities of $169,608,000, an increase of $134,619,000 from
September 30, 1995, primarily reflecting (a) receipt in fiscal 1996 of (i)
approximately $109,000,000 of net proceeds to Interneuron from the June 1996
public offering of 3,000,000 shares of Common Stock, (ii) approximately
$30,000,000 of net proceeds to Intercardia (excluding $5,000,000 received from
Interneuron), from the February 1996 Intercardia IPO, and (iii) approximately
$17,000,000 of net proceeds to Interneuron from the exercise of Class B
Warrants, options and other warrants; and (b) approximately $21,000,000 of cash
used in operating activities and for capital expenditures.
Redux
During fiscal 1996, the Company acquired inventories in connection with
the scale-up of the manufacturing process to support the launch and continued
supply of Redux. Inventories related to Redux were approximately $8,000,000 at
September 30, 1996 and depend to a large extent on forecasts provided by AHP and
production capabilities of Boehringer. There can be no assurance that AHP's
forecasts and the Company's production planning will be accurate, which may
result in higher inventory costs to the Company or inadequate or excessive
supplies of the product. In addition, there can be no assurance that the
manufacture of the capsules and their sale to AHP will result in profits to
Interneuron. There may be seasonality associated with Redux inventories and
revenues which the Company is unable to determine.
The contract manufacturing agreement between Boehringer and the Company
obligates Boehringer to provide, and the Company to purchase, manufactured
product to the extent defined in the agreement, through the current contract
expiration date of December 31, 1998. At the expiration of the agreement, the
Company would be obligated to purchase from Boehringer any unused manufacturing
materials, work in process, or finished product and to assume any unfilled
Boehringer purchase commitments that could not be canceled prior to the
expiration or termination of the agreement. See "Agreements - Redux Agreements."
The Company is highly dependent upon AHP to market Redux and upon Redux
to generate revenues. Currently applicable royalties to the Company under its
agreements with AHP are: (i) "base" royalties to the Company equal to 11.5% of
AHP's net sales (equal to the royalties required to be paid by the Company to
Servier), and (ii) "additional" royalties ranging from 5% of the first
$50,000,000 of net sales to 10% of net sales over $150,000,000 (based on the
current status of dexfenfluramine as a scheduled drug and because the Company is
supplying Redux to AHP). See "Business - Interneuron Products - Redux." In
connection with the April 1996 receipt of FDA marketing clearance of Redux, the
Company received a $500,000 milestone payment from AHP and will be entitled to
an additional $6,000,000 payment and a $3,500,000 equity investment if
dexfenfluramine is descheduled as a controlled substance by April 29, 1997.
There is no assurance that dexfenfluramine will be descheduled as a controlled
substance by such date. See "Risk Factors - Risks Relating to Redux."
35
Intercardia
In February 1996, Intercardia completed the Intercardia IPO resulting
in net proceeds to Intercardia of approximately $30,000,000 (not including
$5,000,000 from Interneuron's purchase of Intercardia shares in the Intercardia
IPO). Interneuron's ownership in Intercardia's outstanding capital stock
decreased from approximately 88% at September 30, 1995 to approximately 60% at
September 30, 1996 as a result of these transactions.
In December 1995, Intercardia received $5,000,000 upon execution of the
Astra Merck Collaboration, which obligates Astra Merck to fund certain future
U.S. development, marketing and manufacturing costs and to assume Intercardia's
funding obligation for the BEST Study, including the drug supplies and
monitoring costs, and royalty obligation to BMS. Intercardia will be entitled to
royalties based on net sales by Astra Merck. Intercardia has agreed to pay Astra
Merck $10,000,000 in December 1997 and to reimburse Astra Merck for one-third of
certain product launch costs, up to a total of $11,000,000. In the event
Intercardia does not make either of these payments, royalties payable by Astra
Merck to Intercardia will be substantially reduced. See "Agreements -
Intercardia Agreements."
In September 1994, Intercardia acquired 80% of the outstanding capital
stock of CPEC in exchange for (i) 170,000 shares of Interneuron's Common Stock
and (ii) payments to shareholders of CPEC and other related expenses and assumed
liabilities totaling approximately $1,100,000. Intercardia agreed to make two
additional purchase price payments, up to a maximum of 75,000 shares of
Interneuron Common Stock each, subject to adjustment based on the fair market
value at the time of issuance, upon the achievement of milestones relating to
the regulatory review of bucindolol. As a result of the transaction, the Company
recorded a charge for the purchase of in-process research and development of
approximately $1,852,000. The Company may incur an additional noncash charge in
connection with each future issuance of such securities, based upon their fair
market value at the time of issuances, of a minimum of $750,000 and a maximum of
$1,875,000. In January 1996, Interneuron acquired the remaining 20% of the
outstanding capital stock of CPEC not owned by Intercardia by issuing an
aggregate of 342,792 shares of Common Stock to the former CPEC minority
stockholders. As a result of this transaction, the Company recorded a noncash
charge for the purchase of in-process research and development of approximately
$6,100,000 in fiscal 1996.
Other Subsidiaries
In December 1995, InterNutria acquired technology and know-how
subsequently resulting in the PMS Escape product in exchange for $2,400,000,
payable in two installments of Interneuron Common Stock, the first in December
1996 and the second in December 1997, at the then-prevailing market price. See
"Results of Operations". InterNutria commenced a test-launch of PMS Escape in a
regional market in March 1996 while continuing clinical studies of the product.
The costs related to this test-launch and continuing clinical studies are
estimated to be approximately $2,200,000 in fiscal 1997. There can be no
assurance of the success of the test launch or the clinical studies.
Interneuron is currently funding operations of Progenitor, Transcell
and InterNutria. Expenses of the Subsidiaries, including those required under
collaboration agreements, constitute a significant part of the Company's overall
expenses.
In June 1996, Progenitor filed a registration statement relating to an
initial public offering of its common stock which was indefinitely postponed.
There can be no assurance this offering will be completed. See "Business -
Progenitor."
Clinical Studies
In addition to Redux-related expenses, the Company's principal
expenditures are for product development and clinical trials, including expenses
required under collaborative agreements. In particular, the Company is
performing two pivotal Phase 3 clinical trials with citicoline which are
expected to proceed at least through fiscal 1997. The costs of the clinical
trials and related studies and the preparation of the NDA are estimated, based
upon current trial protocols, to aggregate approximately $17,500,000. The
Company is unable to predict with certainty the costs of related studies which
will depend upon FDA requirements. Further, in the event the Company markets
citicoline directly, additional funds would be required for manufacturing,
distribution and selling efforts. The Company will also incur substantial
development costs in connection with a Phase 2/3 clinical trial on pagoclone
which commenced in November 1996, and on other products under development,
including those which may be acquired by the Company in the future.
Other
Accounts receivable of $4,338,000 at September 30, 1996 include
Interneuron's receivable from AHP for Redux capsules and support for Redux sales
force expenses pursuant to the copromotion agreement between Interneuron and AHP
and approximately $1,400,000 of Intercardia's receivable from Astra Merck for
bucindolol development costs assumed by Astra Merck.
36
Accrued expenses increased $3,610,000 to $11,604,000 at September 30,
1996 from $7,994,000 at September 30, 1995 primarily due to accruals related to
purchases of Redux capsules and dexfenfluramine drug substance and the Company's
and Subsidiaries' accruals relating to clinical trials and developmental studies
and product marketing.
Deferred revenue of $6,921,000 at September 30, 1996 consists primarily
of payments received from AHP for dexfenfluramine drug substance that had not
been used in the production process or recognized as revenue. See Note B of
Notes to Consolidated Financial Statements.
At September 30, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $100,000,000 which
expire at various dates from 2004 to 2011. In addition, the Company had
approximately $3,700,000 of tax credit carryforwards for federal income tax
purposes expiring at various dates through 2011. The Company's ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code Sections 382 and 383.
The Company's strategy includes evaluation of various technology,
product or company acquisition and/or financing opportunities (including private
placements and initial and follow-on equity offerings) and the Company and
certain of its subsidiaries are currently engaged in discussions relating to
such opportunities, although it has no agreements or commitments relating to any
particular opportunity. Any such initiatives may involve the sale of securities
of Interneuron or its subsidiaries and/or financial commitments to fund product
development.
While the Company believes it has sufficient cash for currently planned
expenditures in fiscal 1997, it may seek additional funds through other equity
and/or debt financings and corporate collaborations to provide working capital
financing and funding for new business opportunities and future growth. In
addition, certain subsidiaries are exploring various financings (including
issuances of securities of the subsidiaries, possibly in combination with
securities of Interneuron, in public offerings or private placements),
collaborations or business combinations. If such efforts are not successful,
certain activities at these subsidiaries may be reduced. Although Interneuron
may acquire additional equity in subsidiaries through participation in
financings or conversion of inter-company debt, equity financings by a
subsidiary will likely reduce Interneuron's percentage ownership of that
subsidiary and funds held by the subsidiaries will generally not be available to
Interneuron. The Company's goal is for its subsidiaries to establish independent
operations and financing through corporate alliances, third-party financings,
mergers or other business combinations, with Interneuron generally retaining an
ongoing equity interest. The nature of any such transaction is expected to vary
depending on the business and capital needs of each subsidiary and the state of
development of their respective technologies or products.
Results of Operations
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995
Total revenues increased $22,460,000 to $26,962,000 in fiscal 1996 from
$4,502,000 in fiscal 1995 reflecting $14,162,000 in product revenue (primarily
from initial sales of Redux), $8,335,000 in contract and license fee revenue and
$4,465,000 in investment income.
Product revenue of $14,162,000 in fiscal 1996 consists primarily of
$8,348,000 of sales of Redux capsules and dexfenfluramine drug substance to AHP
and $5,483,000 of total royalties received by Interneuron from AHP based upon
AHP-reported net sales of Redux for the quarter ended June 30, 1996. The Company
recognizes Redux royalty revenue when net sales are reported to it by AHP, which
occurs in the quarter after AHP shipments of Redux to distributors. See Note B
of Notes to Consolidated Financial Statements.
Contract and license fee revenue increased $4,872,000, or 141%, to
$8,335,000 in fiscal 1996 from $3,463,000 in fiscal 1995. This increase reflects
primarily $5,000,000 received by Intercardia pursuant to the Astra Merck
Collaboration, revenues derived under the co-promotion agreement with AHP to
support Interneuron's sales force and a milestone payment from AHP paid upon the
marketing approval of Redux. Partially offsetting these increases is a net
reduction of $2,000,000 pertaining to payments made to Progenitor in fiscal 1995
pursuant to Progenitor's license agreement with Chiron.
37
Investment income increased $3,426,000, or 330%, to $4,465,000 in
fiscal 1996 from $1,039,000 in fiscal 1995. This increase is due to
substantially higher weighted average invested cash balances resulting primarily
from proceeds from Interneuron's and Intercardia's public offerings and the
exercise of Interneuron's Class B Warrants and other warrants and options.
Total costs and expenses increased $32,476,000 or 141%, to $55,522,000
in fiscal 1996 from $23,046,000 in fiscal 1995. For the first time, during
Fiscal 1996, the Company incurred cost of product revenue, aggregating
$11,617,000 and representing 36% of the increase in total costs and expenses.
Cost of product revenue consists primarily of cost of Redux capsules and
dexfenfluramine drug substance sold to AHP and royalties paid to Servier on
total net sales of Redux. The Company also incurred charges of $8,584,000
relating to the purchase of in-process research and development, which
represents 26% of the increase in total costs and expenses. The charges for the
purchase of in-process research and development, of which $8,098,000 was
noncash, related primarily to (i) Interneuron's acquisition of the remaining 20%
of CPEC not owned by Intercardia in exchange for the issuance of 342,792 shares
of Interneuron Common Stock and (ii) the Company's acquisition of technology and
know-how to produce a specially-formulated dietary supplement for women's use
during their pre-menstrual period (PMS Escape) in exchange for the issuance of
Interneuron Common Stock in December 1996 and 1997. See Note 2 of Notes to
Consolidated Financial Statements.
Research and development expenses increased $2,656,000, or 18%, to
$17,824,000 in fiscal 1996 from $15,168,000 in fiscal 1995. This increase is due
primarily to increased license fees, patent expenses and milestones related to
certain products in various stages of development and increased product
development expenses relating to antioxidant small molecules, Melzone, PMS
Escape and other products and compounds. The Company continues to expend
substantial funds on the development of citicoline and commenced two additional
pivotal Phase 3 trials in 1996 which are expected to continue through 1997.
Additionally, the Company has begun a Phase 2/3 study on pagoclone and will
share 50% of the costs of a Phase 4, or post-marketing, study on Redux with AHP,
expected to commence during fiscal 1997. Research and development expenses in
fiscal 1996 of $17,824,000 was comprised primarily of Interneuron's costs to
develop citicoline dexfenfluramine and pagoclore and the subsidiaries' costs to
develop their technologies, including Intercardia's efforts to develop
bucindolol.
Selling, general and administrative expense increased $9,619,000, or 122%,
to $17,497,000 in fiscal 1996 from $7,878,000 in fiscal 1995. This increase
reflects increased expenses from the Subsidiaries, including the addition of
management personnel by Intercardia and InterNutria, costs relating to
InterNutria's commencement of a regional test launch of PMS Escape and related
sales, marketing and public relations expenses and costs relating to a proposed
initial public offering by Progenitor which has been indefinitely postponed.
During the quarter ended June 30, 1996, Interneuron hired an approximately 30
person sales force to co-promote Redux along with Wyeth-Ayerst and incurred
related hiring and carrying costs. Interneuron is expected to incur additional
costs in fiscal 1997 relating to a regional test launch of Melzone and Boston
Sports Supplement and continued test marketing of PMS Escape. Redux co-promotion
costs are expected to increase substantially in future periods.
Primarily as a result of increased selling, general and administrative
expenses and the non-recurring charges for the purchase of in-process research
and development, particularly offset by increased contract and license fees and
increased investment income, net loss increased to ($27,986,000) in fiscal 1996
from ($17,981,000) in fiscal 1995. Net loss per share increased to ($0.76) in
fiscal 1996 from ($0.59) in fiscal 1995. Weighted average common shares
increased in the fiscal 1996 periods reflecting additional equity issuances.
The Company from time to time explores various technology, product or
company acquisitions and/or business combinations or financing opportunities and
is currently engaged in discussions relating to such opportunities. Any such
initiatives may involve the issuance of shares of Interneuron's Common Stock or
other securities and/or financial commitments for licensing fees and/or to fund
product development, either of which may adversely affect the Company's
consolidated financial condition or results of operations.
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended September 30,
1994
Contract and license fee revenue increased $3,362,000 to $3,433,000 in
fiscal 1995 from $101,000 in fiscal 1994. This increase is primarily due to the
receipt of $2,500,000 by Progenitor under its license agreement with Chiron. The
Company had minimal contract and license fee revenue in fiscal 1994. Also,
investment income increased substantially primarily due to higher invested
balances as well as higher
38
prevailing interest rates. The Company may continue to experience significant
fluctuations in revenues from the timing of license fees, contract and royalty
income and milestone payments.
Total costs and expenses decreased $4,946,000, or 18%, to $23,046,000 in
fiscal 1995 from $27,992,000 in fiscal 1994. This decrease was due to a general
reduction in spending and prioritizing of resources and the non-recurrence of a
$1,852,000 charge during fiscal 1994 relating to the purchase of technology
rights associated with the acquisition of CPEC. See Note L of Notes to the
Consolidated Financial Statements. Activities of the Subsidiaries continued to
represent a significant percentage of the Company's consolidated expenses and
represented 54% and 42% of consolidated expenses in fiscal 1995 and 1994,
respectively.
Research and development expenses decreased $2,569,000, or 14% to
$15,168,000 in fiscal 1995 from $17,737,000 in fiscal 1994. Substantial initial
expenses incurred in fiscal 1994 for the Phase 3 clinical trial for citicoline
caused a relative decrease in such spending in fiscal 1995. Also contributing to
this decrease were reduced spending on development of certain other products by
the Company and decreased spending by Transcell and Progenitor. Additionally,
fiscal 1994 included an initial license payment by Interneuron to RPR for the
acquisition of pagoclone and a non-recurring charge pertaining to the issuance
of warrants to a licensee of the Company. Partially offsetting these decreases
in fiscal 1995 was a $750,000 charge for Progenitor's obligation to fund certain
manufacturing costs at Chiron, Intercardia's increased funding of Phase 3
clinical trial for bucindolol, and the Company's increased spending to prepare
for Redux-related advisory committee meetings which occurred in September 1995.
General and administrative expenses decreased $525,000, or 6%, to
$7,878,000 in fiscal 1995 from $8,403,000 in fiscal 1994. This decrease was
primarily due to decreased recruiting, relocation and severance costs and
non-recurring business development costs which were partially offset by wage,
benefit and administrative costs related to management additions and business
development activity at Intercardia and InterNutria.
Primarily as a result of increased revenues, decreased costs and expenses
and the allocation of the net loss of certain Subsidiaries to their minority
stockholders, net loss decreased $9,405,000, or 34%, to ($17,981,000) in fiscal
1995 from ($27,386,000) in fiscal 1994. Net loss per share decreased from ($.98)
in fiscal 1994 to ($.59) in fiscal 1995 also reflecting an increase in weighted
average shares outstanding from 27,873,000 in fiscal 1994 to 30,604,000 in
fiscal 1995 resulting from additional equity issuances.
Item 8. Financial Statement and Supplementary Data
The response to this item is included in a separate section of this Report.
See Index to Consolidated Financial Statements on Page F-1.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not applicable.
39
PART III
The information called by Item 10: Directors and Executive Officers of the
Registrant; Item 11: Executive Compensation; Item 12: Security Ownership of
Certain Beneficial Owners and Management; and Item 13: Certain Relationships and
Related Transactions will be included in and is incorporated by reference from
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the close of its fiscal year.
RISK FACTORS
An investment in the Company's securities is speculative in nature
and involves a high degree of risk. Each prospective investor should carefully
consider the following risk factors, as well as others described elsewhere in
this Form 10-K, before making an investment.
History of Losses; Accumulated Deficit and Potential Future Losses;
Potential Fluctuations in Revenues. Until recently, the Company has been engaged
primarily in research and development activities. At September 30, 1996, the
Company had accumulated net losses since inception of approximately $107
million. Losses are continuing and cash continues to be used by operating
activities. The Company will be required to conduct significant development and
clinical testing activities and establish marketing, sales, regulatory and
administrative capabilities for many of its proposed products, including
products which may be acquired in the future, which are expected to result in
continued operating losses for the foreseeable future. The extent of future
losses and time required to achieve profitability are highly uncertain. There
can be no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. The Company has experienced, and may continue to
experience, fluctuations in revenues as a result of the timing of license fees,
royalties, or product shipments regulatory approvals, product launches and
milestone payments.
Risks Relating to Redux. The Company's future success may depend
in large part on the long-term marketing success of Redux. There can be no
assurance as to the successful commercialization of Redux, which may be affected
by various factors, including the following:
Safety Issues; Post-Marketing Study. Included in the
FDA-approved labeling for Redux are references to certain risks
that may be associated with dexfenfluramine and which were
highlighted during the FDA's review of the drug. One issue relates
to whether there is an association between appetite suppressants,
including dexfenfluramine, and the development of primary
pulmonary hypertension ("PPH"), a rare but serious lung disorder.
In the general population, the yearly occurrence of PPH is
estimated to be about one to two cases per million. An
epidemiologic study conducted in Europe examining risk factors for
PPH showed that among other factors, weight reduction drugs
including dexfenfluramine, systemic hypertension, and obesity
itself were associated with a higher risk of PPH. Results of the
final study, including a reclassification and inclusion of certain
previously excluded cases by the authors of the study, estimated
the yearly occurrence to be between 23 and 46 cases per million
for patients taking appetite suppressants for greater than three
months duration. Although the Company believes that the benefits
of weight loss by obese patients meeting the labeling criteria for
Redux outweigh the risk of developing PPH, issues relating to PPH
may adversely affect the market for, and the sales and marketing
of, Redux as well as the Company's business, financial condition
and results of operations.
A second issue discussed in the FDA-approved labeling for
Redux is whether dexfenfluramine is associated with certain
neurochemical changes in the brain. Certain studies related to
this issue, conducted by third parties, purport to show that very
high doses of dexfenfluramine cause prolonged serotonin depletion
in certain animals, which some researchers believe is an
indication of neurotoxicity. The Company presented data relating
40
to the lack of neurocognitive effects in patients taking Redux and
believes that, as demonstrated in human trials, these animal
studies are clinically irrelevant to humans because of
pharmacokinetic differences between animals and humans (resulting
in much higher brain concentrations of dexfenfluramine and its
active metabolite in certain animals than in humans) and because
of the high dosages used in animal studies. The Company has agreed
with the FDA to conduct a Phase 4, or post marketing, study of
Redux. Interneuron expects the Phase 4 study to be a double-blind
placebo-controlled trial to further evaluate long-term
neurocognitive function in patients taking Redux. Adverse results,
if any, of this study or the perceived likelihood of the
occurrence of the labeled risks in patients taking Redux may
materially adversely affect the labeling market, and/or marketing,
of the drug as well as the Company's business, financial condition
and results of operations.
Recent FDA Approval and Launch; Costs Associated with
Sales Force; Potential Fluctuations in Revenues and Related Costs.
Redux was launched commercially by AHP in June 1996. Accordingly,
the Company has only limited experience in sales and manufacturing
of Redux in commercial quantities and cannot predict the extent of
fluctuations in revenues and costs and inventory levels. The
Company has incurred substantial costs in connection with the
launch of Redux, including costs associated with developing a
sales force and implementation of co-promotion activities.
Substantial working capital is required to fund inventories and
receivables associated with the commercialization of Redux.
Dependence on AHP for Marketing: The success of Redux
depends to a significant extent on the marketing and sales efforts
of AHP, over which the Company has minimal control. There can be
no assurance that the Company will generate significant revenues
from royalties, or that such royalties will be sufficient to
offset the Company's significant investment in research and
development, manufacturing, sales force and other costs associated
with Redux.
Dependence on Suppliers; Risks Related to Manufacturing.
The Company is required to purchase all dexfenfluramine bulk
chemical from Servier at a fixed cost, subject to annual
adjustments. The Company is responsible for supplying AHP with
Redux finished product requirements and has contracted to purchase
all Redux finished product until December 1998 from Boehringer,
which is the sole manufacturer of the finished product identified
in the Redux NDA. The Company will be required to obtain a
replacement GMP manufacturing facility for Redux prior to
expiration of the Boehringer agreement. There can be no assurance
a replacement supplier will be approved by the FDA in sufficient
time to avoid an interruption in supply. The Company is materially
dependent on the ability of each of Servier and Boehringer to have
manufactured and delivered, on a timely basis, sufficient
quantities of bulk chemical and finished product, respectively, in
accordance with applicable specifications. In the event Servier or
Boehringer are unable to satisfy production requirements on a
timely basis or are prevented for any reason from manufacturing
bulk chemical or finished product, respectively, the Company would
likely be unable to secure any alternate supplier or manufacturer
without materially adverse disruption and substantially increased
costs, if at all, which would materially adversely affect the
Company's business and results of operations.
Inventory levels depend to a large extent on forecasts
provided by AHP and production capabilities of Boehringer. There
can be no assurance that AHP's forecasts and the Company's
resulting production planning will be accurate, or that Boehringer
(or its suppliers) will be able to manufacture product according
to specifications on a timely basis, which may result in higher
product costs to the Company or inadequate or excessive supplies
of the product, any of which could materially adversely affect the
Company's business and results of operations. There may be
seasonality associated with Redux inventories and revenues which
the Company is unable to determine. In addition, there can be no
assurance that the manufacture and sale of Redux capsules will be
profitable to the Company.
41
Effect of Controlled Substances Act and Similar State
Regulations. Fenfluramine and its isomers, including
dexfenfluramine, are currently designated as Schedule IV
substances under the Controlled Substances Act. This act imposes
various registration and record keeping requirements and restricts
the number of prescription refills. In September 1995, an advisory
committee of the FDA recommended the removal of fenfluramine and
its isomers, including dexfenfluramine, from these controls. There
can be no assurance as to whether descheduling will occur or as to
the timing of such descheduling. In connection with the
committee's recommendation, the Company and AHP have agreed to
develop and administer a program to monitor for potential abuse or
misuse of dexfenfluramine. Further, state descheduling actions are
required by many states even after federal descheduling. The
continued status of dexfenfluramine as a controlled substance
would adversely affect the marketability of the drug and is
resulting in delayed milestone payments and equity investments in
the Company. Interneuron will receive such payments and investment
only if dexfenfluramine is descheduled prior to April 29, 1997. In
addition, because dexfenfluramine is scheduled, royalties payable
to the Company by AHP are lower than if the drug were descheduled.
Termination of Agreements. The Servier Agreements may be
terminated by Servier under certain conditions, including an
acquisition by a new party (other than existing stockholders or
their affiliates as of the date of the Servier Agreements) of a
20% beneficial ownership interest in the Company without Servier's
consent. The Servier Agreements also require Servier's consent to
a Company sublicense, which consent was obtained in connection
with the AHP Agreements. However, Servier has the right to
withdraw its consent to the AHP Agreements in the event of a
change in control of AHP or unless certain minimum net sales are
achieved or payments are made as if such minimum sales were
achieved. In the event of a breach of the Servier Agreements by
the Company, or of other specified events which result in the
termination of the Servier Agreements, AHP may succeed to the
Company's position under the Servier Agreements. AHP has the right
to terminate the AHP Agreements at any time on 12 months notice.
Wyeth-Ayerst may also terminate the co-promotion agreement in the
event annual sales generated by the Interneuron sales force do not
exceed specified levels. The Company anticipates that for the
foreseeable future, royalties from AHP on Redux sales will
constitute a substantial portion of the Company's revenues.
Accordingly, the termination of the Servier Agreements or the AHP
Agreements would have a material adverse effect on the Company.
Other Risks. The successful commercialization of Redux is
also subject to other risks including those set forth under "Risks
Factors -- Competition" and "- Uncertainty of Patent Protection
and Proprietary Rights," "- Risks Relating to Managing Growth,"
"Competition," "- Risk of Product Liability" and "- Uncertainty
Regarding Pharmaceutical Pricing and Reimbursement."
Uncertainties Related to Clinical Trials. Before obtaining
regulatory approval for the commercial sale of any of its pharmaceutical
products under development, the Company must demonstrate that the product is
safe and efficacious for use in each target indication. The results of
preclinical studies and early clinical trials may not be predictive of results
that will be obtained in large-scale testing or use, and there can be no
assurance that clinical trials of the products under development by the Company
will demonstrate the safety and efficacy of such products or that, regardless of
clinical trial results, FDA approval will be obtained. A number of companies in
the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials or have not received FDA approval, even after promising results
in earlier trials. If clinical trials do not demonstrate the safety and efficacy
of certain products under development, the Company may be adversely affected.
Citicoline and bucindolol are currently in Phase 3 clinical trials and a Phase
2/3 clinical trial on pagoclone has recently commenced. There can be no
assurance that these trials will confirm or demonstrate the safety and efficacy
of the respective drug or that FDA approval will be obtained. Ferrer may
terminate the Ferrer Agreement in the event FDA approval of citicoline is not
obtained by January 1999. The Company also expects to conduct clinical
evaluation on certain dietary supplement products under development to
substantiate the claims that are expected to be made for the products. There can
be no assurance that these clinical evaluations will be successful.
Funding Requirements. The Company has expended and will continue
to expend substantial funds to conduct research and development activities and
preclinical and clinical testing on products under development, including
products which may be acquired in the future. In addition, the Company is
establishing sales and marketing capabilities for certain of its products. The
Company is co-promoting Redux and intends to market and/or co-promote directly
citicoline, Melzone and PMS Escape, assuming applicable regulatory
42
approvals are obtained and test launches are successful. The Company will
therefore be required to establish and maintain appropriate internal sales
forces and functions and will require additional funds for manufacturing and
marketing activities. The Company may seek additional funds through corporate
collaborations or future equity or debt financings to provide funding for new
business opportunities and future growth.
Interneuron is also currently funding the activities of
Progenitor, Transcell and InterNutria, each of which is seeking to enter into
collaborations, business combinations or private or public equity or debt
financings to pursue development and commercialization of their technologies or
products. Although Interneuron may acquire additional equity in a subsidiary
through participation in any such financing or conversion of intercompany debt,
equity financings by a subsidiary will likely reduce Interneuron's percentage
ownership of that subsidiary and funds raised by the subsidiaries will generally
not be available to Interneuron. Although certain of the subsidiaries are
engaged in discussions relating to potential business combinations or private or
public equity financings, none of the subsidiaries has any commitments for
additional financing and there can be no assurance that any such financing will
be available on acceptable terms, if at all. In particular, Progenitor had filed
a registration statement with the Commission relating to an initial public
offering of its securities. Such offering has been postponed indefinitely and
there can be no assurance that such offering will be completed or as to the
timing or amount of any offering.(1) If adequate funds are not available to
these subsidiaries on acceptable terms, such subsidiaries may be required to
delay, scale back or eliminate some or all of their respective research and
product development programs or product launches.
Risks Relating to Test Launches of Non-Pharmaceutical Products.
During 1996, the Company commenced a regional test launch of PMS Escape, a
dietary supplement for women with pre-menstrual syndrome which is continuing to
be clinically evaluated. The Company also recently commenced a regional test
launch of Melzone, a low-dose dietary supplement formulation of melatonin and
intends shortly to commence a test launch of Boston Sports Supplement. Based on
the results of the test launches, ongoing clinical evaluation and the
availability of sufficient funds, the Company may determine not to market any of
these products, to conduct additional testing of any of these products or to
market any of these products on a broader scale. There can be no assurance any
of these test launches will be successful, or if successful, be predictive of
the commercial viability of any product if marketed more broadly.
Uncertainty of Government Regulation. The Company's research,
development and pre-clinical and clinical trials and the manufacturing and
marketing of most of its products are subject to an extensive regulatory
approval process by the FDA and other regulatory agencies in the U.S. and other
countries. The process of obtaining FDA and other required regulatory approvals
for drug and biologic products, including required preclinical and clinical
testing, is lengthy, expensive and uncertain. There can be no assurance that,
even after such time and expenditures, the Company will be able to obtain
necessary regulatory approvals for clinical testing or for the manufacturing or
marketing of any products. Even if regulatory clearance is obtained, post-market
evaluation of the products, if required, could result in restrictions on a
product's marketing or withdrawal of the product from the market as well as
possible civil or criminal sanctions. In addition, the Company will be dependent
upon the manufacturers of its products to maintain compliance with current Good
Manufacturing Practices ("GMP") and on laboratories and medical institutions
conducting preclinical studies and clinical trials to maintain both good
laboratory and good clinical practices. There can be no assurance that GMP
manufacturers capable of producing product according to forecasts can be
obtained on a timely basis, or at all, for products under development, including
citicoline and pagoclone, which would materially adversely affect the Company's
ability to commercialize these products. Certain products are proposed to be
marketed by the Company as dietary supplements, such
- --------
(1) A registration statement relating to those securities has been
filed with the Commission but has not yet become effective. Those
securities may not be sold nor offers to buy be accepted prior to
the time the registration statement becomes effective. This Form
10-K shall not constitute an offer to sell or the solicitation of
an offer to buy nor shall there be any sales of those securities
in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the
securities laws of any such state.
43
as Melzone and PMS Escape. There can be no assurance that the FDA will not
attempt to regulate the products as drugs, which would require the filing of
NDAs and review and approval by the FDA prior to marketing, or otherwise
restrict the marketing of these products. In addition, classification of these
products as dietary supplements limits the types of claims that can be made in
marketing.
In addition to the regulatory framework for product approvals, the
Company and its collaborative partners may be subject to regulation under state
and federal laws, including requirements regarding occupational safety,
laboratory practices, environmental protection and hazardous substance control,
and may be subject to other present and possible future local, state, federal
and foreign regulation. The impact of such regulation upon the Company cannot be
predicted and could be material and adverse.
Uncertainty of Patent Position and Proprietary Rights. The
Company's success will depend to a significant extent on its ability to obtain
and enforce patent protection on its products and technologies, to maintain
trade secrets and to operate without infringing on the proprietary rights of
others. There can be no assurance that any Company patents will afford any
competitive advantages or will not be challenged or circumvented by third
parties or that any pending patent applications will result in patents being
issued. Certain of the Company's patents and patent applications include
biotechnology claims, the patentability of which generally is highly uncertain
and involves complex legal and factual questions. Because of the extensive time
required for development, testing and regulatory review of a potential product,
it is possible that before a potential product can be commercialized, any
related patent may expire, or remain in existence for only a short period
following commercialization, thus reducing any advantage of the patent.
The composition of matter patent on dexfenfluramine in the U.S.
has expired. The use patent on dexfenfluramine for the treatment of abnormal
carbohydrate craving, which has been licensed to the Company, expires in 2000.
Competitors, including generic drug manufacturers, may market dexfenfluramine in
the U.S. claiming uses for obesity, assuming FDA approval can be obtained. Thus
there can be no assurance that this use patent will afford any competitive
advantage or will not be challenged or circumvented by third parties, although
the Company believes Redux will likely be entitled to market exclusivity under
the Drug Price Competition and Patent Term Restoration Act of 1984 (the
"Waxman-Hatch Act") until April 1999. Subsequent to the expiration of market
exclusivity or patent extension, the Company's revenues from Redux may be
materially reduced. The Company's royalty obligations to Servier for the license
of the know-how and trademark extend beyond the patent expiration date. This
royalty obligation may adversely affect the Company's ability to compete against
any then available generic drugs that are offered at lower prices. In addition,
the Company's royalties from AHP are subject to 50% reduction if generic drug
competition achieves a market share of 10% or greater of total new Redux
prescriptions in two consecutive quarters.
The U.S. composition of matter patent on bucindolol expires in
November 1997, prior to the anticipated launch of the product. As a result,
assuming FDA approval can be obtained, competitors, including generic drug
manufacturers, may market bucindolol, subject to potential market exclusivity
under the Waxman-Hatch Act. The Company's licensed U.S. patent covering the
administration of citicoline to treat patients afflicted with conditions
associated with the inadequate release of brain acetylcholine expires in 2003.
As described in the licensed patent, the inadequate release of acetylcholine may
be associated with several disorders, including the behavioral and neurological
syndromes seen after brain traumas and peripheral neuro-muscular disorders
including myasthenia gravis and post-stroke rehabilitation. The claim of the
licensed patent, while being broadly directed to the treatment of inadequate
release of brain acetylcholine, does not specifically recite the indications for
which the IND has been filed.
The Company may conduct research on pharmaceutical or chemical
compounds or technologies, the patents or other rights to which may be held by
third parties. Others have filed and in the future may file patent applications
covering certain products or technologies that are similar to those of the
Company. If products based on such technologies are commercialized by the
Company, they may infringe such patents or other rights, licenses to which may
not be available to the Company. Failure to obtain needed patents, licenses or
proprietary information held by others may have a material adverse effect on the
Company's business. There can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by the
Company or, if patents are issued, successfully design around the patented
aspects of any technology developed by the Company. Furthermore, litigation may
be necessary to enforce any patents issued to the Company, to determine the
scope and validity of the patent rights of others or in response to legal action
against the Company claiming damages for infringement of patent rights or other
proprietary rights or seeking to enjoin commercial activities relating
44
to the affected product or process. Not only is the outcome of any such
litigation highly uncertain, but such litigation may also result in significant
use of management and financial resources. The Company believes there may be
significant litigation in the industry regarding patent and other intellectual
property rights relating to leptin and leptin receptors; patent applications
relating to leptin receptors have been filed by Progenitor. The Company is aware
that Millennium has filed a patent application relating to a receptor for leptin
and its use in obesity applications, and has licensed to Hoffman-LaRoche Inc.
rights to develop certain therapeutics for obesity using Millennium's discovery
of a leptin receptor.
Millennium has filed a "Protest" in the United States Patent and
Trademark Office in connection with certain Progenitor applications relating to
leptin receptors. A Protest is an available procedure sometimes used by a third
party to provide the patent examiner who is reviewing the involved application
or applications with what the third party believes to be relevant information.
The Protest procedure does not afford any right to the third party to
participate in the patent prosecution process beyond the filing of its written
Protest. Millennium's Protest primarily argues that any claims allowed to
Progenitor should not be so broad as to cover Millennium's own leptin receptor.
There can be no assurance that Millennium's patent application, or
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor, the leptin protein or other ligands,
or any of their respective uses, including obesity. There can be no assurance
that the invention by Millennium will be accorded an invention date later than
Progenitor's invention date, that any patent will issue to Progenitor or that
any such patent issued to Progenitor would be broad enough to cover leptin
receptors of Millennium or others.
To the extent that consultants, key employees or other third
parties apply technological information independently developed by them or by
others to the Company's proposed products, disputes may arise as to the
proprietary rights to such information which may not be resolved in favor of the
Company. Most of the Company's consultants are employed by or have consulting
agreements with third parties and any inventions discovered by such individuals
generally will not become property of the Company. There can be no assurance
that Company confidentiality agreements will not be breached or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
Uncertainty Regarding Waxman-Hatch Act. Certain provisions of the
Waxman-Hatch Act grant market exclusivity for certain new drugs and dosage
forms. The Waxman-Hatch Act provides that a patent which claims a product, use
or method of manufacture covering certain drugs and certain other products may
be extended for up to five years to compensate the patent holder for a portion
of the time required for research and FDA review of the product. Although the
Company has applied for such protection for the use patent relating to
dexfenfluramine, there can be no assurance that it will receive an extension.
See "Risk Factors - Uncertainty of Patent Position and Proprietary Rights". The
Waxman-Hatch Act also establishes a period of time from the date of FDA approval
of certain new drug applications during which the FDA may not accept or approve
short-form applications for generic versions of the drug from other sponsors,
although it may accept or approve long-form applications (that is, other
complete NDAs) for such drug. There can be no assurance the Company will receive
marketing exclusivity any of its products, including bucindolol, for which the
composition of matter patent expires in November 1997. There can be no assurance
that any of the benefits of the Waxman-Hatch Act or similar foreign laws will be
available to the Company or that such laws will not be amended or repealed.
Risk of Clinical Trial and Product Liability. The use of the
Company's products in clinical trials and the marketing of any products may
expose the Company to substantial clinical trial and product liability claims.
Certain of the Company's agreements require the Company to obtain specified
levels of insurance coverage, naming the other party thereto as an additional
insured. There can be no assurance that the Company will continue to be able to
obtain such insurance coverage, that such insurance can be acquired in
sufficient amounts to protect the Company or other named parties against such
liability, at a reasonable cost, or at all or that any insurance obtained will
cover any particular liability claim. The Company is required to indemnify
Servier, Boehringer and AHP against claims, damages or liabilities incurred by
any of them in connection with the marketing of dexfenfluramine under certain
circumstances. The Company may also be required to indemnify other licensors
against product liability claims incurred by them as a result of products
developed by the Company under licenses from such entities. In the event of an
uninsured or inadequately insured
45
product liability claim, or in the event an indemnification claim was made
against the Company, the Company's business and financial condition could be
materially adversely affected.
Early Stage of Products Under Development by the Company. The
Company is investigating for therapeutic potential a variety of pharmaceutical
compounds, technologies and other products at various stages of development. In
particular, Progenitor and Transcell each are conducting very early stage
research and all of their proposed products require significant further research
and development, as well as testing and regulatory clearances, and are subject
to the risks of failure inherent in the development of products or therapeutic
procedures based on innovative technologies. The products under development by
the Company are subject to the risk that any or all of these proposed products
are found to be ineffective or unsafe, or otherwise fail to receive necessary
regulatory clearances. The Company is unable to predict whether any of its
products will be successfully manufactured or marketed. Further, due to the
extended testing and regulatory review process required before marketing
clearance can be obtained, the time frames for commercialization of any products
or procedures are long and uncertain.
Dependence on Others for Clinical Development, Regulatory
Approvals, Manufacturing and Marketing. The Company expects to rely upon
collaborative partners for the development, manufacturing and marketing of
certain of its products, including products which may be required in the future.
The Company is therefore dependent on the efforts of these collaborative
partners and the Company may have limited control over the manufacture and
commercialization of such products. For example, with respect to bucindolol,
neither the Company nor Intercardia controls the BEST Study, which is being
conducted by the NIH and the VA, and the Company will be substantially dependent
upon Astra Merck for the commercial success of the twice-daily formulation of
bucindolol in the U.S., assuming FDA approval is obtained. In the event certain
of the Company's collaborative partners terminate the related agreements or fail
to manufacture or commercialize products, the Company would be materially
adversely affected. Because the Company will generally retain a royalty interest
in sales of products licensed to third parties, its revenues may be less than if
it retained commercialization rights and marketed products directly. Although
the Company believes that its collaborative partners will have an economic
motivation to commercialize the products that they may license, the amount and
timing of resources devoted to these activities generally will be controlled by
each partner. There can be no assurance that the Company will be successful in
establishing any additional collaborative arrangements, or that any such
collaborative partners will be successful in commercializing products or not
terminate their collaborative agreements with the Company.
Risks Relating to Managing Growth. As a result of the Redux launch
and, assuming additional proposed product launches occur, the Company
anticipates experiencing a period of rapid growth, which is likely to place
significant demands on the Company's management, operational, financial and
accounting resources. The Company's intention to market certain products
directly will further strain these resources. In particular, the Company is
co-promoting Redux, which requires the Company to maintain a sales force and
related management systems. The Company's future success will depend in part on
whether it can expand its operational, financial and accounting systems and
expand, train and manage its employee base. The Company's inability to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition. Competition from other pharmaceutical companies,
biotechnology companies, dietary supplement companies and research and academic
institutions is intense and expected to increase. The Company is aware of
products and technologies under development by its competitors that address
diseases being targeted by the Company and competitors have developed or are in
the process of developing products or technologies that are, or in the future
may be, the basis for competitive products. Redux may be subject to substantial
competition. Dexfenfluramine is an isomer of fenfluramine, which is sold under
the brand name Pondimin by AHP for approximately the same use as
dexfenfluramine, although indicated only for "short-term (a few weeks) use."
Although dexfenfluramine is distinguishable from fenfluramine, there can be no
assurance that Redux, which is higher priced than Pondimin, will achieve greater
market acceptance than Pondimin or any other prescription drug used to treat
obesity. The Company is aware of drugs under development for the treatment of
obesity including sibutramine, for which an affiliate of BASF AG has filed an
NDA to treat obesity. Although an FDA advisory committee had recommended against
its approval, it has been reported that the FDA has issued an approvable letter
relating to the drug. In addition, the Company is aware of anti-obesity drugs
under development by an affiliate of Roche Holdings Ltd. and by Neurogen
Corporation. In addition, other drugs and technologies relating to the treatment
of obesity are in earlier
46
stages of development and, due to the limited period of marketing exclusivity,
Redux may eventually be subject to competition from generic versions of
dexfenfluramine. The introduction of additional competitive products may
substantially reduce the Company's revenues from Redux.
Activase was recently approved for stroke and the Company is also
aware of a number of products in clinical development pursuing an indication for
stroke which could compete with citicoline. In addition, if regulatory approval
is obtained, bucindolol may compete with carvedilol, which is under development
in the U.S. by SmithKline Beecham, for the treatment of congestive heart
failure. An advisory committee of the FDA recommended against the approval of
carvedilol to treat congestive heart failure, although the Company believes
SmithKline Beecham is continuing to seek to gain FDA approval for the drug. In
addition, Melzone will compete with a substantial number of available melatonin
dietary supplement products and PMS Escape will compete with a number of
products for use during the pre-menstrual period.
Many companies in the pharmaceutical and dietary supplement
industries have substantially greater financial resources and development
capabilities than the Company and have substantially greater experience in
undertaking preclinical and clinical testing of products, obtaining regulatory
approvals and manufacturing and marketing products. In addition to competing
with universities and other research institutions in the development of
products, technologies and processes, the Company may compete with other
companies in acquiring rights to products or technologies. There can be no
assurance that the Company will develop products that are more effective or
achieve greater market acceptance than competitive products, or that the
Company's competitors will not succeed in developing products and technologies
that are safer or more effective or less expensive than those being developed by
the Company or that would render the Company's products and technologies less
competitive or obsolete.
Dependence Upon Key Personnel and Consultants. The Company is
dependent on certain executive officers and scientific personnel. The Company
has key person life insurance policies on the lives of Glenn L. Cooper, M.D.,
Richard Wurtman, M.D. and Lindsay A. Rosenwald, M.D. Drs. Wurtman and Rosenwald
devote only a portion of their time to the Company's business. In addition, the
Company is dependent upon certain executive officers or scientific personnel of
the subsidiaries, each of which has separate management who are responsible, to
a large extent, for the day-to-day operations and the strategic direction of the
respective subsidiary. In addition, the Company relies on independent
consultants to design and supervise clinical trials and assist in preparation of
FDA submissions.
Competition for qualified employees among pharmaceutical and
biotechnology companies is intense, and the loss of any of such persons, or an
inability to attract, retain and motivate additional highly skilled employees,
could adversely affect the Company's business and prospects. There can be no
assurance that the Company will be able to retain its existing personnel or to
attract additional qualified employees.
Uncertainty Regarding Pharmaceutical Pricing and Reimbursement.
The Company's business will be affected by the efforts of governmental and
third-party payors to contain or reduce the cost of health care. There have
been, and the Company anticipates that there will continue to be, a number of
proposals to implement government control over the pricing or profitability of
prescription pharmaceuticals, as is currently the case in many foreign markets.
The announcement or adoption of such proposals could have an adverse effect on
the Company. Furthermore, the Company's ability to commercialize its products
may be adversely affected to the extent that such proposals have a material
adverse effect on the business, financial condition and profitability of
companies that are prospective collaborative partners of the Company. Successful
commercialization of many of the Company's products, including Redux, may depend
on the availability of reimbursement for the cost of such products and related
treatment from third-party health care payors, such as the government, private
insurance plans and managed care organizations. There can be no assurance that
such reimbursement will be available. Such third-party payors are increasingly
challenging the price of medical products and services.
Control by Present Stockholders; Anti-Takeover Provisions. The
officers, directors and principal stockholders of the Company (including
individuals or entities related to such stockholders) beneficially own
approximately 47% of Interneuron's outstanding Common Stock. Accordingly,
these officers, directors and stockholders may have the ability to exert
significant influence over the election of the Company's Board of Directors and
to determine corporate actions requiring stockholder approval.
The Board of Directors has the authority, without further approval
of the Company's stockholders, to fix the rights and preferences of and to issue
shares of preferred stock. Further, the Servier
47
Agreements may be terminated in the event of any acquisition by a new party
(other than existing stockholders or their affiliates as of the date of the
Servier Agreements) of a 20% beneficial interest in the Company. The preferred
stock held by AHP provides that AHP's consent is required prior to the merger of
the Company, the sale of substantially all of the Company's assets or certain
other transactions. In addition, Ferrer may terminate the Ferrer Agreement in
the event an unaffiliated third party acquires 50% of Interneuron's Common
Stock. In addition, outstanding options under the Company's Stock Option Plans
become immediately exercisable upon certain changes in control of the Company.
In addition, Delaware corporate law imposes limitations on certain business
combinations. These provisions could, under certain circumstances, have the
effect of delaying or preventing a change in control of the Company and,
accordingly, could adversely affect the price of the Company's Common Stock.
No Dividends. The Company has not paid any cash dividends on its
Common Stock since inception and does not expect to do so in the foreseeable
future. Any dividends will be subject to the preferential cumulative dividend of
$0.1253 per share and $1.00 per share payable on the outstanding Series B
Preferred Stock and Series C Preferred Stock, respectively, held by AHP and
dividends payable on any other preferred stock issued by the Company.
Possible Volatility of Stock Price. The market prices for
securities of emerging growth companies have historically been highly volatile.
Future announcements concerning the Company or its subsidiaries, including
Intercardia, which is publicly-traded, or the Company's competitors, including
the results of testing and clinical trials, technological innovations or
competitive products, government regulations, developments concerning
proprietary rights, litigation, the Company's results of operations or public
concern as to the safety or commercial value of the Company's products, may have
a significant impact on the market price of the Company's Common Stock.
Shares Eligible for Future Sale; Registration Rights. As of
December 13, 1996, approximately 41,017,875 shares of Common Stock were
outstanding. Of these shares, approximately 19,000,000 are owned by affiliates
(or individuals or entities that may be deemed affiliates) of the Company or are
"restricted securities" within the meaning of Rule 144. Substantially all of
these shares are eligible for sale under Rule 144. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including persons who may be deemed to be "affiliates" of the Company as that
term is defined under the Securities Act of 1933, as amended (the "Securities
Act"), is entitled to sell within any three-month period a number of restricted
shares beneficially owned for at least two years that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock, or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. However, a person who is not an
affiliate and has beneficially owned such shares for at least three years is
entitled to sell such shares without regard to the volume or other requirements.
A stockholder of the Company with demand registration rights has
requested that the Company file a registration statement on Form S-3 relating to
the resale of such stockholder's shares of Common Stock and the Company intends
to file such registration statement in December 1996. Other stockholders of the
Company have demand and/or piggy back registration rights, including (i) one
stockholder of the Company with demand and piggy-back registration rights
relating to 622,222 shares of Common Stock issuable upon conversion of preferred
stock, (ii) two stockholders of the Company having piggy-back registration
rights until March 1997 relating to an aggregate of approximately 1,330,000
shares of Common Stock; (iii) individuals and entities entitled to receive
shares of Common Stock in each of December 1996 and 1997 with a market value of
$1,200,000 at the time of each issuance have registration rights in January 1997
and 1998 relating to the resale of those shares; and (iv) in the event up to a
maximum of 2,181,250 shares of Common Stock are issued in June 1998 pursuant to
certain put protection rights, holders of such shares will have registration
rights at that time.
The Company has outstanding other registration statements on Form
S-3 relating to the resale of shares of Common Stock and has registration
statements on Form S-8 relating to its 1989 Stock Option Plan, 1994 Long-Term
Incentive Plan and its 1995 Stock Purchase Plan.
Outstanding Options and Warrants. As of September 30, 1996,
approximately 5,000,000 shares of Common Stock were issuable upon exercise of
outstanding options and warrants. In addition, the Company is required to issue
additional shares of Common Stock in connection with technology acquisitions and
may issue
48
additional shares if certain put protection rights are exercised. To the extent
such shares are issued, the interest of holders of Common Stock will be diluted.
49
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. Financial Statements
An index to Consolidated Financial Statements appears on page F-1.
2. Schedules
All financial statement schedules are omitted because they are not
applicable, not required under the instructions or all the information
required is set forth in the financial statements or notes thereto.
<TABLE>
<CAPTION>
3. Exhibits
<S> <C>
3.4 - Restated Certificate of Incorporation of Registrant (17)
3.5 - By-Laws of Registrant (1)
4.4 - Certificate of Designation establishing Series C Preferred Stock(17)
4.6 - Form of Registrant Warrant issued in subsidiary private
placement (25)
4.7 - Form of Registrant Warrant issued to designees of Paramount
Capital, Inc., and D.H. Blair& Co., Inc.(25)
10.5 (a) - Consultant and Non-competition Agreement between the
Registrant, Richard Wurtman, M.D. (34)
10.5 (b) - Consultant and Non-competition Agreement between InterNutria,
Inc. and Judith Wurtman, Ph.D. (34)
10.6 - Assignment of Invention and Agreement between Richard Wurtman,
M.D.,Judith Wurtman and the Registrant (1)
10.7 - Management Agreement between the Registrant
and Lindsay Rosenwald, M.D. (1)
10.9(a) - Restated and Amended 1989 Stock Option Plan (7)
10.10 - Form of Indemnification Agreement (1)
10.11 - Restated Amendment to MIT Option Agreement (1)
10.12(a) - Patent and Know-How License Agreement between the
Registrant and Les Laboratoires Servier ("Servier") dated February 7, 1990 ("License
Agreement") (1)
10.12(b) - Revised Appendix A to License Agreement (1)
10.12(c) - Amendment Agreement between Registrant and Servier, Orsem and Oril, Produits
Chimiques dated November 19,1992(3)(12)
10.12(d) - Amendment Agreement dated April 28, 1993 between Registrant and
Servier (16)
10.12 (e) - Consent and Amendment Agreement among Servier, American Home Products Corp.
and Registrant (34)
10.13 - Trademark License Agreement between the Registrant and Orsem dated February 7,
1990 (1)
10.14 - Supply Agreement between the Registrant and Oril Products Chimiques dated
February 7, 1990 (1)(3)
10.15(a) - Form of Indemnification Agreement between the Registrant and Alexander M. Haig,
Jr. (1)
10.16 - Assignment of Invention by Richard Wurtman, M.D. (1)
10.22(a) - License Agreement dated January 15, 1993, as amended, between the
Registrant and Grupo Ferrer (3)(16)
10.25 - License Agreement between the Registrant and the Massachusetts
Institute of Technology (4)
10.28 - Letter Agreement between the Registrant and Bobby W. Sandage, Jr., Ph.D. (7)
50
10.29 - Amended Lease dated December 12, 1991 for Registrant's offices in
Lexington, Massachusetts (7)
10.29(a) - First Amendment to Lease dated as of October 14, 1994 between Registrant and
Ledgemont Realty Trust (25)
10.30 - License Agreement dated January 1, 1992 between the Trustees of Princeton
University and the Registrant (3)(8)
10.31 - Research Agreement dated as of July 1, 1991 between the Registrant and the
Trustees of Princeton University (3)(8)
10.32 - Consulting Agreement dated as of July 1, 1991 between the Registrant and Daniel
Kahne, Ph.D. (3)(8)
10.33 - License Agreement dated January 28, 1992 between Ohio University, The Castle
Group, Inc. and Scimark Corporation (assigned to Progenitor, Inc.)(3)(8)
10.34 - Sponsored Research Agreement between Scimark Corporation (assigned to
Progenitor, Inc.) and Ohio University (3)(8)
10.34(a) - Letter Amendment between Progenitor, Inc. and Ohio University (18)
10.35 - Technology License Contract dated December 18, 1991 between the
Registrant and the Mayo Foundation for Medical Education and Research (3) (8)
10.36 - Exclusive License Agreement dated February 24, 1992 between the
Registrant and Purdue Research Foundation (9)
10.37 - License Agreement dated as of February 15, 1992 between the
Registrant and Massachusetts Institute of Technology (9)
10.39 - Employment Agreement between Transcell Technologies, Inc. and Elizabeth Tallet
dated November 11, 1992 and Guarantee by
Registrant (13)
10.40 - Patent and Know-How Sublicense and Supply Agreement between
Registrant and American Cyanamid Company dated November 19, 1992 (3)(12)
10.41 - Equity Investment Agreement between Registrant and American Cyanamid Company
dated November 19, 1992 (12)
10.42 - Trademark License Agreement between Registrant and American
Cyanamid Company dated November 19, 1992 (12)
10.43 - Consent Agreement between Registrant and Servier dated November
19,1992 (12)
10.45 - Agreement between Registrant and Parexel International Corporation
dated October 22, 1992 (as of July 21, 1992) (3) (14)
10.46 - License Agreement dated February 9, 1993 between the Registrant and Massachusetts
Institute of Technology (3)(15)
10.47 - Sublease between Enichem America and Transcell Technologies, Inc.
including guarantee by the Registrant (15)
10.49 - License Agreement between Registrant and Elan Corporation, plc dated September
9, 1993 (3)(18)
10.51 - Letter Agreement between the Registrant and Mark Butler (18)
10.52 - License Agreement dated February 18, 1994 between Registrant and
Rhone-Poulenc Rorer, S.A. (20)
10.54 - Form of Purchase Agreement dated as of February 24, 1994 (20)
10.54(a) - Form of Amendment to Purchase Agreement (20)
10.55 - Patent License Agreement between Registrant and Massachusetts
Institute of Technology dated March 1, 1994 (20)
10.57 - Employment Letter dated February 28, 1994 between the Registrant and Thomas F.
Farb (21)
10.58 - Master Equipment Lease including Schedules and Exhibits between
Phoenix Leasing and Registrant (agreements for Transcell and
Progenitor are substantially identical), with form of continuing
guarantee for each of Transcell and Progenitor (22)
10.59 - Exhibit D to Agreement between Registrant and Parexel International
Corporation dated as of March 15, 1994 (3)(22)
51
10.60(a) - Acquisition Agreement dated as of May 13, 1994 among the Registrant, Intercardia,
Inc., Cardiovascular Pharmacology Engineering Consultants, Inc. (CPEC), Myocor,
Inc. and the sellers named therein (23)
10.60(b) - Amendment dated June 15, 1994 to the Acquisition Agreement (23)
10.61 - License Agreement dated December 6, 1991 between Bristol-Myers
Squibb and CPEC, as amended (3)(23)
10.61(a) - Letter Agreement dated November 18, 1994 between CPEC and Bristol-Myers
Squibb (25)
10.62 - Lease Agreement between Thomas R. Eggers and Progenitor, Inc. dated as of
November 1994 with Registrant guaranty (25)
10.63 - Form of Stock Purchase Agreement dated December 15, 1994 (25)
10.64 - Form of Investor Rights Agreement among Progenitor, Transcell, Registrant and each
investor in the subsidiary private placement (25)
10.64(a) - Form of Investor Rights Agreement among Intercardia, the Registrant and each
investor in the Intercardia private placement (25)
10.65 - 1994 Long-Term Incentive Plan (25)
10.67 - Employment Agreement between Intercardia and Clayton I. Duncan with Registrant
guarantee (25)
10.67(a) - Amendment to Employment Agreement between Intercardia, Inc. and Clayton I.
Duncan (36)
10.68(a) - Interneuron Pharmaceuticals, Inc. 1995 Employee Stock Purchase Plan, as amended (36)
10.69 - Office Lease, dated April 24, 1995 between Intercardia, Inc. and Highwoods/Forsyth
Limited Partnership, with Registrant Guaranty (27)
10.70 (a) - License and Collaboration Agreement by and between Progenitor, Inc., and Chiron
Corporation dated March 31, 1995 (3) (30)
10.71 - Securities Purchase Agreement dated June 2, 1995
between the Registrant and Reliance Insurance
Company, including Warrant and exhibits (29)
10.72 - Sponsored Research and License Agreement dated as of May 1, 1995 between
Progenitor and Novo Nordisk (3) (30)
10.73 - Form of Stock Purchase Agreement dated as of June 28, 1995 (31)
10.74 - Securities Purchase Agreement dated as of August 16, 1995 between the Registrant
and BT Holdings (New York), Inc., including Warrant issued to Momint (nominee
of BT Holdings) (32)
10.75 - Stock Purchase Agreement dated as August 23, 1995 between the Registrant and
Paresco, Inc. (32)
10.76 - Stock Purchase Agreement dated as of September 15, 1995 between the Registrant
and Silverton International Fund Limited (32)
10.77 - Subscription Agreement dated September 21, 1995, as of August 31, 1995, including
Registration Rights Agreement between Registrant and GFL Advantage Fund
Limited. (32)
10.78 - Contract Manufacturing Agreement dated November 20,1995 between Registrant and
Boehringer Ingelheim Pharmaceuticals, Inc. (3) (34)
10.79 - Development and Marketing Collaboration and License Agreement
between Astra Merck, Inc., Intercardia, Inc. and CPEC, Inc., dated December 4, 1995.
(3) (33)
10.80 - Intercompany Services Agreement between Registrant and Intercardia, Inc. (33)
10.81 - Asset Purchase Agreement dated November 14, 1995 among Registrant, InterNutria,
Inc., and Walden Laboratories, Inc. (34)
10.82 - Employment Agreement between Registrant and Glenn L. Cooper, M.D. dated April
30, 1996 effective as of May 13, 1996 (37)
10.83 - Co-promotion Agreement effective June 1, 1996 between Wyeth-Ayerst
Laboratories and Interneuron Pharmaceuticals, Inc. (3)(38)
10.84 - Master Consulting Agreement between Interneuron Pharmaceuticals, Inc. and Quintiles,
Inc. dated July 12, 1996(38)
10.85 - Amendment No. 1 dated July 3, 1996 to Master Consulting Agreement between
Interneuron Pharmaceuticals, Inc. and Quintiles, Inc. dated July 12, 1996 (3)(38)
10.86 - Lease Agreement between Transcell Technologies, Inc. and Cedar Brook Corporate
Center, L.P., dated September 19, 1996, with Registrant guaranty
52
21 - List of Subsidiaries
23 - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule
- ---------------------------
(1) Incorporated by reference to the Registrant's registration statement on Form S-1 (File No. 33-32408)
declared effective on March 8, 1990.
(3) Confidential Treatment requested for a portion of this Exhibit.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September
30, 1990.
(7) Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's registration statement
on Form S-1 (File No. 33-32408) filed December 18, 1991.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the three months ended
December 31, 1991.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the three months ended
March 31, 1992.
(12) Incorporated by reference to the Registrant's Form 8-K dated November 30, 1992.
(13) Incorporated by reference to Post-Effective Amendment No. 5 to the Registrant's Registration Statement
on Form S-1 (File No. 33-32408) filed on December 21, 1992.
(14) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1992.
(15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the three months ended
December 31, 1992
(16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the six months ended
March 31, 1993
(17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the nine months ended
June 30, 1993
(18) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993
(20) Incorporated by reference to the Registrant's Registration Statement on Form S-3 or Amendment No. 1
(File no. 33-75826)
(21) Incorporated by reference to the Registrant's Form 8-K dated March 31, 1994
(22) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the six months ended
March 31, 1994
(23) Incorporated by reference to the Registrant's Form 8-K dated June 20, 1994
(25) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994
(27) Incorporated by reference to the Registrant's Quarterly Report on From 10-Q for the six months ended
March 31, 1995
(29) Incorporated by reference to the Registrant's Quarterly Report on Form 8-K dated June 2, 1995
(30) Incorporated by reference to the Registrant's Quarterly Report on Form 8-K dated May 16, 1995; Exhibit
10.70 (a) supersedes Exhibit 10.70.
(31) Incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the nine months ended June 30, 1995.
(32) Incorporated by reference to Registrant's Report on Form 8-K dated August 16, 1995.
(33) Incorporated by reference to Registration Statement filed on Form S-1 (No. 33-80219) by Intercardia, Inc.
on December 8, 1995.
(34) Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
(36) Incorporated by reference to Amendment No. 1 to Registrant's Registration Statement on Form S-3 (File
No. 333-1273) filed March 15, 1996.
(37) Incorporated by reference to Registrant's Registration Statement on Form S-3 (File No. 333-03131) filed
May 3, 1996
(38) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q or 10-Q/A for the quarter ended
June 30, 1996.
</TABLE>
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the three
month period ended September 30, 1996.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements Page
- ---------------------------- ----
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets -- September 30, 1996 and 1995.................F-3
Consolidated Statements of Operations -- For the years ended
September 30, 1996, 1995 and 1994........................................F-4
Consolidated Statements of Stockholders' Equity -- For the years
ended September 30, 1996, 1995 and 1994..................................F-5
Consolidated Statements of Cash Flows -- For the years ended
September 30, 1996, 1995 and 1994........................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Interneuron Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Interneuron
Pharmaceuticals, Inc. as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. 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. These 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 consolidated financial position of Interneuron
Pharmaceuticals, Inc. as of September 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
November 8, 1996
F-2
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $145,901 $16,781
Marketable securities 17,068 18,208
Accounts receivable 4,338 237
Inventories 8,376 -
Prepaids and other current assets 1,324 190
--------------- --------------
Total current assets 177,007 35,416
Marketable securities 6,639 -
Property and equipment, net 2,689 1,671
Other assets 103 429
---------------- --------------
$186,438 $37,516
================ ==============
LIABILITIES
Current liabilities:
Accounts payable $ 2,575 $ 1,161
Accrued expenses 11,604 7,994
Deferred revenue 6,921 -
Current portion of capital lease obligations 661 506
---------------- --------------
Total current liabilities 21,761 9,661
Long-term portion of capital lease obligations 526 782
Other long-term liabilities 16 43
Minority interest 19,373 5,638
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value, authorized 5,000,000 shares:
Series B, 239,425 shares issued and outstanding at September 30, 1996
and September 30, 1995, respectively (liquidation preference at
September 30, 1996 $3,026) 3,000 3,000
Series C, 5,000 shares issued and outstanding at September 30, 1996
and September 30, 1995, respectively (liquidation preference at
September 30, 1996 $502) 500 500
Common stock, par value $.001; 60,000,000 shares authorized;
41,015,969 and 33,284,006 shares issued and outstanding at
September 30, 1996 and September 30, 1995, respectively 41 33
Additional paid-in capital 247,999 96,651
Accumulated deficit (106,778) (78,792)
---------------- --------------
Total stockholders' equity 144,762 21,392
---------------- --------------
$186,438 $37,516
================ ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the years ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product revenue $14,162 $ - $ -
Contract and license fee revenue 8,335 3,463 101
Investment income 4,465 1,039 505
--------- ------------ -------------
Total revenues 26,962 4,502 606
Costs and expenses:
Cost of product revenue 11,617 - -
Research and development 17,824 15,168 17,737
Selling, general and administrative 17,497 7,878 8,403
Purchase of in-process research and development 8,584 - 1,852
--------- ------------ -------------
Total costs and expenses 55,522 23,046 27,992
Net loss from operations (28,560) (18,544) (27,386)
Minority interest 574 563 -
----------- ---------- -------------
Net loss ($27,986) ($17,981) ($27,386)
=========== ========== =============
Net loss per common share ($0.76) ($.059) ($0.98)
=========== ========== =============
Weighted average common shares
outstanding 37,004 30,604 27,873
=========== ========== =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------- -------------------- Additional Total
Number of Par Value Number of Paid in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------------------------- ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993................. 26,851,867 $ 27 244,425 $3,500 $51,125 ($33,426) $21,226
Proceeds from exercise of Class B
Warrants......... .......................... 177,000 841 841
Proceeds from exercise of stock options....... 110,500 465 465
Private placements of common stock,
net of issuance costs of $1,609............. 1,707,000 2 13,752 13,754
Issuance of warrants.......................... 180 180
Issuance of common stock for technology
rights..... ................................ 170,000 759 759
Dividends on preferred stock.................. (63) (63)
Net loss...................................... (27,385) (27,385)
--------------- ------ ---------- ------- -------- -------- --------
Balance at September 30, 1994........... 29,016,367 29 244,425 3,500 67,059 (60,811) 9,777
Proceeds from exercise of Class B Warrants.... 257,107 1,221 1,221
Proceeds from exercise of stock options....... 61,200 151 151
Private placement of common stock, net of
issuance costs of $1,244 ................... 3,009,045 3 24,698 24,701
Dividends on preferred stock.................. (35) (35)
Proceeds from offerings of Employee Stock
Purchase Plan........... ................... 10,287 70 70
Proceeds from exercise of unit purchase
options and Class A warrants 930,000 1 2,324 2,325
Proceeds from issuance of Put Protection
Rights and warrants...... .................. 1,163 1,163
Net/loss...................................... (17,981) (17,981)
------------- ------- ---------- ------- -------- ---------- ----------
Balance at September 30, 1995........... 33,284,006 33 244,425 3,500 96,651 (78,792) 21,392
Proceeds from exercise of Class B and other
warrants.............. ..................... 3,524,897 4 13,124 13,128
Proceeds from exercise of stock options....... 740,022 1 3,141 3,142
Public offering of common stock, net of
issuance costs of $850.. .................. 3,000,000 3 109,127 109,130
Proceeds from offering of Employee Stock
Purchase Plan............ .................. 16,672 146 146
Dividends on preferred stock.................. (35) (35)
Shares issued in payment of dividends......... 9,935 105 105
Issuance of common stock for technology
rights ..................................... 342,792 8,827 8,827
Shares and payments pursuant to private
placement agreements...... ................. 97,645 (35) (35)
Gain on sale of stock by subsidiary........... 16,348 16,348
Stock-based compensation...................... 600 600
Net loss................................ (27,986) (27,986)
------------- ------- ---------- ------- -------- ---------- ----------
Balance at September 30, 1996 41,015,969 $41 244,425 $3,500 $247,999 ($106,778) $144,762
============= ======= ========== ====== ======== ========= ==========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-5
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
For the years ended September 30,
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($27,986) ($17,981) ($27,386)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 889 715 685
(Gain) loss on disposal of fixed assets 38 (34) 46
Amortization of bond premium - - 24
Minority interest in net loss of consolidated
subsidiaries (574) (563) -
Noncash license fee expense - - 180
Purchase of in-process research and
development 8,098 - 759
Noncash compensation 1,422 - 326
Change in assets and liabilities:
Accounts receivable and other assets (4,909) (186) 851
Inventories (8,376) - -
Accounts payable 1,414 44 535
Deferred revenue 6,921 - -
Accrued expenses and other liabilities 3,649 2,129 4,124
----- ----- -----
Net cash (used) by operating activities (19,414) (15,876) (19,856)
------ ------ ------
Cash flows from investing activities:
Capital expenditures (1,850) (504) (1,178)
Purchase of marketable securities (56,641) (22,465) (12,621)
Proceeds from maturities and sales of
marketable securities 51,141 8,614 22,736
Proceeds from sale of fixed assets 63 47 -
----- ------ ------
Net cash provided (used) by investing activities (7,287) (14,308) 8,937
----- ------ ------
Cash flows from financing activities:
Net proceeds from issuance of stock and
other financing activities 125,510 29,630 14,671
Net proceeds from issuance of stock by
subsidiaries 30,569 6,070 -
Proceeds from sale/leaseback 313 324 1,498
Principal payments of capital lease obligations (571) (416) (118)
------- ------ ------
Net cash provided by financing activities 155,821 35,608 16,051
------- ------ ------
Net change in cash and cash equivalents 129,120 5,424 5,132
Cash and cash equivalents at beginning of period 16,781 11,357 6,225
------ ------ -----
Cash and cash equivalents at end of period $145,901 $16,781 $11,357
======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
INTERNEURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Nature of the Business:
Interneuron Pharmaceuticals, Inc. (the "Company") is a diversified
biopharmaceutical company engaged in the development and commercialization of a
portfolio of products and product candidates primarily for neurological and
behavioral disorders, including obesity, stroke, anxiety and insomnia. The
Company focuses primarily on developing products that mimic or affect
neurotransmitters, which are chemicals that carry messages between nerve cells
of the central nervous system ("CNS") and the peripheral nervous system. The
Company is also developing products and technologies, generally outside the CNS
field, through four subsidiaries ("the Subsidiaries"): Intercardia, Inc.
("Intercardia"), focuses on cardiovascular disease; Progenitor, Inc.
("Progenitor"), focuses on developmental genomics; Transcell Technologies, Inc.
("Transcell"), focuses on carbohydrate-based drug discovery; and InterNutria,
Inc. ("InterNutria"), focuses on dietary supplement products.
B. Summary of Significant Accounting Policies:
Basis of Presentation: The consolidated financial statements include the
accounts of the Company and its wholly- and majority-owned Subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
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 reported period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Marketable Securities: The Company invests available
cash in short-term bank deposits, money market funds, U.S. and foreign
commercial paper and U.S. and foreign government securities. Cash and cash
equivalents includes investments with maturities of three months or less at date
of purchase. Marketable securities consist of investments purchased with
maturities greater than three months and are classified as non-current if they
mature one year or more beyond the balance sheet date. The Company classifies
its investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time the
investments are purchased. At September 30, 1995, all investments held were
classified as "held-to-maturity". At September 30, 1996, all investments held
were classified as "available-for-sale."
Property and Equipment: Property and equipment are stated at cost. The Company
provides for depreciation using the straight-line method based upon the
following estimated useful lives:
Estimated Useful Lives:
Office equipment. . . . . . . . . . . . . . . . .. . . . . . . . 2 to 5 years
Laboratory equipment.. . . . . . . . . . . . . . . . . . . . . . . . 5 years
Leasehold improvements. . . . . . Shorter of lease term or estimated useful life
F-7
Expenses for repairs and maintenance are charged to operations as incurred. Upon
retirement or sale, the cost of the assets disposed and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged, respectively, to operations.
Inventories: Inventories are valued at the lower of cost (first-in, first-out
method) or market. Drug inventory costs are capitalized commencing from the time
the pertinent drug is recommended for approval by an Advisory Committee of the
U.S. Food and Drug Administration ("FDA") for drugs that are subject to FDA
approval and from the time product is manufactured with the intention of
commercial sale for products not requiring FDA approval.
Revenue Recognition: Product revenue consists of product sales which are
recognized at the later of shipment or acceptance and royalties from licensed
products which are recognized when the amount of and basis for such royalties
are reported to the Company in accordance with the related license agreements.
Cash received in advance of product shipments or acceptance is recorded as
deferred revenue. Contract and license fee revenue consists of contractual
research milestone payments, sales and marketing payments, research and
development grants and contractual research and development funding and is
recognized when services are performed or when contractual obligations are met.
Research and Development: Research and development costs are expensed in the
period incurred.
Income Taxes: Deferred tax liabilities and assets are recognized based on
temporary differences between the financial statement basis and tax basis of
assets and liabilities using current statutory tax rates. A valuation allowance
against net deferred tax assets is established if, based on the available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized (see Note I).
Accounting for Stock-Based Compensation: In October 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123, Accounting for
Stock-Based Compensation, which changes measurement, recognition and disclosure
standards for stock-based compensation. The Company will adopt the disclosure
requirements of SFAS No. 123 in fiscal year 1997 and will continue to measure
stock-based compensation in accordance with present accounting rules. As such,
the adoption of SFAS No. 123 will not impact the financial position or the
results from operations of the Company.
Issuance of Stock by a Subsidiary: Gains on the issuance of common stock by a
subsidiary are included in net income unless the subsidiary is a research and
development, start-up or development stage company or an entity whose viability
as a going concern is under consideration. In those situations the Company
accounts for the change in its proportionate share of the subsidiary's net
assets resulting from the additional equity raised by the subsidiary as an
equity transaction and credits any resulting gain to additional paid-in capital.
Uncertainties: The Company is subject to risks common to companies in the
Biotechnology industry, including, but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
Reclassification: Certain prior year amounts have been reclassified to conform
with fiscal 1996 classifications.
F-8
C. Marketable Securities:
Investments in marketable securities consisted of the following at September 30,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------------
Market Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
U.S. government treasury
and agency obligation ................. $2,005,000 $2,033,000 $4,953,000 $4,950,000
Foreign government and
corporate obligations ................. 3,260,000 3,193,000 - -
U.S. corporate notes ....................... 18,442,000 18,503,000 13,255,000 13,255,000
---------- ---------- ---------- ----------
Total ..................................... $ 23,707,000 $23,729,000 $18,208,000 $18,205,000
============ =========== =========== ===========
</TABLE>
At September 30, 1996, marketable securities representing $6,639,000 of the
total cost mature between September 30, 1997 and 1998 and marketable securities
representing $17,068,000 of the total cost mature within one year from September
30, 1996. At September 30, 1996 and 1995, marketable securities were carried at
cost due to insignificant differences from market value. At September 30, 1996,
gross unrealized gains and loses were $144,000 and $122,000, respectively.
D. Inventories:
Inventories at September 30, 1996 consisted of:
Raw materials $5,420,000
Finished goods 2,956,000
---------
$8,376,000
==========
Raw materials consists primarily of dexfenfluramine drug substance and finished
goods consists primarily of finished Redux(TM).
E. Property and Equipment:
At September 30, 1996 and 1995, property and equipment consisted of the
following:
1996 1995
---- ----
Office equipment ............................ $1,622,000 $ 796,000
Laboratory equipment ........................ 2,612,000 2,036,000
Leasehold improvements ...................... 242,000 337,000
----------- ----------
4,476,000 3,169,000
Less: accumulated depreciation
and amortization ................. (1,787,000) (1,498,000)
--------- ---------
$2,689,000 $1,671,000
========== ==========
Included in the above amounts is property and equipment under capital lease
obligations of $2,169,000 and $1,890,000 at September 30, 1996 and 1995,
respectively, and related accumulated depreciation of $845,000 and $619,000 at
September 30, 1996 and 1995, respectively. Leased assets consist primarily of
laboratory equipment. The Company paid $158,000 and $146,000 in interest expense
during the years ended September 30, 1996 and 1995, respectively, related to
these capital lease obligations.
F-9
F. Accrued Expenses:
At September 30, 1996 and 1995 accrued expenses consisted of the following:
1996 1995
---------------- ---------
Professional fees. . . . . . . . . . $ 947,000 $ 526,000
Clinical and sponsored research. . . 5,490,000 3,737,000
Compensation related . . . . . . . . 3,058,000 1,504,000
Shared manufacturing costs . . . . . - 701,000
Other. . . . . . . . . . . . . . . . 2,109,000 1,526,000
----------- ---------
$11,604,000 $7,994,000
============ ===========
G. Commitments:
The Company leases its facilities, as well as certain laboratory equipment and
furniture, under non-cancelable operating leases. Rent expense under these
leases was approximately $1,195,000, $1,055,000 and $913,000 for the years ended
September 30, 1996, 1995 and 1994, respectively. The Company also leases certain
property and equipment under capital leases.
At September 30, 1996, the Company's future minimum payments under lease
arrangements are as follows:
Fiscal Year Operating Leases Capital Leases
----------- ---------------- --------------
1997 $ 1,022,000 $ 777,000
1998 1,078,000 329,000
1999 1,059,000 204,000
2000 1,050,000 47,000
2001 997,000 -
Thereafter 5,093,000 -
------------- --------------
Total lease payments $10,299,000 $1,357,000
===========
Less: amount representing interest (170,000)
-----------
Present value of net minimum lease payments $ 1,187,000
===========
H. Stockholders' Equity:
Preferred Stock: The Certificate of Incorporation of the Company authorizes the
issuance of 5,000,000 shares of Preferred Stock. The Board of Directors has the
authority to issue preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including the dividend, conversion,
voting, redemption (including sinking fund provisions), and other rights,
liquidation preferences, and the number of shares constituting any series and
the designations of such series, without any further vote or action by the
stockholders of the Company. In fiscal 1993 the Company issued shares of Series
B and Series C Preferred Stock in connection with an agreement with American
Home Products Corp. (see Note K).
Common Stock and Warrants: In March 1990, the Company completed its initial
public offering of securities. The offering consisted of 1,782,500 units at
$6.00 per unit, each unit consisting of three shares of Common Stock, $.001 par
value, and three Class A Warrants. Each Class A Warrant entitled the holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $2.20. As of February 1992, all such Class A Warrants had been exercised.
Each Class B Warrant entitled the holder to purchase one share of Common Stock
at $4.75 per share, from the date of issuance through March 15, 1996. During
fiscal 1995, 257,107 Class B Warrants were exercised and proceeds of
approximately $1,221,000 were realized by the Company. In fiscal 1996, Class B
Warrants were exercised (including 165,000 that were exercised on a cashless
basis by an affiliate of the Company resulting in the issuance of 138,432 shares
of Common Stock of the Company) resulting in net proceeds to the Company of
approximately $10,612,000 and the issuance of approximately 2,375,000 shares of
Common Stock.
F-10
In connection with the initial public offering, the Company also provided the
underwriter with Unit Purchase Options to purchase up to 155,000 units for $8.40
per unit. In fiscal 1995, all 155,000 Unit Purchase Options and underlying Class
A Warrants were exercised resulting in proceeds of $2,325,000 and issuance of
930,000 shares of the Company's Common Stock and 465,000 Class B Warrants, which
were exercised in full in fiscal 1996.
In fiscal 1994, the Company completed a private placement of 1,707,000 shares of
its Common Stock resulting in net proceeds of approximately $13,754,000.
In fiscal 1995, the Company completed private placements of 3,009,045 shares of
its Common Stock, at prices ranging from $3.75 to $13.08 per share, which
resulted in net proceeds of approximately $24,701,000. Additionally as part of
the private placements, the Company issued warrants to purchase 500,000 and
62,500 shares of its Common Stock at $10.00 and $12.77 per share, respectively,
which are exercisable through June 1,2002 and August 16, 2000, respectively. In
connection with these private placements, 91,000 additional warrants to purchase
shares of the Company's Common Stock were issued to certain financial
intermediaries at prices ranging from $5.00 to $13.08 per share which expire at
various dates from July 5, 2000 to February 3, 2005. At September 30, 1996,
70,000 of these warrants were outstanding at prices ranging from $5.00 to $7.88
per share and expiring from June 1, 2002 to February 3, 2005.
Pursuant to certain placement agreements, an additional 97,645 shares of the
Company's Common Stock were issued during the year ended September 30, 1996.
In January 1996, the Company issued 342,792 shares of Common Stock for the
purchase of the remaining 20% of outstanding capital stock of CPEC, Inc.
("CPEC") not owned by Intercardia (see Note L).
In June 1996, the Company completed a public offering of 3,000,000 shares of
Common Stock at $39.00 per share and received proceeds, net of issuance costs,
of approximately $109,130,000.
During fiscal 1995, certain Subsidiaries issued convertible preferred stock
through private placements which resulted in net proceeds of approximately
$7,233,000 (the "Subsidiaries' Private Placements"). In connection with certain
of the Subsidiaries' Private Placements the Company issued 218,125 warrants to
purchase shares of the Company's Common Stock exercisable at $4.625 per share
until June 30, 1998 (the "Warrants") of which 41,250 warrants were outstanding
at September 30, 1996. Additionally, investors in the private placements have
the ability on June 30, 1998 to cause the Company to purchase from them certain
amounts of the convertible preferred stock deemed to be illiquid but in no
circumstance for an amount greater than that initially paid by the investor (the
"Put Protection Rights"). The Company received approximately $1,163,000 from the
proceeds of the offerings as consideration for its issuance of the Warrants and
the Put Protection Rights, which was recorded as an equity issuance by the
Company. The Company may pay cash or issue its Common Stock to settle any
obligations arising from the Put Protection Rights and intends to choose
settlement through issuance of its Common Stock. The Company could be required
to issue up to a maximum aggregate of approximately 2,181,250 shares of Common
Stock under certain circumstances if the Put Protection Rights were exercised in
full and the Company's Common Stock is valued at $2.00 per share or less.
Investors also received registration rights relating to the shares underlying
the Warrants and Put Protection Rights. In connection with these private
placements, the Company issued to designees of the Placement Agent which is an
affiliate of the Company (see Note J), warrants to purchase approximately 21,813
shares of Common Stock at $4.625 per share, exercisable through June 30, 1998.
In connection with the Subsidiaries' Private Placements, Interneuron converted
the amounts owed to Interneuron by these Subsidiaries as a result of
Interneuron's funding of the Subsidiaries' operations into convertible preferred
stock of these Subsidiaries. In fiscal 1996, Intercardia completed an initial
public offering of 2,530,000 shares of Intercardia common stock (see Note M).
The Company's percentage of ownership in Progenitor, Transcell and Intercardia
changed from approximately 78%, 79% and 88%, respectively, at September 30, 1995
to approximately 76%, 78% and 60%, respectively, at September 30, 1996.
F-11
Stock Options and Warrants: Under the Company's 1989 Stock Option Plan (the
"1989 Plan"), incentive or non-qualified options to purchase 3,000,000 shares of
the Company's Common Stock may be granted to employees. Under the Company's 1994
Long-Term Incentive Plan (the "1994 Plan"), employees, directors and consultants
to the Company may be granted incentive or non-qualified options to purchase up
to 2,700,000 shares of the Common Stock of the Company and restricted stock
awards of up to 300,000 shares of the Common Stock of the Company. Restricted
stock awards may be made without payment of consideration by the recipient and
may be subject to performance criteria and restriction periods. Under the 1989
and 1994 Plans ("the Plans") the exercise price of incentive options granted
must not be less than the fair market value of the Common Stock as determined on
the date of grant and the term of each grant cannot exceed ten years.
The Company has also granted outside of the Plans options to purchase shares of
the Company's Common Stock ("Non-Plan Options"). At September 30, 1996, 100,000
Non-Plan options were outstanding
The Company has issued warrants to purchase shares of the Company's Common
Stock, certain of which were issued in connection with various financing
arrangments and have been disclosed in this and other Notes to the Consolidated
Financial Statements.
F-12
Presented below under the caption "Stock Options" is all Plan and Non-Plan
option activity and under the caption "Warrant" is all warrant activity certain
of which may also be disclosed in this and other Notes to the Consolidated
Financial Statements:
<TABLE>
<CAPTION>
Stock Options Warrants
--------------------------- --------------------------------
Option Warrant
------ -------
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at
September 30, 1993 2,127,441 $ .83-$12.63 1,020,000 $4.00-$9.00
Granted 916,500 $5.12-$10.00 125,000 $5.12-$14.00
Exercised ( 110,500) $0.00-$ 6.25 -
Canceled (13,600) $4.38-$ 9.63 -
------ ---------------
Outstanding at
September 30, 1994 2,919,841 $ .83-$12.63 1,145,000 $4.00-$14.00
Granted 1,225,200 $4.88-$12.75 893,438 $4.63-$13.08
Exercised (61,200) $.83-$ 7.12 -
Canceled (2,400) $5.12-$ 7.12 -
------------ ---------------
Outstanding at
September 30, 1995 4,081,441 $ .83-$12.63 2,038,438 $4.00-$14.00
Granted 848,300 $14.75-$42.00 75,000 $23.25-$29.75
Exercised (740,021) $2.00-$10.00 (1,309,125) $4.00-$14.00
Canceled (298,000) $6.50-$42.00 -
------- ----------------
Outstanding at
September 30, 1996 3,891,720 $ .83-$32.00 804,313 $4.63-$29.75
========= ================
</TABLE>
At September 30, 1996, outstanding stock options and warrants were exercisable
as follows:
<TABLE>
<CAPTION>
Exercise Price Per Share: Under $5.00 $5.00 to $10.00 Over $10.00 Total
----------- --------------- ----------- --------
<S> <C> <C> <C> <C>
Stock options 127,315 3,066,705 697,700 3,891,720
Warrants 61,813 605,000 137,500 804,313
------- ------------- -------- ----------
189,128 3,671,705 835,200 4,696,033
======= ============= ========= =========
</TABLE>
At September 30, 1996, 2,210,998 stock options and 740,980 warrants were
exercisable and there were no awards of restricted stock. All outstanding
options vest at various rates over periods up to six years and expire at various
dates from August 1, 1999 to September 26, 2006. All outstanding warrants expire
at various dates from June 30, 1998 to February 3, 2005.
F-13
Employee Stock Purchase Plan: On March 22, 1995, the stockholders approved the
Company's 1995 Employee Stock Purchase Plan ("the 1995 Plan") covering an
aggregate of 100,000 shares of Common Stock which is offered in one-year
offerings ("an Offering"), the first of which began April 1, 1995. Each Offering
is divided into two six-month Purchase Periods (the "Purchase Periods").
Employees may contribute up to ten percent (10%) of gross wages, with certain
limitations, via payroll deduction, to the 1995 plan. Stock will be purchased at
the end of each Purchase Period with employee contributions at the lower of 85%
of the last sale price of the Company's Common Stock on the first day of an
Offering or the last day of the related Purchase Period. In fiscal 1995 and
1996, 10,287 and 16,672 shares, respectively, of Common Stock had been purchased
pursuant to the 1995 plan.
Other: In addition to the 41,016,000 shares of Common Stock outstanding at
September 30, 1996, there were approximately 14,000,000 potentially issuable
shares of Common Stock ("Reserved Common Shares"). Included in the number of
Reserved Common Shares are the following: (i) 4,756,000 shares of Common Stock
reserved for issuance upon conversion of the Company's authorized but unissued
Preferred Stock; (ii) 622,222 shares of Common Stock issuable upon conversion of
issued and outstanding Preferred Stock; (iii) 2,181,250 shares reserved for the
maximum number of shares issuable under the Put Protection Rights, which assumes
exercise for the full amount possible; (iv) 4,900,000 shares reserved for
issuance under the Plans and the 1995 Plan (of this amount approximately
3,800,000 has been granted, not all of which was vested); (v) an estimated
250,000 shares issuable in connection with certain acquisitions; and (vi)
approximately 804,000 shares reserved for issuance from exercise of outstanding
warrants.
I. Income Taxes:
At September 30, 1996 and 1995, the significant components of the Company's
deferred tax asset consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal and state net operating loss
carryforwards $38,798,000 $28,315,000
Federal and state tax credit carryforwards 3,721,000 3,527,000
Deferred revenue and accrued expenses 3,723,000 2,555,000
---------- ------------
Total deferred tax asset before
valuation allowance 46,242,000 34,397,000
Valuation allowance against total
deferred tax asset (46,242,000) (34,397,000)
------------ -------------
Net deferred tax asset $ - $ -
============ =============
</TABLE>
At September 30, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $100,000,000 which
expire at various dates from 2004 to 2011. In addition, the Company had
approximately $3,700,000 of tax credit carryforwards for federal income tax
purposes expiring at various dates through 2011. The Company's ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code Sections 382 and 383.
J. Related Party Transactions:
The Company licensed certain patents and technologies from Massachusetts
Institute of Technology ("MIT") relating to research of a principal shareholder
and director and his associates. The Company is obligated to reimburse MIT for
one half of any patent prosecution and maintenance costs to maintain certain of
these licenses.
F-14
During fiscal 1995, Paramount Capital, Inc. ("Paramount") served as placement
agent for the Subsidiaries' Private Placements (see Note H). Lindsay A.
Rosenwald, M.D., the Chairman of the Board and a principal stockholder of the
Company, is the Chairman, Chief Executive Officer and sole stockholder of
Paramount.
Paramount earned $657,000 in commissions related to the Subsidiaries' Private
Placements. In addition, the Company issued to Dr. Rosenwald and other designees
of Paramount warrants to purchase a total of 21,813 shares of the Company's
Common Stock at $4.625 per share, exercisable through June 30, 1998, of which
20,583 were outstanding at September 30, 1996.
D.H. Blair and Co., Inc. ("Blair") was a selected dealer associated with the
Subsidiaries' Private Placements. Blair is substantially owned by relatives of
the sole stockholder of the parent of D.H. Blair Investment Banking Corp., a
principal stockholder of the Company. Blair earned $113,000 in commissions
related to the Subsidiaries' Private Placements. Designees of Paramount
(including Dr. Rosenwald) and Blair also received warrants to purchase an
aggregate of 10% of the preferred stock of the Subsidiaries sold in the
Subsidiaries' Private Placements. These warrants represent less than 1% of the
subsidiaries outstanding stock at September 30, 1996.
Under consulting agreements with two directors and a party related to a director
to provide scientific advice and administrative services, the Company is
obligated to make monthly payments, generally for a one year period subject to
annual renewals. Payments were $180,000, $174,000 and $163,000 for the years
ended September 30, 1996, 1995 and 1994, respectively. Also, one of these
directors received additional payments aggregating approximately $103,000
related to certain patent matters and the April 1996 FDA approval of Redux.
Another director has a three year consulting agreement with the Company to
provide services for a total of up to $120,000. Payments under this agreement
were $32,000, $36,000, and $11,000 in fiscal 1996, 1995, and 1994, respectively.
In fiscal 1996, InterNutria acquired certain technology from Walden
Laboratories, Inc. of which the Company's Chairman is a stockholder (see Note
L).
Advances were provided to several employees of the Company and its Subsidiaries
for moving and relocation costs. As of September 30, 1996 and 1995, these loans
totaled approximately $204,000 and $560,000 respectively. Certain amounts will
be repaid and certain amounts will be forgiven upon achievement of specific
milestones; remaining balances will be repaid by the earlier of four years from
the date of the loan or termination of the executive's employment.
The Company made contributions of $182,000, $147,000 and $134,000 in the years
ended September 30, 1996, 1995 and 1994, respectively, to The Center for Brain
Science and Metabolism Charitable Trust of which one of the Company's directors
is the scientific director.
K. Agreements:
Servier: In February 1990, as amended, the Company entered into a series of
agreements with Les Laboratoires Servier ("Licensor") under which the Company
agreed to pursue activities designed to obtain approval to market
dexfenfluramine, a prescription drug developed by the Licensor for the treatment
of obesity associated with carbohydrate craving. Under the terms of the
agreements, the Company obtained U.S. marketing rights to the product in
exchange for future royalty payments based upon net product sales, as defined.
These agreements required non-refundable royalties of $100,000 paid in February
1991, and $300,000 in each subsequent February, until approval of the NDA, which
occurred on April 29, 1996. Additionally, under the terms of these agreements,
the Company is required to purchase the bulk compound from an affiliate of the
Licensor. The Company is obligated to pay to the Licensor 11.5% of net sales by
"AHP" (see below). During fiscal 1996, the Company incurred an expense of and
paid to the Licensor royalties of approximately $3,800,000 which fulfills the
Company's initial annual minimum royalty obligation to the Licensor. Payments
will continue to be made quarterly based upon sales of Redux.
American Home Products: In November 1992, the Company entered into an agreement
with American Cyanamid Company (which subsequently was acquired by American Home
Products Corp.) ("AHP") for the
F-15
development and marketing in the U.S. of dexfenfluramine for use in treating
obesity associated with carbohydrate craving. On this date, the Company received
$2,000,000 for a patent license and sold to American Home 239,425 shares of its
convertible Series B Preferred Stock for $3,000,000. Holders of Series B
Preferred Stock are entitled to receive mandatory dividends of $.1253 per share
payable at the election of the Company in cash or Common Stock. Such dividends
are payable annually on April 1 of each year, accrue on a daily basis and are
cumulative. Holders of Series B Preferred Stock are also entitled to a
liquidation preference of $12.53 per share, plus accumulated and unpaid
dividends. Holders of Series B Preferred Stock are entitled to convert such
shares into an aggregate of 533,333 shares of Common Stock (a conversion price
of $5.625 per share) subject to adjustment in the event of future dilution. The
agreement provides for additional cash payments for the patent license and
additional purchases of convertible Preferred Stock based upon the Company's
achievement of certain milestones. Additionally, the agreement with AHP provides
for royalty payments to the Company based upon net sales of dexfenfluramine and
for AHP to share equally with the Company certain research and development
expenses.
In June 1993, the Company received payments from AHP in connection
with the submission of a New Drug Application ("NDA") for dexfenfluramine,
consisting of $2,500,000 in a milestone payment and $500,000 through the
purchase of 5,000 shares of convertible Series C Preferred Stock. Holders of
Series C Preferred Stock are entitled to receive mandatory dividends of $1.00
per share payable annually on April 1, of each year, which accrue on a daily
basis and are cumulative. Holders of Series C Preferred Stock are also entitled
to a liquidation preference of $100 per share, plus accumulated and unpaid
dividends. Holders of Series C Preferred Stock are entitled to convert such
shares into an aggregate of 88,888 shares of Common Stock of the Company (a
conversion price of $5.625 per share) subject to anti-dilution adjustment.
Holders of the Series B and C Preferred Stock are entitled to vote on all
matters submitted to a vote of stockholders, other than the election of
directors, generally holding the number of votes equal to the number of shares
of Common Stock into which such shares of Preferred Stock are convertible.
On September 29, 1995 dexfenfluramine was recommended for removal from Schedule
IV of the Controlled Substances Act (the "Descheduling") by a joint committee of
the Endocrinologic and Metabolic Advisory Committee and Drug Abuse Advisory
Committee of the FDA and on April 29, 1996 received clearance for marketing as a
twice-daily prescription drug for the treatment of obesity. If the Descheduling
is effected within one year of NDA approval, the Company would receive
$6,000,000 as a milestone payment and $3,500,000 as an equity investment from
AHP. The Company is uncertain whether the Descheduling will occur within the
time required to receive this payment and investment.
AHP has the right to terminate its sublicense upon twelve months notice to the
Company. The AHP agreements provide that Servier has the right to withdraw its
consent to the sublicense in the event that any entity acquires stock in AHP
sufficient to elect a majority of AHP's Board of Directors or otherwise obtains
control of AHP, provided that no such termination shall occur if AHP or its
successor achieves minimum net sales of $75,000,000 in the first marketing year
or $100,000,000 thereafter or pays Servier amounts to which it would have been
entitled if AHP had achieved such minimum net sales. Servier consented to the
AHP acquisition of American Cyanamid Company.
On April 29, 1996, dexfenfluramine received FDA clearance for marketing under
the name Redux. The Company's License Agreement with AHP provides for base
royalties equal to 11.5% of AHP's net sales and additional royalties ranging
from 5% of the first $50,000,000 of AHP's annual net sales if Redux is a
scheduled drug to 11% of AHP's annual net sales over $200,000,000, providing
Redux is supplied to AHP by the Company and is descheduled. Royalties of
approximately $5,500,000 on net sales through June 30, 1996 were reflected as
product revenue in fiscal 1996. AHP will make quarterly royalty payments to the
Company for net sales of Redux. The Company manufactures Redux through an
arrangement with Boehringer Ingleheim Pharmaceuticals, Inc. (see Boehringer) and
is the exclusive supplier of Redux to AHP.
Boehringer: In November 1995, the Company entered into an exclusive
manufacturing agreement with Boehringer Ingleheim Pharmaceuticals, Inc.
("Boehringer") under which Boehringer agreed to supply, and the Company agreed
to purchase from Boehringer, all of the Company's requirements for
dexfenfluramine capsules. The contract, which expires December 31, 1998,
contains certain minimum purchase and insurance commitments by the Company and
requires conformance by Boehringer to the FDA's Good Manufacturing Practices
F-16
regulations. The agreement provides for the Company to be able to qualify a
second source manufacturer under certain conditions.
Ferrer: The Company has licensed from Ferrer International, S.A. exclusive
rights to citicoline, a drug for potential treatment for memory and motor
impairment due to ischemic stroke, for commercialization in the U.S., Puerto
Rico and Canada. A license fee and future royalties on net sales of citicoline
were consideration provided to Ferrer.
Rhone-Poulenc Rorer: In February 1994, the Company entered into a license
agreement with Rhone-Poulenc Rorer S.A., granting the Company worldwide
exclusive rights to an anti-anxiety compound (pagoclone). The Company paid an
upfront license fee of $250,000 upon execution of the agreement. Additional
payments totaling $1,250,000 relating to the initiation of clinical trials and
submission of an NDA are required based upon achievement of milestones, certain
of which were achieved in fiscal 1996. Payments to be made by the Company upon
approval of an NDA will range from $3,000,000 to $5,000,000, depending on the
number of countries in which approval is achieved. Additional royalties will be
paid based on sales.
Bristol-Myers Squibb: Intercardia acquired CPEC (see Note L), which holds an
exclusive worldwide license to bucindolol, for use in the treatment of
congestive heart failure, which CPEC acquired from Bristol-Myers Squibb Company
("BMS"). Royalties will be due to BMS based upon net sales of the product.
Astra Merck: In December 1995, Intercardia executed a Development and Marketing
Collaboration and License Agreement (the "Astra Merck Collaboration") with Astra
Merck, Inc. ("Astra Merck") to provide for the development, commercialization
and marketing in the U.S. of a twice-daily formulation of bucindolol for the
treatment of congestive heart failure. Intercardia received $5,000,000 upon
execution of the Astra Merck Collaboration, which was recognized as contract and
license fee revenue in the first quarter of fiscal 1996, and may receive
additional payments based upon achievement of certain milestones and royalties
based on net sales of bucindolol in the U.S. Intercardia has agreed to pay Astra
Merck $10,000,000 in December 1997 and to reimburse Astra Merck for one-third of
certain product launch costs, up to a total of $11,000,000. In the event
Intercardia elects not to make these payments, future royalties payable by Astra
Merck to Intercardia will be substantially reduced. During the year ended
September 30, 1996, Astra Merck made payments or assumed liabilities of
approximately $4,300,000 on Intercardia' behalf. These amounts did not flow
through the Consolidated Statement of Operations, as they were offset against
related expenses. Astra Merck had paid approximately $2,900,000 of this amount
by September 30, 1996 and approximately $1,400,000 was included as offsetting
accounts receivable and accrued expenses on the Balance Sheet at September 30,
1996.
Chiron: In April 1995, Progenitor entered into an agreement with Chiron
Corporation ("Chiron") to collaborate in the development and commercialization
of Progenitor's proprietary gene therapy technology.
Progenitor received an initial payment of $2,500,000 in April 1995 and paid
$750,000 for certain start-up manufacturing costs to Chiron during fiscal 1995
and 1996. These amounts have been recognized as contract revenue and research
and development expense, respectively, in the year ended September 30,1995.
Progenitor received an additional $500,000 payment in January 1996, which was
recognized as contract revenue in fiscal 1996.
L. Acquisitions:
In May 1994, Intercardia entered into an agreement to acquire 80% of the
outstanding common stock of CPEC, Inc. (formerly Cardiovascular Pharmacology
Engineering and Consultants, Inc.), ("CPEC"), subject to conditions which were
met on September 26, 1994, the effective date of the acquisition. CPEC has an
exclusive worldwide license in North America and Europe to bucindolol, a
non-selective beta-blocker currently under development for congestive heart
failure. Bucindolol began a Phase 3 clinical trial, the Beta-blocker Evaluation
of Survival Trial (the "BEST Study"), for treatment of congestive heart failure
in cooperation with the National Institutes of Health (the "NIH") and The
Department of Veteran Affairs (the "VA") in April 1995. The NIH and VA have
agreed to provide up to $15,750,000 throughout the study and CPEC is obligated
to provide up to an additional
F-17
$2,000,000, of which $1,250,000 has been paid through September 30, 1996, and
fund other costs of the study including drug supply and clinical monitoring.
The purchase price of CPEC was approximately $1,852,000 comprised of 170,000
shares of Common Stock of the Company, payments to stockholders of CPEC, assumed
liabilities, and other related expenses. Additionally, future issuances of
Interneuron's Common Stock are required upon achieving the milestones of filing
an NDA and receiving an approval letter from the FDA. The value of these
additional shares is not included in the purchase price because their issuance
is contingent upon achieving these milestones. Substantially all of the purchase
price has been allocated to the bucindolol technology rights. However, because
bucindolol was not a currently commercializable product at the time of
acquisition and future benefits are dependent upon successful completion of
clinical trials and FDA approval, the Company recorded a charge to operations
for the costs associated with this transaction. Future issuances of Common Stock
will result in additional charges.
Intercardia and CPEC also entered into a consulting agreement with a corporation
owned by the minority stockholders of CPEC providing for consulting fees
aggregating $300,000 over a three year period beginning October 1994.
In January 1996, the Company acquired the remaining 20% of the outstanding
capital stock of CPEC not owned by Intercardia by issuing an aggregate of
342,792 shares of Common Stock to the former CPEC minority stockholders. For the
same reasons as stated above, the Company, recorded a charge for the purchase of
in- process research and development of approximately $6,084,000 in fiscal 1996.
In December 1995, Internutria acquired from Walden Laboratories, Inc.
("Walden"), the technology and know-how to produce a specially formulated
dietary supplement for women's use during their pre-menstrual period called PMS
Escape in exchange for $2,400,000 payable in two installments of Common Stock,
the first in late calendar 1996 and the second in late calendar 1997, at the
then-prevailing market price. Certain affiliates of the Company are or were
stockholders or Walden but will not receive any of the purchase price. The
Company recorded a charge of approximately $2,150,000 in fiscal 1996 in
connection with this transaction for the purchase of in-process research and
development as the future benefits from this technology will depend upon the
successful completion of certain clinical trials.
M. Intercardia:
In February 1996, Intercardia completed an initial public offering of 2,530,000
shares of Intercardia common stock at $15.00 per share resulting in proceeds,
net of offering costs, of approximately $35,000,000 (the "Intercardia IPO") the
Company purchased 333,333 shares of the Intercardia IPO for approximately
$5,000,000. The Company's ownership of Intercardia' outstanding capital stock
decreased from approximately 88% at September 30, 1995 to approximately 60% as a
result of the Intercardia IPO, without giving effect to exercise of options and
warrants. In certain circumstances, the Company has the right to purchase
additional shares of Intercardia common stock at fair market value to provide
that the Company's equity ownership in Intercardia does not fall below 51%. As a
result of the Intercardia IPO, Put Protection Rights that could have caused the
Company to issue in June 1998 up to approximately 1,914,000 shares of Common
Stock expired. As a result of the Intercardia IPO and the Company's purchase of
333,333 shares thereof, the Company recognized a gain on its investment in
Intercardia of approximately $16,350,000 which has been recorded as an increase
to the Company's Additional paid-in capital.
F-18
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNEURON PHARMACEUTICALS, INC.
Date: December 16, 1996 By: /s/ Glenn L. Cooper
-------------------
Glenn L. Cooper, M.D.,
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons in the capacity
and as of the date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Glenn L. Cooper President and Chief Executive December 16, 1996
- ---------------------------- Officer and Director (Principal
Glenn L. Cooper, M.D. Executive Officer)
/s/ Lindsay Rosenwald
- ---------------------------- Chairman of the December 16, 1996
Lindsay Rosenwald, M.D. Board of Directors
- ---------------------------- Director December , 1996
Harry Gray
/s/ Alexander M. Haig, Jr. Director December 16, 1996
- ----------------------------
Alexander M. Haig, Jr.
/s/ Peter Barton Hutt Director December , 1996
- ----------------------------
Peter Barton Hutt
/s/ Malcolm Morville Director December 16, 1996
- ----------------------------
Malcolm Morville
/s/ Robert K. Mueller Director December 16, 1996
- ----------------------------
Robert K. Mueller
/s/ Lee J. Schroeder Director December 16, 1996
- ----------------------------
Lee J. Schroeder
- ---------------------------- Director December , 1996
David Sharrock
/s/ Richard Wurtman
- ---------------------------- Director December 16, 1996
Richard Wurtman, M.D.
/s/ Thomas F. Farb
- ---------------------------- Executive Vice President, December 16, 1996
Thomas F. Farb Finance and Chief Financial
Officer (Principal Financial
and Accounting Officer)
</TABLE>
EXHIBIT 10.86
L E A S E A G R E E M E N T
BY AND BETWEEN:
CEDAR BROOK CORPORATE CENTER, L.P.
"Landlord"
- and -
TRANSCELL TECHNOLOGIES, INC.
"Tenant"
PREMISES: 8 Cedar Brook Drive
Cranbury, New Jersey 08512
DATED: September 19, 1996
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
1. LEASED PREMISES........................................................................................ 1
---------------
2. TERM OF LEASE.......................................................................................... 3
-------------
3. CONSTRUCTION........................................................................................... 3
------------
4. RENT................................................................................................... 11
----
5. PARKING AND USE OF EXTERIOR AREA....................................................................... 13
--------------------------------
6. USE.................................................................................................... 13
---
7. REPAIRS AND MAINTENANCE................................................................................ 13
-----------------------
8. COMMON AREA EXPENSES, TAXES AND INSURANCE.............................................................. 16
-----------------------------------------
9. SIGNS.................................................................................................. 21
-----
10. ASSIGNMENT AND SUBLETTING.............................................................................. 22
-------------------------
11. FIRE AND CASUALTY...................................................................................... 22
-----------------
12. COMPLIANCE WITH LAWS, RULES AND REGULATIONS............................................................ 24
-------------------------------------------
13. INSPECTION BY LANDLORD................................................................................. 28
----------------------
14. DEFAULT BY TENANT...................................................................................... 28
-----------------
15. LIABILITY OF TENANT FOR DEFICIENCY..................................................................... 31
----------------------------------
16. NOTICES................................................................................................ 31
-------
17. NON-WAIVER............................................................................................. 32
----------
18. RIGHT OF TENANT TO MAKE ALTERATIONS AND IMPROVEMENTS................................................... 32
----------------------------------------------------
19. NON-LIABILITY OF LANDLORD.............................................................................. 32
-------------------------
20. RESERVATION OF EASEMENT................................................................................ 33
-----------------------
21. STATEMENT OF ACCEPTANCE................................................................................ 33
-----------------------
22. FORCE MAJEURE.......................................................................................... 33
-------------
23. STATEMENTS BY LANDLORD AND TENANT...................................................................... 33
---------------------------------
24. CONDEMNATION........................................................................................... 34
------------
25. LANDLORD'S REMEDIES.................................................................................... 34
-------------------
26. QUIET ENJOYMENT........................................................................................ 35
---------------
27. SURRENDER OF PREMISES.................................................................................. 35
---------------------
28. HOLDOVER............................................................................................... 36
--------
29. INDEMNITY.............................................................................................. 36
---------
30. LEASE CONSTRUCTION..................................................................................... 37
------------------
31. BIND AND INURE CLAUSE.................................................................................. 38
---------------------
32. INCLUSIONS............................................................................................. 38
----------
33. DEFINITION OF TERM "LANDLORD".......................................................................... 38
-----------------------------
34. COVENANTS OF FURTHER ASSURANCES........................................................................ 38
-------------------------------
35. COVENANT AGAINST LIENS................................................................................. 39
----------------------
36. SUBORDINATION.......................................................................................... 39
-------------
37. EXCULPATION OF LANDLORD................................................................................ 39
-----------------------
38. SECURITY............................................................................................... 40
--------
39. BROKERAGE.............................................................................................. 40
---------
40. LATE CHARGES........................................................................................... 40
------------
41. OPTION TO RENEW........................................................................................ 40
---------------
42. RIGHT TO LEASE ADDITIONAL SPACE........................................................................ 42
-------------------------------
43. MEMORANDUM OF LEASE.................................................................................... 43
-------------------
</TABLE>
AGREEMENT, made September 19, 1996, between CEDAR BROOK
CORPORATE CENTER, L.P., 1000 Eastpark Blvd., Cranbury, New Jersey 08512,
"Landlord"; and TRANSCELL TECHNOLOGIES, INC., 2000 Cornwall Rd., Monmouth
Junction, NJ 08852, "Tenant".
W I T N E S S E T H :
WHEREAS, the Landlord intends to lease to the Tenant a portion
of 8 Cedar Brook Drive, Cranbury, New Jersey 08512, constituting a portion of
the office/industrial park known as CEDAR BROOK CORPORATE CENTER ("Office
Park"); and
WHEREAS, the parties hereto wish to mutually define their
rights, duties and obligations in connection with the said lease;
NOW THEREFORE, in consideration of the promises set forth
herein, the Landlord leases unto the Tenant and the Tenant rents from the
Landlord the Leased Premises described in Paragraph 1, and the Landlord and
Tenant do hereby mutually covenant and agree as follows:
1. LEASED PREMISES
1.1 The leased premises shall consist of approximately 32,500
square feet, measured from outside of glass to center line of common wall, but
no less than 30,000 square feet; consisting of approximately 29,300 square feet
of laboratory/office space, plus 3,200 square feet of executive offices, all as
identified on the plan attached hereto and made a part hereof as Schedule "A",
("Leased Premises") together with all improvements to be constructed thereon by
the Landlord for the use of the Tenant, and all improvements, tenements,
hereditaments, fixtures and rights and privileges appurtenant thereto, and any
and all fixtures and equipment which are to be installed in said building by the
Landlord for the use of the Tenant in its occupancy of the Leased Premises and
any expansion phases. Tenant shall also have the right to use all common areas
of the Office Park in a similar manner as other Office Park tenants.
1.2 Tenant shall have an option to expand the Leased Premises
by renting all, or a portion of the adjacent areas identified on Schedule "A" as
Phases 2A and 2B, in no less than 4,800 square foot increments (except for the
final increment which may be less), by providing Landlord with written notice
within 2 years of the Commencement Date, as defined hereafter, and paying
Landlord the Reservation Fee set forth in Paragraph 4.1. If Tenant, at its
option, leases all or a portion of Phase 2, Tenant shall continue to pay the
Reservation Fee for any area of Phase 2 that it does not lease, for the
remainder of the two year period. If Tenant leases any of Phase 2B, then Tenant
must either exercise its option on Phase 2A no later than the end of the two
year period or be obligated to pay full rent for Phase 2A after the end of the 2
year period; provided, however, if Tenant does not then construct improvements,
it shall pay a reduced rent for said expansion phase of $9.00 for an additional
12 months. Tenant shall still be entitled to the $40.00 allowance referred to in
Paragraph 3.1(d) when and if it decides to construct improvements and shall pay
rent at the rental rate as shown in Paragraph 4.2 for Months 19-24 plus the sum
of $0.55 per square foot. If Tenant rents only a portion of Phase 2 during the 2
year option period, the remaining portion of Phase 2 shall continue to be
subject to the option for the remaining balance of the 2 year period. In
addition, if Tenant leases any portion of Phase 2, it may elect to reserve a
corresponding amount of space in Phase 3, contiguous to Phase 2, and pay the
$5/sq. ft. Reservation Fee as set forth in Paragraph 4.2 for that space.
1.3 In the event Tenant leases Phase 2, it shall have a second
option to lease any remaining portion of Phase 3 not then under reservation, by
notifying Landlord and paying the Reservation Fee for such remaining portion.
1.4 In the event Tenant leases Phases 2 and 3, it shall have a
further option to lease Phase 4, which option shall be exercisable at any time
during the term of this Lease. Tenant shall provide Landlord with written notice
exercising its option and Landlord shall then have a period of up to 1 year
after notice to deliver said space to Tenant. If said space is leased to another
tenant, then Landlord shall pay the cost to relocate the other tenant. The
Tenant shall lease Phase 4 in its "as is", broom
2
clean condition, and at the then market rent for comparable space in the
vicinity; however, if the parties cannot agree, then standard appraisal methods
shall be used.
1.5 To the extent that Tenant leases any of the expansion
Phases, that space shall be included within the definition of Leased Premises
and be coterminous with the term thereunder. Any construction work performed
and/or machinery, fixtures and equipment installed in the expansion Phases by
Landlord shall be included within the definition of Tenant Improvements as
hereinafter defined.
2. TERM OF LEASE
The term of the Lease shall be 10 years, to commence on the
"Commencement Date" (as that term is hereinafter defined) and to end on the last
day of the month in which occurs the 10th anniversary of the Commencement Date.
The term "Commencement Date" shall mean the later of (x) April 1, 1997 or (y)
the first day of the next succeeding month following the occurrence of all of
the following conditions:
(a) Landlord shall have achieved Substantial Completion (as
that term is defined in Section 3.2 hereof);
(b) All parking and Exterior areas of the Building shall be
usable by Tenant;
(c) All utilities to be furnished by Landlord shall be
available to the Leased Premises; and
(d) Cranbury Township shall have issued a letter stating that
Tenant's use is permitted in the zone.
3. CONSTRUCTION
3.1 (a) Landlord shall complete the building shell in a
competent and workmanlike manner and in accordance with plans being prepared by
The Kellner Group, Architects and CEC, Inc., Structural Engineers ("Base
Building Plans"). Landlord shall complete the construction of the Leased
Premises in a competent and workmanlike manner and in accordance with plans and
specifications ("Plans") to be prepared by Ewing Cole Cherry Brott, which Plans
shall be in substantial accordance with the specifications set forth in Schedule
"B" and the Plans attached as Schedule "C" which Plans may be amended from time
to time by the mutual agreement of both parties. Landlord shall use its best
3
efforts to achieve Substantial Completion, as hereinafter defined, on or before
May 1, 1997. Unless specifically revised by both parties, Schedule "B" assumes
the size of the laboratory/office space portion of the Leased Premises to be
30,000 square feet and has been developed based on the type and quality of work
set forth in the Jacobs Wyper plans and specifications for Phase 1 of 3000
Eastpark Blvd., Cranbury, NJ. The improvements, machinery, fixtures and
equipment to be constructed and installed by Landlord, pursuant to this
Paragraph 3, are hereafter referred to as the "Tenant Improvements". In the
event the number of square feet leased by Tenant increases or decreases then the
quantity of materials shall be adjusted. Said Plans will be designed for a
minimum area of 47,000 square feet of the building so that the parties will know
where Tenant's expansion is intended to occur in the event it exercises its
option to lease Phases 2A and 2B. Approximately 32,500 square feet will be
designed completely, with the balance designed schematically, including
mechanical and electrical support rooms. Tenant shall deliver to Landlord a
complete set of Plans with which Landlord can obtain a building permit by the
later of 30 days after the completion of the erection of the structural steel,
or November 1, 1996. In the event that Tenant does not meet these dates, Tenant
shall be responsible to Landlord from that date for monthly rent of $21,667
until Plans are delivered, prorated on a per diem basis. The monthly rent shall
accrue, but not be payable, provided the Plans are delivered prior to February
1, 1997, and shall be paid by Tenant in a lump sum on the Commencement Date. If
the Plans are not delivered by February 1, 1997, then Tenant shall, on that
date, pay to Landlord all of the monthly rent that has then accrued. Thereafter,
Tenant shall pay the monthly rent of $21,667, in arrears prorated as provided
above, until it delivers the Plans to Landlord.
Landlord has prepared the Base Building Plans and has provided Tenant
with the said Plans dated August 28, 1996 prepared by The Keller Group and the
preliminary/final site plan drawings dated June, 1996 prepared by Kupper
Associates and a list of building specifications as set forth in Schedule "D".
Landlord shall be responsible for the construction at its sole cost and expense
of the base building in conformance to the Base Building Plans. Landlord will
use reasonable efforts to keep Tenant advised of the progress of the building
construction, and the approval of same and of the Plans by the local
4
governmental authorities, and will provide Tenant with benchmark drawings and
design parameters for the building. Tenant shall notify Landlord of any changes
it desires to make to the Base Building Plans and shall bear all cost of such
changes. In the event any change requested by Tenant causes a delay in time,
such delay shall extend Landlord's time to perform hereunder.
Tenant shall contribute toward the cost of construction of the Phase I
laboratory/office space, as defined in Schedule "A", the amount of $800,000. The
$800,000 shall be paid by Tenant upon Substantial Completion (as defined in
Paragraph 3.2) less 5% which shall be withheld until completion of the punch
items. Tenant shall also provide Landlord with an unconditional letter of credit
for $800,000 substantially in accordance with the form attached as Schedule "E"
within 30 days of execution of this Lease which will be promptly returned to
Tenant if it pays said sums as contemplated herein. Subject to Paragraph 3.1(b),
any cost over $800,000 shall be paid by Landlord. The $800,000 shall be adjusted
up or down based on the ratio of actual square footage of laboratory/office
space, excluding executive offices as referred to in Paragraph 1.1., leased to
the 30,000 square foot design standard for laboratory/office space. At Tenant's
request, Landlord will provide Tenant with documentation to support Tenant's
$800,000 contribution to the cost of Tenant Improvements.
In addition, Landlord shall provide Tenant with an allowance for Tenant
Improvements for the executive offices of $50 per square foot, i.e., $50/sq. ft.
x 3200 sq. ft. = $160,000. Upon receipt of Plans from Tenant showing the
complete design of the executive offices, Landlord will provide, in writing,
within 10 business days, an estimated cost to construct the executive offices.
If such cost exceeds $50/sq. ft., then Tenant shall have the option, within 30
days after receipt of Landlord's estimate, to have its own professional
estimator or construction consultant confirm the per square foot price. If the
price is confirmed, then Tenant shall, still within said 30 day period, revise
the Plans to reduce the cost or advise Landlord to commence construction. If
Tenant's estimator or consultant feels that the per square foot price is too
high, then the parties shall negotiate in good faith to attempt to achieve a
cost of $50/sq. ft.
5
In determining the construction cost set forth above, for all
authorized deviations from Schedule B and costs in excess of the $50/sq. ft.
allowance for the executive offices and change orders referred to in Paragraph
3.1(c), the actual cost charged by subcontractors, material suppliers and/or
governmental authorities shall be marked up for general conditions, overhead and
profit as set forth below:
Billing Cost = Actual Cost x 1.02 x 1.08 x 1.05
After the Plans are delivered by Tenant, any changes shall be governed
by Paragraph 3.1(c).
(b) In the event Tenant or its architect adds to the
scope, quantity or quality of construction described in Schedule B, such
additional cost up to a maximum of $500,000, shall be paid by Tenant, through an
increase in rent. Tenant shall elect the method of paying the increase prior to
the Commencement Date of this Lease by choosing one of the following options:
(i) to fully amortize the increased cost
over the first 5 years of the lease
term, beginning from the
Commencement Date, at the interest
rate on the date of election of
either 500 basis points over the 5
year Treasury bill rate or the Wall
Street Journal published prime rate
plus 3%; or
(ii) to amortize the increased cost over
the 10 year lease term, beginning
from the Commencement Date, at the
interest rate on the date of
election of either 500 basis points
over the 5 year Treasury bill rate
or the Wall Street Journal published
prime rate plus 3%, with a balloon
payment of the total unamortized
amount due at the end of the fifth
lease year;
If such additional cost exceeds $500,000, Tenant shall pay the amount in excess
of $500,000 within 10 days of the date billed by Landlord.
(c) Any change orders that do not delay the
Completion Date and that increase or decrease the cost of the Tenant
Improvements and that are desired by Tenant after the Plans are delivered shall
not be effective unless approved, in writing, by
6
both parties, and such approval by Landlord shall not be unreasonably withheld
or delayed and such cost shall be borne by Tenant and paid for as set forth in
Subparagraph 3.1(b);
(d) In the event Tenant leases any of the expansion
Phases, Landlord shall be responsible for constructing the Tenant Improvements
to said space provided that Landlord has performed in substantial accordance
with the construction provisions set forth in this Lease, and the expansion
Phases are not specialized, scientific space not generally constructed by
general contractors experienced in laboratory construction. Tenant shall deliver
the construction plans for said space and Landlord agrees to develop a schedule
and cost budget for the expansion Phase and deliver same to Tenant within 15
business days after receipt of the construction plans. Tenant, at its option,
may accept such schedule and budget or may use the services of a professional
estimator or construction consultant to review the schedule and cost budget with
Landlord. If Landlord and Tenant cannot agree, Landlord will be given 3 business
days after receipt of written notice from Tenant of the disagreement to match
the schedule and cost budget provided by Tenant's consultant. If Landlord
chooses not to accept the schedule and cost budget, Tenant shall competitively
bid the project using general contractors that have experience in the type of
project being undertaken. After such bids are received, Tenant shall provide
them to Landlord and Landlord shall have 5 business days after receipt to match
the bid chosen by Tenant. If Landlord elects to match said bid, it shall perform
the construction in accordance with the terms of the bid including reasonable
timing and guarantee terms. If Landlord is to perform said construction, the
Reservation Fee shall terminate in accordance with the terms of Paragraph 4.2
and rent shall commence upon Substantial Completion in accordance with the terms
of Paragraph 3.2. If Landlord does not match such bid, Tenant shall be free to
accept the outside bid. Landlord shall also have the right to approve the
outside contractor, which approval shall not be unreasonably withheld or
delayed, inspect the work as it progresses and receive a fee of 2.5% of the
total job cost. Rent shall commence for said Phase, or part thereof, on the
earlier of 6 months after Tenant elects to retain the outside contractor, or
occupancy, at which time the Reservation Fee shall terminate.
7
Regardless of who performs the construction on the expansion Phases,
Landlord shall provide Tenant with an allowance for improvements of $40/sq. ft.
The actual cost of construction shall be paid by the Landlord and Tenant as
incurred relative to the amount by which the anticipated construction cost
exceeds $40.00 until Tenant's allowance of $40.00 per square foot has been fully
utilized. For example, if the anticipated construction cost is $120/sq. ft., the
construction costs shall be paid 1/3 by Landlord and 2/3 by Tenant on a monthly
basis until the Tenant allowance has been fully utilized. Thereafter, Tenant
shall be responsible for the full payment of all construction costs. Tenant's
Architect shall certify to Landlord that the construction for which Tenant seeks
payment has been completed. If actual costs are less than the anticipated
construction costs, then at the conclusion of construction, Landlord shall pay
Tenant any unpaid balance of the $40.00 allowance. If Landlord does not pay all
or part of the $40.00 allowance, within 60 days of the date Landlord receives an
invoice, Tenant may offset said amount against rent. Said costs shall include
actual fees for consultants, contractors, subcontractors, material suppliers and
governmental authorities, and the installed cost and related construction costs
of all of the tenant improvements shown on the expansion plans, including but
not limited to such items as trash removal related to tenant improvements.
If Landlord is to construct the expansion Phases, representatives of
each party shall inspect the site no less frequently than every 2 weeks and
verify and agree that work has been completed in a manner acceptable to both
Landlord and Tenant. Landlord will then prepare an invoice for work completed
(less Landlord's proportionate share), and Tenant shall pay the same within 10
business days of receipt. Landlord shall be responsible for paying $40/sq. ft.
for Tenant Improvements to the expansion Phases and Tenant shall bear the
balance of the cost. For example, if the cost is determined to be $137/sq. ft.,
Landlord shall pay $40 and Tenant shall pay $97. In the event the payment is not
received by Landlord within the specified time, interest shall accrue on the
unpaid balance at an interest rate of 1% per month.
(e) During construction of the Leased Premises or any
expansion Phases, Tenant shall have access in order to install its own equipment
provided:
8
(i) it delivers to Landlord a
certificate of insurance for the
coverage set forth in Paragraph 8.5;
and
(ii) it shall coordinate its work with
the work being performed by Landlord
so that there shall be no
unreasonable interference with,
delay or interruption of, Landlord's
work.
(f) All construction of expansion Phases by Landlord
shall be done in a competent and workmanlike manner, in accordance with Tenant's
plans and specifications and the cost and timing schedule agreed to by Landlord.
At Tenant's request, Landlord will provide Tenant with documentation to support
Tenant's $800,000 contribution to the cost of Tenant Improvements.
3.2 The Leased Premises and any expansion Phases, if
constructed by Landlord, shall be considered substantially completed, and rent
payments shall commence, upon the issuance of a Temporary or Permanent
Certificate of Occupancy, or a Temporary or Permanent Certificate of Acceptance
("CO/CA") provided that any Temporary CO/CA is not revoked or does not limit
Tenant's use and is promptly followed by a Permanent CO/CA; and when the
machinery, equipment and fixtures to be installed by Landlord are operable so
that Tenant can conduct its customary business activities ("Substantial
Completion") but for the initial Leased Premises, not before April 1, 1997. It
is agreed that for the purpose of this Lease, wherever and whenever the term
Substantial Completion is used, it shall not include items of maintenance,
service or guarantee. Within 30 days after occupancy, Tenant will provide
Landlord with a punch list of items to be corrected which will be completed by
Landlord within 60 days of receipt of the punch list. Tenant and Landlord shall
execute a confirmation of Lease Commencement Date in the form of Schedule "F".
If the Commencement Date occurs on a day other than the first day of a month,
rent from such day until the first day of the following month shall be prorated
(at a rate of 1/30th of the monthly rent per day). During said period of partial
monthly occupancy, all other terms and conditions of this Lease shall apply.
3.3 Landlord acknowledges and agrees that Tenant will suffer
financial loss, the exact extent of which is difficult to determine, if the
Leased Premises are not
9
Substantially Completed by May 1, 1997 subject to extension for Tenant's failure
to deliver Plans in a timely manner as set forth in Paragraph 3.1(a) and
Paragraph 22, Force Majeure. In connection with the foregoing, if the Tenant
Improvements are not Substantially Completed by June 1, 1997, Landlord shall be
liable for and shall promptly pay to Tenant at the end of the month, as
Stipulated, Fixed, Agreed Upon and Liquidated Damages (and not as a penalty)
$20,000. If the Leased Premises are not Substantially Completed on or before
July 1, 1997, Landlord shall promptly pay to Tenant, on July 3, 1997 and at the
end of each month thereafter, an additional $30,000 for each month or prorated
portion thereof that the Tenant Improvements are not Substantially Complete.
Said monthly sum of $30,000 shall continue to be paid by Landlord until October
1, 1997. After November 15, 1997, Tenant shall have the right to terminate this
Lease if Substantial Completion has not been achieved. Upon termination,
Landlord shall promptly return to the Tenant, the letter of credit referred to
in Paragraph 3.1(a).
3.4 The Landlord shall have the right to substitute for the
materials and equipment required by the Plans, materials and equipment of equal
quality and standard, provided said substitutions are requested in writing and
conform with applicable building codes and Tenant or its designee has consented
in writing to the substitution, which consent shall not be unreasonably withheld
or delayed. If Tenant does not reply to Landlord within 3 business days, it
shall be determined to have approved the change.
3.5 With regard to the initial Leased Premises, Landlord
shall, within 10 days of date Tenant requests, waive, in writing, all rights or
liens on Tenant's equipment, such as analytical and synthesis instruments,
portable cold rooms, refrigerators, freezers, items mounted on bench tops and
any equipment which is bolted to the structure or walls for added stability,
which Tenant has leased. With regard to the expansion Phases, Landlord agrees
to, within 10 days of date Tenant requests, waive, in writing, all rights or
liens on Tenant's equipment or trade fixtures such as fume hoods, case work,
refrigerators, freezers, biosafety cabinets, analytical and synthesis
instruments, items mounted on bench tops and any equipment which is bolted to
the structure or walls for added stability which Tenant has leased. The waiver
shall not apply to any building improvements made by, or
10
on behalf of Tenant, such as permanently installed cold rooms, HVAC equipment
and ducts, plumbing, electrical or units related thereto.
4. RENT
4.1 The Original Base Rent for the Leased Premises shall be
calculated based on the following annual rates per square foot:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
================== ============================ ============================ ========================================
Years Laboratory/Office Executive Office Phase 2 (if not occupied)
- ------------------ ---------------------------- ---------------------------- ----------------------------------------
1-5 27.30 16.75 5.00* for 2 years only
6-10 28.00 18.43 -------
================== ============================ ============================ ========================================
*This sum shall include common area maintenance and real estate taxes.
</TABLE>
In the event Tenant occupies the 32,500 square feet contemplated at the
execution of this Lease, the rent on the Commencement Date shall be:
29,300 sq. ft. laboratory/office $799,890
3,200 sq. ft. executive office 53,600
14,510 sq. ft. Phase 2 (Reservation Fee) 72,550
--------
$926,040
payable in equal monthly installments in the sum of $77,170. In the event the
actual space occupied at the Commencement Date varies from 32,500 square feet,
the rent shall be adjusted based on the rental rates per square foot set forth
above.
4.2 Unless a third party performs the construction, the $5/sq.
ft. rent ("Reservation Fee") for Phase 2, or part thereof, and Phase 3, or part
thereof, if applicable pursuant to Paragraph 1.2, shall continue until (i) 30
days after Tenant gives written notice that it is cancelling its option to lease
such space; (ii) the receipt by Landlord from Tenant of notice that it has
chosen Landlord to perform the construction and permittable construction
documents for the Phase to be constructed; or (iii) the expiration of the two
year period. However, if Tenant stops paying the Reservation Fee, it shall still
have the Right of First Refusal set forth in Paragraph 42 for Phase 2, or part
thereof, for an additional number of months equal to the number of months that
it had paid the Reservation Fee. Except as provided in Paragraph 42.4, in the
event Tenant leases any
11
or all of Phase 2, the annual rent per square foot shall be as set forth in the
table below, pro rated for a partial month, and such rent shall be added to the
Original Base Rent.
Dollar Amount/Sq. Ft.
Number of Months from Commencement Date to Occupancy of
Phase 2
<TABLE>
<CAPTION>
Lease Year Months 1-6 Months 7-12 Months 13-18 Months 19-24
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 - 5 $15.22 $15.47 $15.74 $16.06
6 - 10 $16.74 $17.02 $17.31 $17.67
11 - 15 (option yrs.) $16.74 $16.74 $16.74 $16.74
16 - 20 (option yrs.) $18.41 $18.41 $18.41 $18.41
</TABLE>
Except as provided in Paragraph 42.4, the rental rate for Phase 3, or part
thereof, shall be as set forth above for Phase 2, Months 19-24, increased by 2%
annually until the commencement date of Phase 3, or part thereof. The $40/sq.
ft. tenant allowance shall also be increased annually by 2%.
4.3 Rental payments shall be made promptly in advance on the
first day of each and every month during the term of the Lease without demand
and without off-set or deduction, except as otherwise set forth herein or if
Tenant obtains a money judgment against Landlord, together with such additional
rent and other charges required to be paid by Tenant as are hereinafter set
forth, all of which charges shall be considered additional rent. Tenant shall
pay as additional rent, the amounts required in Paragraph 8. If any amount due
to Tenant pursuant to Paragraph 3.3 is not paid within 30 days of the date due,
Tenant shall have the right to set off said sum against any rent due hereunder.
5. PARKING AND USE OF EXTERIOR AREA
The Tenant shall have the right to use the parking spaces for
their employees and visitors on a non-exclusive basis in common with other
tenants of the building. Landlord will provide 4 visitor and 2 reserved signs
for Tenant to use, but shall not monitor parking in the spaces. The Landlord and
Tenant mutually agree that they will not block, hinder or otherwise obstruct the
access driveways and parking areas so as to impede the free flow of vehicular
traffic on the property. If Tenant leases the expansion Phases, additional
visitor and
12
reserved signs will be provided in reasonable proportion to the additional space
leased. In connection with the use of the loading platforms, if any, Tenant
agrees that it will not use the same so as to unreasonably interfere with the
use of the access driveways and parking areas. Tenant shall not store trailers
or other vehicles on any portion of the access driveways or parking areas, and
may not utilize any portion of the land outside of the Leased Premises for any
purpose unless consented to in advance by Landlord.
6. USE
The Tenant covenants and agrees to use and occupy the Leased
Premises for office, general laboratory, manufacturing, marketing,
pharmaceutical and bio-technical research and development, or any combination of
the foregoing, which uses are expressly subject to all applicable zoning
ordinances, rules and regulations of any governmental instrumentalities, boards
or bureaus having jurisdiction thereof. Prior to Substantial Completion of
Leased Premises, Landlord will obtain and deliver to Tenant a letter from the
Township that the Tenant's initial use of the building is permitted under the
Township ordinances. Landlord represents that there are no recorded documents
that would prevent Tenant's contemplated use of the Leased Premises.
7. REPAIRS AND MAINTENANCE
7.1 (a) Subject to Paragraph 7.1(b), Tenant shall generally
maintain and repair the Leased Premises in a good and workmanlike manner, and
shall, at the expiration of the term, deliver the Leased Premises in good order
and condition, damages by fire or casualty, whether or not Tenant has been
negligent, the elements or other causes outside the control of Tenant and
ordinary wear and tear excepted. Tenant covenants and agrees that, subject to
Paragraph 8.6 hereof, it shall not cause or permit any waste, damage or
disfigurement to the Leased Premises, or permit the load factor on the slab on
grade to exceed 150 p.s.i. The Tenant shall make all repairs to the floor
surface, the electrical and plumbing systems located within the Leased Premises,
both above and below the floor, including all ballasts and fluorescent fixtures
and HVAC system, unless the repair
13
is the result of the negligence of Landlord, its agents, contractors, employees,
tenants or invitees.
(b) Landlord shall assign to Tenant all
manufacturer's warranties for Tenant Improvements and Tenant agrees to rely on
said warranties in the event of any problem with such covered items.
Notwithstanding the foregoing, in the event any Tenant Improvements installed or
constructed by Landlord are not covered by a warranty or the party providing the
warranty does not adequately respond, then Landlord shall guarantee the proper
operation and performance of those Tenant Improvements for a period of one year
after Substantial Completion of the applicable work, except for items of normal
maintenance and provided that the problem was not caused by Tenant's negligence,
lack of maintenance or incorrect maintenance. For the first 60 days after
Substantial Completion, the Landlord will perform all routine maintenance on the
HVAC System. Landlord shall be responsible for good and workmanlike repairs and
replacements necessary to the roof, foundation, exterior and load-bearing walls
and other structural elements, and electric, plumbing and other building systems
to the point where they enter the Leased Premises, unless, and to the extent the
repair is necessitated by the negligence of Tenant or its agents, and the cost
thereof is not covered by Landlord's insurance, or the insurance Landlord is
required to carry under this Lease, (without taking into account any deductible)
whichever is greater. Repairs and replacements shall be made within a reasonable
time after Landlord receives notice or has actual knowledge of the need for such
repair or replacement.
7.2 The Tenant shall, at its own cost and expense, pay all
utility meter and service charges for utilities used by Tenant in the Leased
Premises, including gas and electric servicing its space. Landlord shall have
the option to install, at its own cost, a separate water meter in order to
monitor Tenant's water usage. The Tenant agrees to maintain all leased areas at
a minimum temperature of 45 degrees Fo, excluding cold rooms or other rooms
designated for a lower temperature, to prevent the freezing of domestic water
and sprinkler pipes
14
provided Tenant shall not be liable if gas or electrical service to the Building
has been interrupted for a reason not caused by Tenant. Tenant shall not store
any garbage or recyclables outside the Leased Premises, and shall deliver its
garbage and recyclables to the central receiving area on the lot.
7.3 Landlord shall provide the following during the term of
this Lease:
(a) Continually cooperate with Public Service
Electric and Gas to have Public Service Electric and Gas provide gas and
electrical service to the point where it enters the Leased Premises for Tenant's
permitted uses, as specified in the Plans approved by Public Service Electric &
Gas;
(b) Extermination and pest control when necessary;
(c) 24-hour access to the Leased Premises;
(d) Water facilities to the point where they enter
the Leased Premises for lavatory, drinking and cleaning purposes; and
(e) Maintenance of the common areas of the Office
Park, in a manner similar to other office parks in the area, with the cost to be
passed on to Tenant as set forth in Paragraph 8.
7.4 Landlord does not warrant that any services Landlord or
any public utilities supply will not be interrupted. Services may be interrupted
because of accidents, repairs, alterations, improvements or any other reason
beyond the reasonable control of Landlord. Notwithstanding the foregoing, if any
essential services (such as access, electricity or water) supplied to the Leased
Premises are interrupted, or if Landlord fails to make any repairs or
replacements it is required under this Lease to make and that are necessary to
enable Tenant and its employees, invitees and agents to use the Leased Premises
without material interference, then Tenant shall be entitled to an abatement of
rent and additional rent. The abatement shall begin on the seventh consecutive
business day of the interruption or interference, or when Tenant stops using the
Leased Premises because of the interruption or interference, whichever is later.
The abatement shall end when the services are restored or the repairs or
replacements are made
15
or installed. Tenant shall have the option to cancel this Lease without penalty
if the interruption or failure to repair or replace unreasonably interferes with
Tenant's use of or access to the Leased Premises for at least thirty (30)
consecutive days, and Landlord is not exercising its best efforts to restore the
services or make the repair or replacement.
8. COMMON AREA EXPENSES, TAXES AND INSURANCE
8.1 The Tenant shall pay to the Landlord, monthly, as
additional rental during the first lease year, Common Area Expenses at the
annual rate of $1.50/sq. ft. plus property taxes as provided in Paragraph 8.2
and a management fee of 3% of $16.75/sq. ft. times the square footage of the
Leased Premises. Common Area Expenses shall consist of:
(a) The reasonable costs incurred by the Landlord for
the operation, maintenance or repair of the following:
(i) lawns and shrubbery;
(ii) water and standby sprinkler charges
including a charge for sprinkler and
electrical room which is at a rent
of $6.00 sq. ft.;
(iii) exterior lighting;
(iv) exterior sewer lines;
(v) exterior utility lines;
(vi) repair and maintenance of any signs
serving the Office Park;
(vii) snow removal which Landlord agrees
to commence within 12 hours of the
end of the storm;
(viii) garbage disposal and recycling;
(ix) general ground maintenance;
(x) parking lot, driveways and walkways;
(xi) maintenance contract for the roof
and building site;
16
(xii) pest control;
(xiii) central station monitoring;
(xiv) the annual insurance premiums
charged to the Landlord for
insurance coverage set forth in
Paragraph 8.5(b); and
(xv) other ordinary maintenance expenses
normally incurred by a Landlord in
comparable office parks, upon prior,
if possible, notice to Tenant.
(b) The following items shall be excluded from common
area maintenance charges:
(i) Cost of decorating, redecorating or
special cleaning or other services
not provided on a regular basis to
the tenants of the building;
(ii) Wages, salaries, fees and fringe
benefits paid to administrative or
executive personnel or officers or
partners of Landlord, unless
employed at competitive rates as
independent contractors at the
building or Office Park;
(iii) All cost relating to activities for
the solicitation, negotiation,
execution and enforcement of leases
of space in the Office Park;
(iv) Cost of any repair or other work
made by Landlord because of the
total or partial destruction of the
building or the condemnation of a
portion of the building;
(v) Any insurance premium for which
Landlord is to be reimbursed by
Tenant, pursuant to this Lease, or
by any other tenant of the building.
(vi) Depreciation, amortization, interest
or rents paid or incurred by
Landlord;
17
(vii) Any real estate taxes;
(viii) Collection costs for bad debt
expenses not related to Tenant;
(ix) Cost of tenant improvements;
(x) Legal, accounting, bank or other
fees incurred in connection with any
equity or debt financing or sale of
the building or Office Park;
(xi) Costs of specialized services or
other items provided to other
tenants but not provided to tenants
generally;
(xii) Capital expenditures as defined
according to GAAP, or the cost of
rentals and related expenses
incurred in leasing items ordinarily
considered to be of a capital
nature;
(xiii) Cost to comply with ADA related to
the interior of the individual
buildings, but not exterior doors or
the cost of improvements required by
ADA to the Office Park amortized
over their useful life;
(xiv) Fines or costs to cure violations of
law or ordinances in the common
areas;
(xv) Electric and water for non-public
areas;
(c) The $1.50/sq. ft. for Common Area Expenses shall
be increased 2% for each year of the Lease Term on January 1st each year. At the
end of each 5 years of the Lease Term, the per square foot charge shall be
adjusted for the next 5 year period to reflect the actual increase in the CPI,
as defined hereafter, over the prior 5 year period. The parties also agree to
adjust any individual expense item in Paragraph 8.1(a) which has an unusual cost
or usage, or an unusual increase or decrease during any year.
8.2 The Tenant shall pay its proportionate share of real
estate and personal property taxes assessed against the land, building shell and
site
18
improvements, along with any levy for the installation of improvements serving
the Leased Premises assessed by any governmental body having jurisdiction
thereof but excluding any special assessments caused by the use of the building
by other tenants. The real estate tax obligation of the Tenant shall include any
tax or imposition for parking lot usage which may be levied by any governmental
body having jurisdiction thereof. Tenant's proportionate share shall be a
percentage derived by dividing the total square feet leased by Tenant by the
total square feet in the building. In addition to its proportionate share of the
above items, Tenant shall pay all real estate taxes assessed by the municipality
on its Tenant improvements. Tenant shall have the right to contest, or cause
Landlord to contest, the assessed value of the building, land and improvements
or the real estate or personal property taxes and Landlord agrees to provide any
and all documentation reasonably required for Tenant to contest said assessment.
Tenant shall pay all reasonable costs of Landlord in the event Landlord is
required to contest. Landlord is currently not aware of any abatement or
deferral program in connection with the Leased Premises. If taxes are abated or
deferred as a result of an appeal, or under any other program, Tenant shall gain
the benefit of such reduction. Notwithstanding the foregoing, Tenant shall not
be required to reimburse Landlord for any capital stock, income, franchise,
estate, inheritance, gift or transfer taxes, or any penalties or interest for
failure to pay in a timely manner.
8.3 Tenant shall pay its share of Common Area Expenses monthly
together with the rent except for taxes which shall be billed and paid
quarterly. Tenant's Share of Common Area Expenses and real estate taxes for any
calendar year, part of which falls within the term of this Lease and part of
which does not, shall be appropriately prorated.
8.4 If at any time during the term of this Lease the method or
scope of taxation prevailing at the commencement of the Lease Term shall be
altered, Tenant's proportionate share of such substituted tax or imposition if
it relates to
19
Tenant's occupancy, shall be payable and discharged by the Tenant in the manner
required pursuant to the law which shall authorize such change.
8.5 (a) The Tenant covenants and agrees that it will, at
its sole cost and expense, carry liability insurance covering the Leased
Premises in the minimum amount of $1,000,000.00 per accident for 1 person,
$3,000,000.00 per accident for 2 or more persons, and a minimum amount of
$300,000.00 for property damage with Landlord listed as an insured party;
(b) Landlord shall keep the base building of which
the Leased Premises are a part, including without limitation, all fixtures (but
not Tenant Improvements) insured against damage and destruction by fire,
sprinkler damage, vandalism, comprehensive liability and other perils in the
amount of the full replacement value of such building, as the value may exist
from time to time, including insurance for one year's rent, with a deductible of
no more than $10,000 except that Landlord will be responsible for any deductible
amount over that sum. The insurance shall include an extended coverage
endorsement of the kind required by an institutional lender to repair and
restore such base building. Any increase in the insurance premiums due to a
change in rating of the base building which is solely attributable to Tenant's
use, or due to special Tenant equipment, shall be paid entirely by the Tenant.
During construction, Landlord will increase the amount of insurance coverage by
$800,000 to cover Tenant's contribution to Tenant Improvements, with the
additional premium cost thereof to be borne by Tenant.
With regard to each expansion Phase, Tenant shall
certify to Landlord, at the completion of construction, the cost of the
improvements made to that Phase and Landlord shall, after receipt of the
certification, increase the amount of insurance coverage by said amount, with
the additional premium cost thereof to be borne by Tenant;
(c) The insurance policies referred to above shall be
maintained by insurance companies licensed to do business in the State of New
Jersey, with a general policyholder's rating of at least A and a financial
rating of
20
at least XI in Best's Insurance Reports. If such ratings are changed or
discontinued, the parties shall agree to an alternate method of rating insurance
companies. Such policies shall be maintained throughout this Lease, including
any extensions. Each party shall deliver a certificate of insurance to the other
evidencing this insurance. Such certificate shall provide that the policy shall
not be cancelled or the coverage will not be materially reduced without 10 days
prior written notice.
8.6 The parties covenant and agree that the insurance policies
required to be furnished in accordance with the terms and conditions of this
Lease, or in connection with insurance policies which they obtain insuring such
insurable interest as Landlord or Tenant may have in its own properties, whether
personal or real, shall expressly waive any right of subrogation on the part of
the insurer against the Landlord or Tenant. Notwithstanding anything to the
contrary, Landlord and Tenant each mutually waive all right of recovery
against each other, their agents, or employees for any loss, damage or injury of
any nature whatsoever to property or person (regardless of whether the party in
whose favor the waiver applies was negligent) for which either party is required
by this lease to carry insurance.
9. SIGNS
At its sole expense the Tenant shall have the right to install
no more than 2 signs, including exterior ground signs at the Leased Premises,
subject to Landlord's approval, which shall not be unreasonably withheld or
delayed. The signs shall comply with the rules and regulations of the applicable
governmental boards and bureaus having jurisdiction thereof. The installation of
such signs shall not cause any structural damage to the building and shall not
be permitted on the roof. Landlord shall provide a monument sign near the
entrance to the building listing all of the tenants occupying space in the
building, with Tenant's name at the top.
21
10. ASSIGNMENT AND SUBLETTING
10.1 The Tenant may not assign or sublet the Leased Premises
or any part thereof, without the consent of Landlord, which shall not be
unreasonably withheld or delayed. Tenant shall have absolutely no right to
assign or sublet any expansion Phases unless Tenant is paying the full rent due
thereon. If Tenant desires to assign or sublet, it shall first give to Landlord
notice in writing. Landlord shall have 14 calendar days from receipt of such
notice to elect to consent to the assignment of the Lease or the sublease of the
Leased Premises. If Landlord fails to respond in the 14 day period, consent is
deemed given. However, Tenant shall be permitted to assign this Lease or
sublease the premises, without the consent of Landlord but with notice to
Landlord, to (i) a wholly owned subsidiary, or a parent, (ii) any corporation,
partnership, trust, limited liability company or similar entity controlling,
under the direct or indirect control of Tenant or under common control with
Tenant (collectively, "Tenants Affiliates"), (iii) any corporation resulting
from the merger or consolidation with Tenant or that acquires all of Tenant's
assets or stock; (iv) any joint venture or similar arrangement as to which
Tenant or Tenant's Affiliates are a party; or (v) a Tenant whose use is
specifically permitted under this Lease.
10.2 In the event of any assignment or subletting permitted by
the Landlord, the Tenant and Guarantor, as set forth in a separate Guaranty,
shall remain and be directly and primarily responsible for payment and
performance of the within Lease obligations, and the Landlord reserves the
right, at all times, to require and demand that the Tenant pay and perform the
terms and conditions of this Lease. No such assignment or subletting shall be
made to any tenant who shall occupy the Leased Premises for any use other than
that which is permitted to the Tenant.
11. FIRE AND CASUALTY
11.1 If there occurs any damage to or destruction of any
portion of the building of which the Leased Premises is a part by fire or other
casualty occurring during the term of this Lease, which shall render at least
1/3 of the floor
22
area of the Leased Premises untenantable or unfit for occupancy, and either
party reasonably determines within 30 days of the casualty that the Leased
Premises cannot be repaired within 240 days from the happening of such casualty,
using reasonable diligence ("Total Destruction") then the Lease shall, at the
option of the Landlord or Tenant, upon written notice to the other within a
further 15 days, cease and become null and void from the date of such Total
Destruction. In such event the Tenant shall immediately surrender the Leased
Premises to the Landlord and this Lease shall terminate. The Tenant shall only
pay rent to the time of such Total Destruction. However, in the event of Total
Destruction if the Landlord and Tenant shall elect not to cancel this Lease
within the 15 day period the Landlord shall repair and restore the building,
Leased Premises and all Tenant Improvements to substantially the condition they
were in prior to the damage or destruction, with deliberate speed and dispatch.
The rent shall not be accrued after said damage or while the repairs and
restorations are being made, but shall recommence immediately after the Leased
Premises are so restored as evidenced by the issuance of a CO/CA by municipal
authorities and that any machinery, equipment and/or fixtures Landlord was
responsible for installing are operable so as not to materially interfere with
the customary business activities of Tenant. Notwithstanding the foregoing, if
any such restoration is not completed within 365 days of such Total Destruction,
Tenant may terminate this Lease without penalty.
11.2 In the event of any other casualty which shall not be
tantamount to Total Destruction the Landlord shall promptly repair and restore
the Building, the Leased Premises and the Tenant Improvements, subject to
availability of insurance proceeds, to substantially the same condition as they
were prior to the damage or destruction, with reasonable speed and dispatch. The
rent shall abate or be equitably apportioned from the date of casualty to the
extent the Tenant's use is impaired. Landlord shall have the right to not make
the repairs, if it has complied with Paragraph 8.5(b) but cannot confirm the
availability of insurance proceeds within 90 days of the casualty. In such
event, Landlord will notify Tenant within said 90 day period that it cannot
confirm the insurance proceeds and is
23
electing not to make the repairs. Tenant shall have 10 business days from
receipt of said notice to elect whether to terminate the lease. If Landlord does
make the repairs, the rent shall recommence immediately upon restoration of the
Leased Premises as evidenced by the issuance of a CO/CA by municipal authorities
and any machinery, equipment and/or fixtures Landlord was responsible for
installing are operable so as not to materially interfere with the customary
business activities of Tenant. Notwithstanding the foregoing, if any such
restoration is not completed within 365 days of such casualty, Tenant may
terminate this Lease without penalty.
11.3 In the event the Landlord rebuilds, the Tenant agrees, at
its cost and expense, to forthwith remove any and all of its equipment,
fixtures, and personal property in order to permit Landlord to expedite the
construction. The Tenant shall assume at its sole risk the responsibility for
damage to or security of such fixtures and equipment that it does not move in
the event that any portion of the building area has been damaged and is not
secure provided Landlord has not been grossly negligent subsequent to the
casualty. However, nothing shall preclude Tenant from making a claim to any
insurance company for the cost of such removal.
12. COMPLIANCE WITH LAWS, RULES AND REGULATIONS
12.1 (a) The Tenant agrees that upon acceptance and occupancy
of the Leased Premises, it will promptly, at its own cost and expense, comply
with all statutes, ordinances, rules, orders, regulations and requirements of
the Federal, State and Municipal governments ("Applicable Laws") relating to the
manner in which Tenant uses the Leased Premises. The Tenant also agrees that it
will not commit any nuisance, and will dispose of all garbage and waste in
compliance with law and Landlord's reasonable written rules and regulations.
Landlord warrants that on the date this Lease commences, the Leased Premises and
the building of which it is a part will comply with all Applicable Laws.
Notwithstanding anything to the contrary, in no case shall Tenant be required to
comply with Applicable Laws with regard to any structural component or building
system that
24
is Landlord's responsibility pursuant to Paragraph 7.1. Landlord will comply
with all applicable laws with regard to the building shell, core site and
building systems that are not the responsibility of the Tenant.
(b) The Tenant agrees, at its own cost and expense,
to comply with such regulations or requests as may be required by the fire or
liability insurance carriers providing insurance for the Leased Premises in
connection with Tenant's use and occupancy of the Leased Premises. If such
regulations or requests are arbitrary and capricious then Tenant shall have the
right to require Landlord to obtain insurance from another company.
12.2 In case the Tenant shall fail to comply with all material
provisions of the aforesaid statutes, ordinances, rules, orders, regulations and
requirements with which Tenant is required under the terms of this Lease to
comply, then the Landlord may, after 30 days' notice (except for emergency
repairs, which may be made immediately), and provided that Tenant has failed to
take such reasonable action to investigate or remedy the reason for
noncompliance, enter the Leased Premises and take any reasonable actions to
correct any noncompliance, at the cost and expense of the Tenant. The cost
thereof shall be added to the next month's rent and shall be due and payable as
such, or the Landlord may deduct the same from the balance of any sum remaining
in the Landlord's hands. This provision is in addition to the right of the
Landlord to terminate this Lease pursuant to Section 14.2. However, in the event
that Tenant is proceeding with any investigation or repairs to ensure compliance
with the aforesaid laws and regulations, the initial failure to comply with the
aforesaid laws and regulations shall not constitute an event of default.
12.3 Tenant expressly covenants and agrees to indemnify,
defend and save the Landlord harmless against any claim, damage, liability,
cost, penalties, or fines which the Landlord may suffer as a result of air,
ground or water pollution which requires remediation under any Environmental Law
and is caused by the Tenant, its agents and contractors, in its use of the
Leased Premises. Landlord shall indemnify, defend and save the Tenant harmless
against
25
any claim, damage, liability, cost, penalties, or fines which the Tenant may
suffer as a result of air, ground or water pollution which requires remediation
under any Environmental Law and is caused by Landlord, its agents and
contractors. The Tenant covenants and agrees to provide the Landlord with
reasonable notice of any claim or notice served upon it with respect to any
claim that the Tenant is causing air, ground or water pollution in violation of
an Environmental Law; and the Tenant shall take prompt and reasonable steps to
halt, remedy or cure any pollution of air, ground or water which requires
remediation under an Environmental Law and is caused by the Tenant by its use of
the Leased Premises.
12.4 Tenant expressly covenants and agrees to fully comply
with the provisions of the New Jersey Industrial Site Recovery Act (N.J.S.A.
13:1K-6, et seq.) "ISRA", and its regulations to the extent applicable, prior to
the termination of the Lease.
(a) The term "evidence of compliance", as used
herein, shall mean a "letter of non-applicability" issued by the New Jersey
Department of Environmental Protection ("NJDEP"), or an approved "negative
declaration" or a "remediation action plan" which has been submitted to the
NJDEP for approval.
(b) In the event ISRA is applicable and (a) evidence
of Tenant's compliance is not delivered to the Landlord and (b) Tenant has not
attempted to secure evidence from the NJDEP, it is understood and agreed that
Tenant shall be liable to pay to Landlord an amount equal to two times the
Monthly Base Rent then in effect, together with all applicable additional rent
from the date of such surrender until such time as evidence of compliance with
ISRA has been delivered to the Landlord, and together with any costs and
expenses incurred by Landlord in enforcing Tenant's obligations under this
paragraph. Evidence of compliance shall be delivered to Landlord, together with
all copies of all submissions made to the NJDEP, including all environmental
reports, validated test results and other relevant supporting documentation.
26
(c) Tenant shall only be liable to Landlord for
regular rent and not for double rent as set forth above, if (i) Tenant has
submitted all documentation initially required by NJDEP to obtain evidence of
compliance at least 6 months before the expiration of the Lease term and Tenant
is unable to obtain such evidence prior to the expiration of the Lease term, and
(ii) Landlord is unable to either refinance or relet the Leased Premises solely
as a result of Tenant's failure to obtain evidence of compliance.
Notwithstanding anything to the contrary, it is understood and expressly agreed
by Landlord and Tenant that Tenant shall not be required to comply with the time
limits to submit evidence of compliance if the Lease is terminated prior to the
scheduled expiration of the term of the Lease as a result of a reason which is
beyond the control of the Tenant, such as a casualty or condemnation. In such
event, Tenant shall not be liable for any rent so long as Tenant diligently
attempts to obtain such evidence of compliance.
(d) In the event ISRA is applicable to any other
portion of the Office Park not under the operation and control of Tenant and
Landlord is required to apply to the NJDEP for a letter of non-applicability,
negative declaration or remediation plan, Tenant agrees that it shall fully
cooperate with Landlord in connection with any information or documentation
which may be requested of Tenant by the NJDEP, provided Landlord pays all
Tenant's reasonable expenses and cost thereof. If, in the course of Landlord's
application, any remediation of the Office Park is required which is directly
attributable to Tenant's operation of the Leased Premises, Tenant expressly
covenants and agrees that it shall be responsible for only that portion of the
remediation which is directly attributable to its operation. It is understood
and expressly agreed by Landlord and Tenant that Tenant shall not be responsible
for any rent beyond the Lease term as provided for in Paragraph 12(b) or 12(c)
if ISRA is applicable to a portion of the Office Park not under the operation
and control of Tenant.
(e) Tenant hereby represents and warrants that its
Standard Industrial Classification No. is 8731, and that Tenant shall not
generate,
27
manufacture, refine, transport, treat, store, handle or dispose of "hazardous
substances" as the same are defined under ISRA and the regulations promulgated
pursuant thereto in violation of any Environmental Law. Tenant hereby agrees
that it shall promptly inform Landlord of any change in its SIC number.
(f) Landlord represents that, to the best of its
knowledge, the Leased Premises, buildings and Office Park are in compliance with
all Environmental Laws.
12.5 The term "Environmental Law" means Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C.
ss.ss.9601 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42
U.S.C. ss.6901 et seq., the Clean Water Act, 33 U.S.C. ss.ss.1251 et seq., the
Safe Drinking Water Act, 42 U.S.C. ss.ss.3300f et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. ss.1801 et seq., the Toxic Substances Control Act
("TSCA"), 15 U.S.C. ss.2601-2692, et seq., the New Jersey Spill Compensation and
Control Act ("NJ Spill Act"), N.J.S.A. 58:10-23.11 et seq., the New Jersey
Industrial Site Recovery Act ("ISRA"), N.J.S.A. 13:1K-6 et seq, the Safe
Drinking Water Act, 42 U.S.C. ss.ss.300f-300j-26, the Clean Air Act, 42 U.S.C.
ss.ss.7401 et seq., and the Hazardous Materials Transportation Act, 49 U.S.C.
ss.ss.1801, et seq.; and any subsequent Environmental Laws of a similar nature.
13. INSPECTION BY LANDLORD
The Tenant agrees that the Landlord shall have the right to
enter into the Leased Premises at all reasonable hours for the purpose of
examining the same upon reasonable advance notice of not less than 24 hours
(except in the event of emergency), or to make such repairs as are necessary.
Any repair shall not unreasonably interfere with Tenant's use of the Leased
Premises. Unless Tenant permits otherwise, Landlord shall only enter the Leased
Premises: (a) when accompanied by a duly-authorized representative of Tenant;
(b) when wearing any and all protective clothing or equipment that Tenant may
require Landlord to wear to alleviate disturbance of Tenant's operations in such
non-office
28
portions; and (c) at hours and in a manner which will not disturb or unduly
interfere with Tenant's operations in such non-office portions.
14. DEFAULT BY TENANT
14.1 Each of the following shall be deemed a default ( an
"Event of Default") by Tenant and a breach of this lease:
(a) (i) filing of a petition by the Tenant
for adjudication as a bankrupt, or
for reorganization, or for an
arrangement under any federal or
state statute, except in a Chapter
11 Bankruptcy where the rent and
additional rent stipulated herein is
being paid and the terms of the
lease are being complied with;
(ii) dissolution or liquidation of the
Tenant;
(iii) appointment of a permanent receiver
or a permanent trustee of all or
substantially all of the property of
the Tenant, if such appointment
shall not be vacated or stayed
within 90 days, provided the rent
and additional rent stipulated
herein is being paid and the terms
of the lease are being complied
with, during said 90 day period;
(iv) taking possession of the property of
the Tenant by a governmental officer
or agency pursuant to statutory
authority for dissolution,
rehabilitation, reorganization or
liquidation of the Tenant if such
taking of possession shall not be
vacated or stayed within 90 days,
provided the rent and additional
rent stipulated herein is being paid
and the terms of the lease are being
complied with, during said 90 day
period;
(v) making by the Tenant of an
assignment for the benefit of
creditors.
(b) Default in the payment of the rent or additional
rent herein reserved or any part thereof, when due, which continues for 10 days
after notice from Landlord of such default. However, if Tenant is more than 10
days late, twice in any 12 month period, then the 10 day period is reduced to 5
days upon notice to Tenant; and written notice shall no longer be required from
Landlord during such 12 month period.
(c) A default in the performance of any other
covenant or condition of this lease on the part of the Tenant to be performed
for a period of 30 days after notice. However, no default on the part of Tenant
shall be deemed
29
to exist if it diligently commences efforts to rectify same within such 30 day
period.
14.2 Upon any Event of Default set forth above and lapse of
applicable grace period, Landlord may serve written notice upon the Tenant with
a copy to the guarantor, if any, electing to terminate this lease upon a
specified date not less than 10 days after the date of serving such notice and
this Lease shall then expire on the date so specified as if that date had been
originally fixed as the expiration date of the term herein granted. However, an
Event of Default shall be deemed waived if such default is made good before the
date specified for termination in the notice of termination served on the
Tenant.
14.3 In case this Lease shall be terminated Landlord or its
agents may, immediately or any time thereafter, re-enter and resume possession
of the Leased Premises or such part thereof, and remove all persons and property
therefrom, either by summary proceedings or by a suitable action or proceeding
at law, without being liable for any damages therefor. No re-entry by Landlord
shall be deemed an acceptance of a surrender of this lease. However, if an Event
of Default has occurred and Tenant moves out, or is dispossessed, and fails to
remove any of its property, machinery, equipment and fixtures or other property
within 10 days after such default, dispossess or removal, then and in that
event, the said property, machinery, equipment and fixtures or other property
shall at the option of the Landlord, be deemed to be abandoned, or the Landlord
may remove such property and charge the reasonable cost and expense of removal
and storage to the Tenant. The Tenant shall be liable for any damage which it
causes in the removal of said property from the Leased Premises.
14.4 In case this Lease shall be terminated Landlord may,
relet the whole or any portion of the Leased Premises, for any period equal to
or greater or less than the remainder of the then current term, for any sum
which it reasonably may deem appropriate, to any tenant which it may reasonably
deem suitable and satisfactory, and for any use and purpose which it may deem
appropriate. In connection with any such lease, Landlord may make such changes
in the
30
character of the improvements on the Leased Premises as Land lord may reasonably
determine to be appropriate or helpful in effecting such lease and may grant
concessions or free rent to the extent commercially reasonable. Landlord shall
make reasonable efforts to relet the Leased Premises. Landlord shall not in any
event be required to pay Tenant any sums received by Landlord on a reletting of
the Leased Premises, but this shall not effect Landlord's statutory obligation
to mitigate its damages. Amounts received shall be applied against amounts due
from Tenant.
14.5 In the event this Lease is terminated and whether or not
the Leased Premises be relet, Landlord shall be entitled to recover from the
Tenant all rent due and all reasonable expenses, including reasonable counsel
fees, incurred by Landlord in recovering possession of the Leased Premises, and
all reasonable costs and charges for the care of the Leased Premises while
vacant, which damages shall be due at such time as they are incurred by
Landlord; and a sum equal to all damages set forth in Paragraph 15. Without any
previous notice or demand, separate actions may be maintained by Landlord
against Tenant from time to time to recover any damages which have become due
and payable to the Landlord without waiting until the end of the term.
15. LIABILITY OF TENANT FOR DEFICIENCY
In the event that the relation of the Landlord and Tenant
terminates by reason of:
(a) an uncured Event of Default by the Tenant and the
re- entry of the Landlord as permitted herein; or
(b) by the ejectment of the Tenant by summary
proceedings or other judicial proceedings;
it is hereby agreed that the Tenant shall remain liable to pay in monthly
payments the rent and any other charges which shall accrue. The Tenant expressly
agrees to pay as damages for such breach of this Lease the differ ence between
the rent reserved and the rent received, if any, by the Landlord, during the
remainder of the unexpired term.
31
16. NOTICES
All notices required by this Lease shall be given by certified
mail, return receipt requested, nationally recognized overnight courier or
personal delivery with receipt, at the address set forth on the first page of
this lease, and/or such other place as the parties may designate in writing. Any
notices hand delivered or sent by nationally recognized overnight carrier shall
be deemed delivered when received. All notices sent by mail shall be deemed
given 3 days after deposit in the mail. Upon Tenant's occupancy, Tenant's
address for notices shall be the Leased Premises.
17. NON-WAIVER
The failure of either party to insist upon the strict
performance of any of the terms of this Lease, or to exercise any option
contained herein, shall not be construed as a waiver of any such term.
Acceptance of performance of anything required by this Lease to be performed,
with the knowledge of the breach of any term of this Lease, shall not be deemed
a waiver of such breach, nor shall acceptance of rent by Landlord in a lesser
amount than is due (regardless of any endorsement on any check, or any statement
in any letter accompanying any payment of rent) be construed either as an accord
and satisfaction or in any manner other than as payment on account of the
earliest rent then unpaid by Tenant. No waiver of any term of this Lease shall
be deemed to have been made unless expressed in writing and signed by the
benefitted party.
18. RIGHT OF TENANT TO MAKE ALTERATIONS AND IMPROVEMENTS
Upon occupancy the Tenant may make alterations, additions or
improvements to the Leased Premises provided the aggregate cost of same shall be
less than $50,000. If greater than $50,000 then Tenant must obtain the consent
of the Landlord, which shall not be unreasonably withheld or delayed. Tenant
shall obtain all necessary governmental permits and shall furnish to Landlord
as-built drawings of any alterations, additions or improvements which are made.
Landlord agrees to review any alteration, addition, or improvements proposed by
32
Tenant within 10 days of receipt of plans and specifications, and advise Tenant
of its decision. If Landlord does not respond in 10 days, consent is deemed
given. Any approval given is not intended to subject the Landlord's property to
liability under any lien law.
19. NON-LIABILITY OF LANDLORD
Tenant agrees to assume all risk of damage to its property,
equipment and fixtures occurring in or with respect to the Leased Premises,
whatever the cause of such damage or casualty. Landlord shall not be liable for
any damage or injury to property or person caused by or resulting from steam,
electricity, gas, water, rain, ice or snow, or any leak or flow from or into any
part of the building, or from any damage or injury resulting or arising from any
other cause or happening whatsoever, unless arising from gross negligence or
willful misconduct of Landlord or its agents, contractors or employees.
20. RESERVATION OF EASEMENT
Landlord reserves the right, easement and privilege to enter
on the Leased Premises in order to install, at its own cost and expense, any
storm drains and sewers and/or utility lines in connection therewith as may be
required by the Landlord. It is understood and agreed that if such work as may
be required by Landlord requires an installation which may displace any paving,
lawn, seeded area or shrubs the Landlord, shall, at its own cost and expense,
restore or redesign said paving, lawn, seeded area or shrubs. The Landlord
covenants that the foregoing work shall not unreasonably interfere with the
normal operation of Tenant's business.
21. STATEMENT OF ACCEPTANCE
Upon the delivery of the Leased Premises to the Tenant the
Tenant covenants and agrees that it will furnish to Landlord a statement which
shall set forth the Date of Commencement and the Date of Expiration of the lease
term.
22. FORCE MAJEURE
Except for (i) the obligation of the Tenant to pay rent and
other charges, (ii) the date by which Tenant may terminate this Lease because
Landlord
33
has not substantially completed its work pursuant to Paragraphs 3 or 11 hereof,
and (iii) the time period set forth in Paragraph 7.4, the period of time during
which the Landlord or Tenant is prevented from performing any act required to be
performed under this Lease by reason of fire, catastrophe, industry wide
strikes, lockouts not instituted by Landlord, civil commotion, acts of God,
government prohibitions or preemptions or embargoes, inability to obtain
material or labor by reason of governmental regulations, the act or default of
the other party, or other events beyond the reasonable control of Landlord or
Tenant, as the case may be, shall be added to the time for perform ance of such
act.
23. STATEMENTS BY LANDLORD AND TENANT
Landlord and Tenant agree at any time and from time to time
upon not less than 10 days' prior notice from the other to execute, acknowledge
and deliver to the party requesting same, a statement in writing, certifying
that this lease is unmodified and in full force and effect (or if there have
been modifications, that the same is in full force and effect as modified and
stating the modifications), that it is not in default (or if claimed to be in
default, stating the amount and nature of the default) and specifying the dates
to which the basic rent and other charges have been paid in advance.
24. CONDEMNATION
24.1 If there is a condemnation or any similar proceedings and
in Tenant's reasonable opinion, said taking unreasonably or unduly interferes
with the use of the Leased Premises, the lease term created shall terminate from
the date when the authority exercising the power of eminent domain takes or
interferes with the use of the Property. The Tenant shall be responsible for the
payment of rent until the time of surrender. In any event, no part of the
Landlord's condemnation award shall be claimed by the Tenant. Without
diminishing Landlord's award, the Tenant shall have the right to make a claim
against the condemning authority for such independent claim which it may have.
24.2 In the event of any partial taking which would not be
cause for termination of the Lease, or in the event of any partial taking which
would permit
34
termination but Tenant retains the balance of the Leased Premises remaining
after such taking, then the rent shall abate in an amount to be mutually agreed
upon (such agreement not to be unreasonably withheld or delayed) between the
Landlord and Tenant based on the extent of interference with Tenant's normal use
of the Leased Premises. The Landlord shall, to the extent permitted by
applicable law and as the same may be practicable promptly make such repairs and
alterations in order to restore the building and/or improvements to usable
condition to the extent of any condemnation award received by Landlord.
25. LANDLORD'S REMEDIES
25.1 The rights and remedies given to the Landlord in this lease are
distinct, separate and cumulative remedies, and no one of them, whether or not
exercised by the Landlord, shall be deemed to be in exclusion of any of the
others.
25.2 In addition to any other legal remedies for an Event of Default by
the Tenant or by anyone holding or claiming under the Tenant such Event of
Default shall be restrainable by injunction at the suit of the Landlord.
25.3 No receipt of money by the Landlord from any receiver, trustee or
custodian or debtors in possession shall reinstate, continue or extend the term
of this lease or affect any notice theretofore given to the Tenant, or to any
such receiver, trustee, custodian or debtor in possession, or operate as a
waiver or estoppel of the right of the Landlord to recover possession of the
Leased Premises for any of the causes therein enumerated by any lawful remedy;
and the failure of the Landlord to enforce any covenant or condition by reason
of its breach by the Tenant shall not be deemed to void or affect the right of
the Landlord to enforce the same covenant or condition on the occasion of any
subsequent default or breach.
26. QUIET ENJOYMENT
The Landlord covenants that the Tenant, on paying the rental
and performing the covenants and conditions contained in this Lease, subject to
applicable notice and grace periods, may peaceably and quietly have, hold and
enjoy the Leased Premises for the Lease term.
35
27. SURRENDER OF PREMISES
On the last day, or earlier permitted termination of the Lease
term, Tenant shall quit and surrender the Leased Premises in good and orderly
condition and repair (reasonable wear and tear, and damage by fire or other
casualty excepted) and shall deliver and surrender the Leased Premises to the
Landlord peaceably, together with all alterations and improvements to the Leased
Premises. Tenant shall not be required to remove any alterations or improvements
unless: (i) Landlord advised Tenant in writing that Tenant would have to remove
such items when Landlord approved the alterations or received notice thereof
from Tenant or (ii) Landlord gives Tenant written notice on or before 6 months
prior to the expiration of the Term that the condition of such items is beyond
normal wear and tear and in such event Tenant shall be required to remove any
alterations or improvements installed by the Tenant, and restore the Leased
Premises to its original state, normal wear and tear and damage by fire or other
casualty excepted. Notwithstanding the above, Tenant shall not be required to
remove any alterations or improvements shown on Plans. Notwithstanding the
above, Landlord shall have a right, prior to the expiration of the Term, to
notify Tenant that Landlord shall purchase as many hoods and benches as it
desires at a price of $2300/hood and $50/lineal foot of bench. Said payment
shall be made to Tenant in a lump sum on the termination date. All property not
removed by Tenant shall be deemed abandoned by Tenant, and Landlord reserves the
right to charge the reasonable cost of removal to the Tenant, for items which
Tenant was required to remove.
28. HOLDOVER
If the Leased Premises are not surrendered at the end of the
Lease term, the Tenant shall pay 150% of the Base Rent then being paid to
Landlord, on a monthly basis with rent pro-rated until date of surrender. These
covenants shall survive the termination of the Lease.
29. INDEMNITY
29.1 Anything in this Lease to the contrary notwithstanding but subject
to Paragraph 8.6 hereof, and without limiting the Tenant's obligation to
36
provide insurance hereunder the Tenant covenants and agrees that it will
indemnify, defend and save harmless the Landlord against and from all
liabilities, obligations, damages, (except consequential damages) penalties,
claims, costs, charges and expenses, including without limitation reasonable
attorneys' fees, which may be imposed upon or incurred by Landlord by reason of
any of the following occurring during the term of this Lease:
(a) Any claim arising out of Tenant's use, occupancy, control
or management of the Leased Premises and any part thereof unless arising from
negligence or willful misconduct of Landlord or any of its agents, contractors
or employees, or the failure of Landlord to comply with its obligations under
this Lease;
(b) Any negligence on the part of the Tenant or any of its
agents, contractors, servants, employees, licensees or invitees;
(c) Any accident, injury, damage to any person or property of
third parties occurring in, or about the Leased Premises unless arising from
negligence or willful misconduct of Landlord or any of its agents, contractors
or employees, or the failure of Landlord to comply with its obligation under
this Lease;
(d) Any Event of Default. Landlord shall promptly notify
Tenant of any such claim asserted against it and shall promptly send to Tenant
copies of all papers or legal process served upon it in connection with any
action or proceeding brought against Landlord.
29.2 Landlord covenants and agrees that it will indemnify, defend and
save harmless the Tenant against and from all liabilities, obligations, damages,
(except consequential damages) penalties, claims, costs, charges and expenses,
including without limitation reasonable attorneys' fees, which may be imposed
upon or incurred by Tenant by reason of any of the following occurring during
the term of this Lease:
(a) Any claim arising out of Landlord's use, occupancy,
control or management of the Office Park and any part thereof unless arising
from
37
negligence or willful misconduct of Tenant or any of its agents, contractors or
employees, or the failure of Tenant to comply with its obligations under this
Lease;
(b) Any negligence on the part of the Landlord or any of its
agents, contractors, servants, employees, licensees or invitees;
(c) Any accident, injury, damage to any person or property of
third parties occurring in, or about the Office Park unless arising from
negligence or willful misconduct of Tenant or any of its agents, contractors or
employees, or the failure of Tenant to comply with its obligation under this
Lease. Tenant shall promptly notify Landlord of any such claim asserted against
it and shall promptly send to Landlord copies of all papers or legal process
served upon it in connection with any action or proceeding brought against
Tenant.
30. LEASE CONSTRUCTION
This Lease shall be construed pursuant to the laws of the
State of New Jersey.
31. BIND AND INURE CLAUSE
The terms, covenants and conditions of this Lease shall be
binding upon, and inure to the benefit of, each of the parties hereto and their
respective heirs, successors and assigns.
32. INCLUSIONS
The neuter gender when used herein, shall include all persons
and corporations, and words used in the singular shall include words in the
plural where the text of the instrument so requires.
33. DEFINITION OF TERM "LANDLORD"
When the term "Landlord" is used in this Lease it shall be
construed to mean and include only the owner of title to the building. Upon the
transfer by
38
the Landlord of the title, the Landlord shall advise the Tenant in writing by
certified mail, return receipt requested, of the name of the Landlord's
transferee. In such event, the Landlord shall be automatically freed and
relieved from and after the date of such transfer of title of all personal
liability with respect to the performance of any of the covenants and
obligations on the part of the Landlord herein contained to be performed,
provided any such transfer and conveyance by the Landlord is expressly subject
to the assumption by the transferee of all of the obligations of the Landlord
hereunder.
34. COVENANTS OF FURTHER ASSURANCES
If, in connection with obtaining financing for the
improvements on the Leased Premises, the mortgage lender shall request
reasonable modifications in this Lease as a condition to such financing, Tenant
will not unreasonably withhold, delay or refuse its consent thereto, provided
that such modifications do not in Tenant's reasonable judgment materially
increase the obligations or materially decrease the rights of Tenant hereunder
or materially adversely affect the leasehold interest hereby created or
materially adversely affect Tenant's use and enjoyment of the Leased Premises.
Notwithstanding anything contained in this paragraph, the rent shall not
increase.
35. COVENANT AGAINST LIENS
Tenant agrees that it shall not encumber, or permit to be
encumbered, the Leased Premises or the fee thereof by any lien, charge or
encumbrance, and Tenant shall have no authority to mortgage or hypothecate this
Lease in any way whatsoever. Any violation of this Paragraph shall be considered
a breach of this Lease.
36. SUBORDINATION
This Lease shall be subject and subordinate at all times to
the lien of any mortgages or other encumbrances now or hereafter placed on the
land and building and Leased Premises without the necessity of any further
instrument or
39
act on the part of Tenant to effectuate such subordination. However, Tenant
agrees to execute such further documents evidencing the subordination of the
Lease to the lien of any mortgage or ground lease as shall be reasonably
requested by Landlord. It is a condition precedent to Tenant's obligation to pay
rent hereunder and the foregoing subordination, that Landlord shall provide
Tenant with a non-disturbance agreement from any current or future mortgagee,
which shall provide that so long as no Event of Default has occurred and is
continuing, Tenant's rights under this lease shall not be disturbed. Landlord
shall provide Tenant with the non-disturbance agreement from any such current or
future mortgagee within the later of loan closing or 60 days of Lease execution.
Notwithstanding any language to the contrary contained herein, this Lease shall
not be subordinated until Tenant receives a copy of the non-disturbance
agreement.
37. EXCULPATION OF LANDLORD
Neither Landlord nor its principals shall have any personal
obligation for payment of any indebtedness or for the performance of any
obligation under this Lease. The performance of Landlord's obligations expressed
herein may be enforced only against the land and building, and the rents, issues
and profits thereof and insurance and condemnation proceeds. The Tenant agrees
that no deficiency judgment or other judgment for money damages shall be entered
by it against the Landlord or its principals personally in any action. This
exculpation provision shall not apply to misappropriation of Tenant's security
deposit or the aforesaid letter of credit.
38. SECURITY
The Tenant shall deposit with the Landlord 1 month's security,
calculated in accordance with Paragraph 4.1, as security for the full and
faithful performance of its obligations under this Lease. Payment shall be made
1/3 each month for the first 3 months of the Lease Term. Upon termination of
this Lease, and providing that at such time no Event of Default has occurred and
is continuing, the Landlord shall return the security deposit to the Tenant
within 30
40
days of the date of termination. Tenant covenants and agrees that it will not
assign, pledge, hypothecate, mortgage or otherwise encumber the security during
the term of this Lease. It is expressly understood and agreed that the Landlord
shall not be required to segregate the security.
39. BROKERAGE
The parties mutually represent to each other that Tom Giannone
of Julien J. Studley, Inc. is the broker who negotiated and consummated the
within transaction, and that neither party dealt with any other broker in
connection with the Lease. It is agreed that the Landlord shall be responsible,
at its sole cost and expense, to pay the brokerage commission in connection with
this Lease.
40. LATE CHARGES
In addition to any other remedy, a late charge of 1% per month
shall be due and payable, without notice from Landlord, on any portion of rent
or other charges not paid within 10 days of when it is due.
41. OPTION TO RENEW
41.1 Provided there is no continuing Event of Default, Tenant has
the right to renew the lease, for two 5 year periods, to commence at the end of
the initial term of this Lease. The renewal shall be upon the same terms and
conditions as contained in this Lease, except as follows:
(a) For the first 5 year renewal period, the annual rent per
square foot shall be the lesser of $28.00 or the average of the rent then paid
by 2 of Landlord's existing tenants, Biomira USA, Inc. at 1002 Eastpark Blvd.,
Cranbury, NJ, and Pharmacopeia, Inc., at 3000 Eastpark Blvd., Cranbury, NJ or
their successors or assigns. In the event either of those tenants, its successor
or assigns have vacated the premises, then the rent for the laboratory/office
space shall be the lesser of $28.00 or $25.50 times 1 plus the percentage
increase in the Consumer Price Index ("CPI") over the initial 10 years of the
lease term; and the rent for the executive office space shall be the lesser of
$18.43 or $16.75 times 1 plus the percentage increase in the CPI during the same
term. The CPI to be used shall be the "All Items" index figures for the N.Y.
Northeastern N.J. average of the
41
CPI for All Urban Consumers (revised CPI- U) (1982-1984 = 100) published by the
U.S. Department of Labor. The rent for all expansion Phases during both renewal
terms shall be as set forth in Paragraph 4.2.
(b) For the second 5 year renewal period, the rent per square
foot shall be the rent during the first 5 year renewal period increased by 10%.
41.2 Since the rent payment for at least the first month of the
renewal term will have been paid prior to the determination of any applicable
rent increase in excess of the Original Base Rent, any increase for months
already elapsed after commencement of the renewal term shall be added to the
next monthly rent payment then becoming due and payable.
41.3 The options of the Tenant to renew this Lease are expressly
conditioned upon the Tenant delivering to the Landlord a notice, in writing, by
certified mail, return receipt requested at least 9 months prior to the date
fixed for termination of the original Lease term or any renewal term, provided
Landlord will allow Tenant to exercise the option in less than 9 months if
Landlord has not first given a notice to Tenant of the pendency of the option.
41.4 In the event that the Index figure is discontinued the parties
shall agree on an equivalent and substituted Cost of Living Index to be applied
in the same manner. In the event the parties cannot mutually agree as to a
substituted Index, then the issue shall be submitted for arbitration to the
American Arbitration Association to take place in New Brunswick or any of its
contiguous municipalities, with the cost thereof divided between the parties. If
the base year (1982-84 equal to 100) hereinabove referred to with respect to the
"Index" shall be changed after the execution of the Lease, appropriate
adjustments based on such new Index shall be made so as to have a proper
application of the Cost of Living formula.
42. RIGHT TO LEASE ADDITIONAL SPACE
42.1 Landlord shall not attempt to rent any other space at 8 Cedar
Brook Drive until commencement of the erection of the structural steel.
Thereafter, Landlord shall be free to lease space in any area where Tenant is
not paying a
42
Reservation Fee, subject to a right of first refusal by Tenant as provided in
Paragraph 42.3. Provided Tenant has not given the notice under Paragraph 4.2(i),
Landlord shall agree to lease portions of Phase 3 from north to south.
42.2 If Tenant has leased all of Phase 2 or is paying the
Reservation Fee thereon, Tenant shall have, for a 2 year period from the
Commencement Date, the right of first refusal pursuant to Paragraph 42.3 for
all, or the portion of Phase 3 not then reserved, at the rental rates set forth
in paragraph 4.2. However, if Tenant has not leased all of Phase 2 and provides
Landlord with the notice required under Paragraph 4.2(i) that it is cancelling
its option to lease such space or the 2 year period has expired, and as a result
Tenant ceases to pay the Reservation Fee for Phase 2, the right of first refusal
with regard to Phase 3 shall immediately terminate and it shall have the right
of first offer set forth in Paragraph 42.4.
42.3 If Landlord negotiates any lease for Phases 2 or 3 or any
portion thereof while such space is still subject to Tenant's right of first
refusal, it shall give Tenant written notice of same. Tenant shall then have 21
calendar days to notify Landlord that it will lease the space in which the third
party is interested, at the rent set forth in Paragraph 4.2. If Tenant declines
to exercise its right of first refusal to rent such space, it shall still have
the option of reserving that space, by paying Landlord $8/sq. ft., inclusive of
common area maintenance and real estate taxes. Such reserved space may only be
cancelled upon Tenant giving to Landlord 6 months notice. The provisions for the
termination of the Reservation Fee shall also apply to the $8/sq. ft. amount set
forth in this subparagraph and in Subparagraph 42.4.
42.4 If all of Tenant's rights of first refusal have expired,
Landlord agrees that Tenant shall still have the right to meet any serious
offers to lease space in the building that Landlord makes to other tenants. It
is the intent of this Lease that each party will cooperate with the other and
keep the other party reasonably advised of its plans with regard to expansion
and leasing. In that regard to the extent that Landlord is entertaining a
serious offer from a third party
43
to lease any space in the building, it will notify Tenant of same and Tenant
shall sign a confidentiality agreement with regard to the details of said lease
negotiations. Tenant shall then have a period of 14 calendar days to notify
Landlord that it will either meet the third party offer for the space; reserve
the space at $8.00/sq. ft., inclusive of common area maintenance and real estate
taxes; or reject the offer and allow Landlord to lease said space to the third
party on substantially the same terms contained in the original offer. If Tenant
reserves said space, it may only cancel upon Tenant giving Landlord 6 months
notice. However, if Tenant does cancel, then Landlord shall be free to market
that particular space without any further right to offer the space to Tenant in
the future.
42.5 In the event Tenant declines to lease or reserve any expansion
Phases, Landlord will make reasonable efforts, without any guarantee of results,
to include a clause in any third party tenant's lease that requires that tenant
to relocate if Tenant decides to lease the space. If, after Tenant gives notice
that it intends to lease the space occupied by the third party tenant, the
Landlord is only able to relocate said tenant to new space at a lower than
market rent, then Tenant shall either (1) revoke its notice of intention to
lease the third party tenant's space; or (2) pay, on a quarterly basis, the
differential between the rent the tenant was paying and the lower than market
rent the tenant will pay in the space to which it is relocated.
43. MEMORANDUM OF LEASE
The parties shall forthwith execute a short form memorandum of this
Lease Agreement in recordable form to be recorded upon Landlord's receipt of the
first month's rent.
44
IN WITNESS WHEREOF, the parties hereto have executed this
document on the date first above written.
CEDAR BROOK CORPORATE CENTER, L.P.
WITNESS:
By: /s/ Joseph Stern
- ----------------------------- --------------------------------------
Landlord
TRANSCELL TECHNOLOGIES, INC.
ATTEST:
By: /s/ Peter Schied
- ----------------------------- ---------------------------------------
45
SCHEDULE A
----------
DESCRIPTION
-----------
G U A R A N T Y
FOR VALUE RECEIVED, and as an inducement to CEDAR BROOK
CORPORATE CENTER, L.P. ("Landlord"), to enter into a certain lease with
TRANSCELL TECHNOLOGIES, INC. ("Tenant"), dated September 19, 1996, demising a
portion of the premises known as 8 Cedar Brook Drive, Cranbury, New Jersey 08512
("Lease"), to which this Guaranty is attached, Interneuron Pharmaceuticals,
Inc., One Ledgemont Center, Suite 340, 99 Hayden Ave., Lexington, MA 02173
("Guarantor"), hereby guarantees to Landlord, its successors and assigns, the
full performance and observance of all of the covenants, conditions, obligations
and agreements in the Lease to be performed and observed by Tenant, its
successor and assigns, from the signing of the Lease and for a period of 5 years
after the Commencement Date, including the balloon payment referred to in
paragraph 3.1(b) of the Lease, and expressly agrees that the validity of this
agreement and the obligations of Guarantor hereunder shall be and the same are
direct and primary and shall not be terminated, affected or impaired by reason
of the assertion by Landlord against Tenant, its successors or assigns, of any
of the rights or remedies reserved to Landlord pursuant to the provisions of the
Lease or by reason of the waiver by Landlord of, or the failure of Landlord to
enforce, any of the terms, covenants, conditions or obligations of Tenant under
the Lease, or the granting of any indulgence or extension of time to Tenant, its
successors or assigns, all of which may be given or done without notice to
Guarantor. Notwithstanding any language to the contrary contained herein, this
Guaranty shall not cover, and Interneuron shall not be liable, for the payment
of any sums set forth in the Lease which are secured by a letter of credit
(including without limitations the sums specified in Paragraph 3.1(a) of the
Lease).
-1-
Landlord shall provide Guarantor with prompt notice of default
in the payment of rent, additional rent or any other amounts contained or
reserved in said Lease, and notice of a breach of nonperformance of any of the
covenants, conditions or agreements contained in the Lease and the opportunity
to promptly cure any such default or breach.
Guarantor further covenants and agrees that this agreement and
guaranty shall remain and continue in full force and effect as to any amendment,
modification, renewal or extension of the Lease, to all of which Guarantor
hereby consents in advance, provided however and only to the extent same do not
increase the term of the lease, the amount of space leased or the rent, and no
course of dealing between Landlord, its successors and assigns, and Tenant, its
successors and assigns, shall diminish, impair in any respect or abrogate the
obligation of Guarantor hereunder except as hereinabove set forth.
Guarantor further agrees that its liability hereunder shall be
primary and that, in any right of action which shall accrue to Landlord, its
successor and assigns, may, at its or their option, proceed against Guarantor
without having commenced any action, or having obtained any judgment, against
Tenant.
Guarantor further represents to Landlord, as an inducement for
it to make the Lease, that Guarantor has a financial interest in Tenant; and
that the execution and delivery of this guaranty are not in contravention of its
charter or by-laws, and have been duly authorized by its Board of Directors, and
Guarantor will comply with all requirements of New Jersey law to make the
Guaranty valid, subsisting and enforceable in accordance with New Jersey law.
Guarantor acknowledges that Tenant, its successors and
assigns, may assign the Lease pursuant to Paragraph 10 thereof, and Guarantor
hereby agrees that no assignment(s) or
-2-
transfer(s) of the Lease by Tenant or any succeeding Tenant(s) shall operate to
extinguish or diminish the liability of the Guarantor under this Guaranty, and
that Guarantor shall, nevertheless, remain fully liable under this Guaranty
during the 5 year term of this Guaranty, unless Landlord following any such
assignment, shall determine in its sole and absolute judgment that the financial
responsibility of such assignee and/or any guarantor of the obligations of such
assignee under the Lease are satisfactory to Landlord, and Landlord, in its sole
and absolute discretion, shall elect to release the Guarantor from its
obligations hereunder. Notwithstanding the above, Landlord agrees that in the
event Guarantor (a) sells the Tenant; or (b) the Tenant assigns the Lease
pursuant to Paragraph 10 of the Lease; or (c) Tenant becomes a publicly owned
company; and the purchasing company, the assignee or the public company, as the
case may be, has an amount of cash equal to or greater than the amount of cash
possessed by Guarantor at the time the Lease is signed, then this Guaranty shall
automatically expire. If the purchasing company, the assignee or the public
company has less cash than Guarantor at the time the Lease is signed, but has at
lease fifty million dollars in cash, then Landlord shall release Guarantor from
this Guaranty if such entity either (1) provides Landlord with an unconditional
Letter of Credit, or another form of collateral which is reasonably satisfactory
to both Landlord and the lender that financed the Tenant Improvements, for all
rent to come due for the balance of the 5 year guarantee period and the balloon
payment set forth in Paragraph 3.1(b) of the Lease; or (2) agrees to add to the
rent due Landlord in Paragraph 4 of the Lease an additional $3.00/sq. ft. from
the date of the sale, assignment or public issue, as the case may be, to the end
of the 6th full year of the Lease term. In the event the purchasing company, the
assignee or the public company elects option (2), and maintains cash of at least
fifty million dollars for 4 consecutive quarters after said election, then the
$3.00/sq. ft. additional rent shall decrease to
-3-
$1.50/sq. ft. at the start of the 5th quarter and continue at that level until
the end of the 6th full year of the Lease term.
Guarantor agrees that if during the 5 year term of this
Guaranty the Tenant shall become insolvent or shall be adjudged a bankrupt, or
shall file a petition for reorganization, arrangement or similar relief under
any present or future provision of the United States Bankruptcy Code or the
bankruptcy or receivership laws of the United States or the State of New Jersey
or if such a petition filed by creditors of Tenant shall be approved by a Court,
or if Tenant shall seek a judicial readjustment of the rights of its creditors
under any present or future Federal or State law or if a receiver of all of its
property and assets is appointed by any State or Federal Court, and in any such
proceeding the Lease shall be terminated or rejected, or the obligations of
Tenant thereunder shall be modified, Guarantor agrees that it will immediately
pay to Landlord or its successors or assigns an amount equal to all fixed,
contingent and additional rent accrued (and unpaid) to the date of such
termination, rejection or modification, and when due, the rent and additional
rent which would have been payable under the Lease during the unexpired portion
of the term occurring prior to the fifth anniversary of the Commencement Date,
less the aggregate of rentals received by Landlord, its successors and assigns,
either from Tenant, or tenants occupying the demised premises or any portion
thereon during such unexpired portion of the term occurring prior to the fifth
anniversary of the Commencement Date. Any lump sum payment made by Guarantor
pursuant to this Paragraph shall be discounted assuming an interest rate of 4%.
Guarantor's obligation to make payment in accordance with the
terms of this Guaranty shall not be impaired, modified, changed, released or
limited in any manner whatsoever by any impairment, modification, change,
release or limitation of the liability of Tenant or its estate
-4-
in bankruptcy resulting from the operation of any present or future provision of
the Federal bankruptcy statute or other statute, or from the decision of any
court. By execution of the within Guaranty, the Guarantor does hereby covenant,
agree and acknowledge that it irrevocably submits to the jurisdiction of the
State of New Jersey and agrees that the within Guaranty shall be construed in
accordance with the laws of the State of New Jersey in connection with its
obligations as Guarantor as in this Guaranty provided.
This Guaranty is for the benefit of the Landlord and any
present or future bona fide first mortgagee, their successors and assigns, as
additional collateral for any present or future mortgage loan to the Landlord.
This Guaranty shall be null and void and of no further force
or effect after the fifth anniversary of the Commencement Date.
IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands and seals, or caused these presents to be signed by their proper corporate
officers and caused their proper corporate seals to be hereto affixed, the day
and year first above written.
ATTEST: INTERNEURON PHARMACEUTICALS, INC.
/s/ Kathy Embriano By: /s/ Thomas F. Farb
- -------------------------- ----------------------------
-5-
EXHIBIT 21
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SUBSIDIARIES OF THE REGISTRANT
Name Jurisdiction of Incorporation
---- -----------------------------
Progenitor, Inc. Delaware
Transcell Technologies, Inc. Delaware
InterCardia, Inc. Delaware
CPEC, Inc. Nevada
InterNutria, Inc. Delaware
IPI Management Corp. Massachusetts
Aeolus Pharmaceuticals, Inc. Delaware
EXHIBIT 23
----------
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the incorporation by reference in the registration
statements of Interneuron Pharmaceuticals, Inc. on Form S-8 (File Nos. 33-58742,
33-76652, 33-94730 and 33-94736) and on Form S-3 (33-75826, 33-32408 and
333-1273) of our report dated November 13, 1996 on our audits of the
consolidated financial statement of Interneuron Pharmaceuticals, Inc. as of
September 30, 1995 and 1996 and for each of the three years in the period ended
September 30, 1996, which report is included in the Annual Report on Form 10- K
of Interneuron Pharmaceuticals, Inc. for the fiscal year ended September 30,
1996.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 16, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> $145,901,000
<SECURITIES> 23,707,000
<RECEIVABLES> 4,338,000
<ALLOWANCES> 0
<INVENTORY> 8,376,000
<CURRENT-ASSETS> 177,007,000
<PP&E> 4,476,000
<DEPRECIATION> (1,787,000)
<TOTAL-ASSETS> 186,438,000
<CURRENT-LIABILITIES> 21,761,000
<BONDS> 0
0
3,500,000
<COMMON> 37,000
<OTHER-SE> 141,221,000<F1>
<TOTAL-LIABILITY-AND-EQUITY> 186,438,000
<SALES> $8,674,000
<TOTAL-REVENUES> 26,962,000
<CGS> 7,617,000
<TOTAL-COSTS> 11,617,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (27,986,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,986,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,986,000)
<EPS-PRIMARY> (.76)
<EPS-DILUTED> 0
<FN>
<F1> * Additional paid-in capital - $247,999,000
Accumulated Deficit - $(106,778,000)
</FN>
</TABLE>
