<PAGE> 1
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, 1998
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 04-3047911
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Ledgemont Center, 99 Hayden Avenue, Lexington, MA 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 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 and non-voting common equity (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 $69,500,000, based on the last sales price of the
Common Stock as of December 21, 1998. Shares of Common Stock held by each
executive officer and director, by each person who beneficially owns 10% or more
of the outstanding common stock, and individuals or entities related to such
persons have been excluded. This determination of affiliate status may not be
conclusive for other purposes.
As of December 21, 1998, 41,817,017 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 for the fiscal year ended September 30,
1998 to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 and the Exhibit Index hereto.
<PAGE> 2
PART I
Note Regarding Forward Looking Statements
Statements in this Form 10-K that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by the Company or its representatives include, without
limitation, statements regarding the Redux-related litigation, including the
proposed settlement of the Redux-related product liability litigation; the
Company's ability to successfully develop, obtain regulatory approval for and
commercialize any products, to enter into corporate collaborations or obtain
sufficient additional capital to fund operations, and are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements as they involve risks and uncertainties, and actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth under "Risk Factors" and elsewhere in, or
incorporated by reference into, this Form 10-K. These factors include, but are
not limited to, risks relating to the Redux-related litigation, including the
risk that the proposed settlement of the product liability litigation will be
finally approved; uncertainties relating to clinical trials, regulatory approval
and commercialization of CerAxon; need for additional funds; uncertainties
relating to clinical trials, regulatory approval and commercialization of other
products; product liability; dependence on third parties for manufacturing and
marketing; competition; government regulation; contractual arrangements; patents
and proprietary rights; dependence on key personnel; uncertainty regarding
pharmaceutical pricing and reimbursement and other risks. The forward-looking
statements represent the Company's judgment and expectations as of the date of
this Report. The Company assumes no obligation to update any such
forward-looking statements. See "Risk Factors".
Unless the context indicates otherwise, "Interneuron" refers to Interneuron
Pharmaceuticals, Inc.; the "Company" refers to Interneuron and its Subsidiaries;
the "Subsidiaries" refers to Intercardia, Inc., a majority-owned subsidiary of
the Company ("Intercardia"), and its subsidiaries, including CPEC, Inc. ("CPEC")
and InterNutria, Inc., a majority-owned subsidiary of the Company
("InterNutria"); and "Common Stock" refers to the common stock, $.001 par value,
of Interneuron.
Redux(TM) is a trademark of Les Laboratoires Servier, licensed to the
Company and American Home Products Corp. ("AHP"). CerAxon(TM), AnatoMark(TM) and
PMS Escape(TM) are trademarks of the Company and BEXTRA(R) is a registered
trademark of Intercardia. LidodexNS(TM) is a trademark of Algos Pharmaceutical
Corp., licensed to the Company. All other trademarks or trade names referred to
in this report are the property of their respective owners.
Item 1. Business.
(a) General Development of Business
The Company is a diversified biopharmaceutical company engaged in the
development and commercialization of a portfolio of products and product
candidates primarily for central nervous system and other diseases. The Company
seeks to acquire, develop and commercialize products with international market
experience or that are in clinical or late pre-clinical development. The Company
is currently developing several drugs in clinical trials, including citicoline
for ischemic stroke, pagoclone for panic and anxiety and, through Intercardia,
BEXTRA (bucindolol HCl) for congestive heart failure. In April 1998, the
2
<PAGE> 3
Company withdrew its New Drug Application ("NDA") for citicoline which had been
submitted to the Food and Drug Administration (the "FDA") in December 1997,
after negative results from a preliminary analysis of a small Phase 3 clinical
trial. The Company commenced a third large Phase 3 clinical trial in July 1998
testing citicoline in ischemic stroke.
Intercardia is primarily focused on cardiovascular disease. Its most
advanced drug, BEXTRA, is in a Phase 3 clinical trial among patients with
congestive heart failure. As a result of the merger in May 1998 of Transcell
Technologies, Inc., formerly a majority-owned subsidiary of Interneuron
("Transcell"), into Intercardia, Intercardia is also engaged in
carbohydrate-based drug discovery.
In September 1998, the Company adopted a plan to discontinue operations of
InterNutria, which was focused on dietary supplement products. In December 1998,
Progenitor, Inc., a minority-owned subsidiary of Interneuron, announced its
intention to terminate its operations effective immediately. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On September 15, 1997, the Company announced the withdrawal of its first
prescription product, the weight loss medication Redux (dexfenfluramine
hydrochloride capsules) C-IV, which had been launched by AHP, the Company's
licensee, in June 1996. Simultaneously, Wyeth-Ayerst Laboratories
("Wyeth-Ayerst"), a division of AHP, announced withdrawal of the weight loss
medication Pondimin (fenfluramine hydrochloride tablets) C-IV. Following the
withdrawal, Interneuron has been named, together with other pharmaceutical
companies, as a defendant in approximately 779 product liability legal actions,
many of which purport to be class actions, in federal and state courts involving
the use of Redux and other weight loss drugs.
On September 25, 1998, the U.S. District Court for the Eastern District of
Pennsylvania preliminarily approved a formal agreement to settle all product
liability litigation and claims against Interneuron related to Redux. The Court
also conditionally certified a limited fund class action. A fairness hearing on
the settlement has been scheduled for February 25, 1999. The settlement is
subject to certain conditions and will not become final until approved by the
Court and the time for filing appeals has passed or all appeals have been
exhausted.
The Company has also been named as a defendant in approximately ten
lawsuits filed by alleged purchasers of the Company's common stock, purporting
to be class actions, claiming violation of the federal securities laws. The
Redux-related product liability and securities litigation and claims may
materially adversely affect the Company and its financial condition and results
of operations.
The Company was 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, Lexington, Massachusetts 02421-7966. The
Company's telephone number is 781-861-8444, its fax number is 781-861-3830, and
its Internet address is http://www.interneuron.com.
(b) Financial Information about Industry Segments
The Company operates in only one business segment.
(c) Narrative Description of Business
3
<PAGE> 4
PRINCIPAL PRODUCTS UNDER DEVELOPMENT
<TABLE>
<CAPTION>
INTERNEURON:
- ------------
PRODUCT INDICATION/USE STATUS (*) COMMERCIAL RIGHTS
- ------- -------------- ---------- -----------------
<S> <C> <C> <C>
CerAxon Stroke Phase 3 U.S. and Canada
(citicoline)
Pagoclone Anxiety/Panic disorders Phase 2/3 trial Worldwide, except
completed August for France, where
1998 Rhone-Poulenc Rorer
Pharmaceuticals
Inc. ("RPR")
retains an option
IP501 Cirrhosis of the liver Phase 3 Option to acquire
rights to North
America and Asia
</TABLE>
<TABLE>
<CAPTION>
INTERCARDIA:
- ------------
PRODUCT OR TECHNOLOGY INDICATION/USE STATUS(*) COMMERCIAL RIGHTS
- ---------------------- -------------- --------- -----------------
<S> <C> <C> <C>
BEXTRA (bucindolol) Congestive heart Phase 3 Worldwide; licensed
failure in Europe and other
areas outside the
U.S. and Japan to
BASF Pharma/Knoll
AG ("Knoll")
OP2000 Inflammatory bowel Phase 1 Worldwide (except
disease for Japan and
Korea)
Antioxidant small Diseases associated Preclinical Worldwide
molecules with oxygen free
radicals
Combinatorial Drug discovery Research; Preclinical Worldwide; Rights
carbohydrate to compounds from
chemistry two distinct
structural classes
of anti-bacterial
agents licensed to
Merck & Co., Inc.
("Merck")
Hepatic stem cell Liver diseases; Research Worldwide
technology cell and gene
therapy
</TABLE>
_________________
* See "Government Regulation"
4
<PAGE> 5
REDUX
Product Liability Litigation
Following the withdrawal of Redux in September 1997, Interneuron has been
named, together with other pharmaceutical companies, as a defendant in
approximately 779 product liability legal actions, many of which purport to be
class actions, in federal and state courts involving the use of Redux and other
weight loss drugs. On December 10, 1997, the federal Judicial Panel on
Multidistrict Litigation issued an Order allowing for the transfer or potential
transfer of the federal actions to the Eastern District of Pennsylvania for
coordinated or consolidated pretrial proceedings.
Proposed Settlement: On September 25, 1998, the U.S. District Court for the
Eastern District of Pennsylvania (the "Court") preliminarily approved an
Agreement of Compromise and Settlement (the "Settlement Agreement") relating to
the proposed settlement of all product liability litigation and claims against
Interneuron related to Redux. The Court also conditionally certified a limited
fund class action. The Court order followed a letter of understanding outlining
terms of the settlement announced on September 3, 1998 and execution of the
formal settlement agreement between the Company and the Plaintiffs' Management
Committee, consisting of attorneys designated by the Court to represent
plaintiffs in the multi-district litigation relating to Redux. A fairness
hearing on the settlement has been scheduled for February 25, 1999.
On November 3, 1998, the Court issued a stay halting all Redux product
liability litigation against the Company, pending and future, in state courts.
This followed the issuance of a similar stay halting Redux product liability
litigation in federal courts on September 3, 1998. These stays will remain
effective until the February 25, 1999 fairness hearing and may be extended
pending the outcome of this hearing. The settlement is subject to certain
conditions and will not become final until approved by the Court and the time
for filing appeals has passed or all appeals have been exhausted.
Summary of Settlement Agreement: Under the terms of the proposed settlement
and the Court orders, the limited fund class action established by the
settlement includes all persons in the United States who used Redux, and certain
other persons such as their family members, who would be bound by the terms of
the settlement. Membership in the class is mandatory for all persons included
within the class definition. Class members asserting claims against Interneuron
will be required to seek compensation only from the settlement fund, and their
lawsuits against Interneuron will be dismissed. By agreeing to the proposed
settlement, Interneuron does not admit liability to any plaintiffs or claimants.
The Settlement Agreement requires Interneuron to deposit a total of
approximately $15,000,000 in three installments into a settlement fund. The
first installment of $2,000,000 was deposited into the settlement fund in
September 1998. A second installment of $3,000,000 is to be made after the
Settlement Agreement is approved by the Court which, if obtained, would follow
the fairness hearing. These installments, less certain expenses, will be
returned to Interneuron if the settlement does not become final. A third
installment of $10,000,000, plus interest, is to be made after the settlement
becomes final.
In addition, the Settlement Agreement provides for Interneuron to cause all
remaining and available product liability insurance proceeds related to Redux to
be deposited into the settlement fund. Interneuron also agreed to make royalty
payments to the settlement fund, in the total amount of $55,000,000, based upon
revenues related to Interneuron products, over a seven year period commencing
after the settlement becomes final. Royalties will be paid at the rate of 7% of
gross sales of Interneuron products sold by Interneuron,
5
<PAGE> 6
15% of cash dividends received by Interneuron from its subsidiaries related to
product sales, and 15% of license revenues (including license fees, royalties or
milestone payments) received by Interneuron from a sublicensee related to
product sales. All Interneuron products will be subject to this royalty during
the applicable term. If, at the end of that seven year period, the amount of
royalty payments made by Interneuron is less than $55,000,000, the settlement
fund will be entitled to receive the number of shares of Interneuron Common
Stock equal to the unpaid balance divided by $7.49 per share, subject to
adjustment in certain circumstances. The Company will record initial charges to
operations for the estimated fair value of its obligations under the Settlement
Agreement, exclusive of insurance proceeds, at such time as the Company can
determine that it is probable that the conditions to final settlement have been
or will be met, which is expected to be subsequent to the Fairness Hearing and
to the Supreme Court ruling in Ortiz. See Note H of Notes to Consolidated
Financial Statements.
Securities Litigation: The Company has also been named as a defendant in
several lawsuits filed by alleged purchasers of the Company's Common Stock,
purporting to be class actions, claiming violation of the federal securities
laws.
----------------
Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and similar actions
vigorously, the Company has been required and may continue to be required to
devote significant management time and resources to these legal actions.
Payments under the Settlement Agreement will adversely affect the Company's
financial condition and results of operations. In the event the proposed
settlement does not become final and in the event of successful uninsured or
insufficiently insured claims, or in the event a successful indemnification
claim were made against the Company, the Company's business, financial condition
and results of operations could be materially adversely affected. The
uncertainties and costs associated with these legal actions have had, and may
continue to have, an adverse effect on the market price of the Company's Common
Stock and on the Company's ability to obtain corporate collaborations or
additional financing to satisfy cash requirements, to retain and attract
qualified personnel, to develop and commercialize products on a timely and
adequate basis, to acquire rights to additional products, or to obtain product
liability insurance for other products at costs acceptable to the Company, or at
all, any or all of which may materially adversely affect the Company's business,
financial condition and results of operations.
See "Legal Proceedings," "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Risk Factors--Risks Relating to Redux
Litigation" and Note H of Notes to Consolidated Financial Statements.
Background; Regulatory Approval, Labeling and Safety Issues: Redux
(dexfenfluramine) is chemically related to Pondimin (fenfluramine). Fenfluramine
is a drug made up of two mirror-image halves - a "right-handed" half (d-isomer)
and "left-handed" half (l-isomer) - and dexfenfluramine is the right-handed
isomer of fenfluramine (the left-handed half is "levofenfluramine").
Dexfenfluramine alone is a separate drug from the combined
dexfenfluramine/levofenfluramine molecule that is fenfluramine.
Redux received clearance on April 29, 1996 by the FDA for marketing as a
twice-daily prescription therapy to treat obesity and was launched in June 1996.
Until its withdrawal, under license and copromotion agreements, Redux was
marketed in the U.S. by Wyeth-Ayerst and copromoted by the Company.
Included in the FDA-approved labeling for Redux were references to certain
risks that may be associated with dexfenfluramine and which were highlighted
during the FDA's review of the drug. One issue related 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
6
<PAGE> 7
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 disclosed this revised
estimate.
The FDA-approved labeling for Redux also included 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. In connection with the approval of Redux, the Company and
Wyeth-Ayerst had agreed with the FDA to conduct a Phase 4, or post marketing,
study with patients taking Redux. Following the withdrawal of Redux, this study
was terminated.
In July 1997, the Mayo Clinic reported observations of heart valve
abnormalities in 24 patients taking the combination of Pondimin and phentermine.
The Mayo Clinic cases were subsequently reported in an article appearing in the
August 28, 1997 issue of The New England Journal of Medicine. This article was
accompanied by a letter to the editor from the FDA reporting additional cases of
heart valve disease in 28 patients taking the combination of phentermine and
fenfluramine, two patients taking fenfluramine alone, four patients taking Redux
alone and two patients taking Redux and phentermine.
The withdrawal of Redux was based on a preliminary analysis by the FDA of
potential abnormal echocardiogram findings associated with certain patients
taking Redux or the combination of fenfluramine with phentermine (commonly
referred to as the "fen-phen" combination). These observations, presented to the
Company in September 1997, indicated an incidence of approximately 30%. Although
these observations reflected a preliminary analysis of pooled information and
were difficult to evaluate because of the absence of matched controls and
pretreatment baseline data for these patients, the Company believes it was
prudent, in light of this information, to have withdrawn Redux from the market.
Additional adverse event reports of abnormal heart valve findings in
patients using Redux or fenfluramine alone or in combination with other weight
loss agents continue to be received by Interneuron, Wyeth-Ayerst, and the FDA.
These reports have included symptoms such as shortness of breath, chest pain,
fainting, swelling of the ankles or a new heart murmur.
Subsequent Clinical Studies
Subsequent to the withdrawal of Redux, a number of studies have been
conducted by third parties, including Wyeth-Ayerst, and one study was conducted
by Interneuron, to assess the differences in cardiovascular clinical outcomes
between patients who had taken Redux or a combination of fenfluramine and
phentermine ("fen-phen"), compared to an untreated group. In general, these
studies have been and are being conducted and analyzed by independent panels of
cardiologists to compare the incidence of significant heart valve abnormalities
in treated compared to non-treated groups. Patients are selected and assigned to
these groups randomly. Readings of patient echocardiograms have generally been
made on a blinded basis by cardiologists who do not know from which group
individual echocardiograms were taken. Findings of these studies have been
presented or reported by their respective third party sponsors or researchers.
Based on the results of studies announced to date, the incidence of cardiac
valve abnormalities has been shown to be less than that suggested by the
original FDA preliminary analysis. In general, these studies have shown either
no or relatively small differences, although in some cases statistically
significant, between the incidence of cardiac valve abnormalities, as defined by
the FDA, among patients who took Redux and
7
<PAGE> 8
placebo-treated patients and that the incidence of such abnormalities among
Redux patients was less than previously reported estimates. Findings from these
studies differ with regard to the strength and clinical significance of the
association. Differences in trial design preclude precise comparison. A summary
of the results of the study sponsored by the Company follows.
Interneuron Sponsored Clinical Study: Results of a blinded, matched control
group, multi-center clinical study sponsored by the Company and presented on
November 10, 1998 at the Scientific Sessions of the American Heart Association
showed a low overall incidence of FDA-defined cardiac valve abnormalities among
220 patients who took Redux for three months or longer when compared to 192
individuals who had not taken Redux. No severe and very few moderate cardiac
valve abnormalities were found in either Redux patients or non-Redux subjects.
The incidence of cardiac valve abnormalities among Redux patients reported
in this study, although statistically significant, was far less than some
previously reported estimates. In addition, findings from the study suggest that
elevated blood pressure at the time that echocardiograms were taken among these
patients, as well as the concomitant use of drugs with monoamine oxidase
inhibitory properties, which were contraindicated with the use of Redux,
increased the incidence of cardiac valve abnormalities. Additional findings
suggest that the greater the time off Redux, the less likely patients were to
show valvular abnormalities. These findings are being further evaluated.
The average duration of Redux use among all Redux patients in this study
was seven months. The study was designed to evaluate the impact of long-term use
of Redux alone upon the incidence of cardiac valve disease as defined by the
U.S. FDA. Market research data indicates that more than 80% of patients who were
prescribed Redux received drug therapy for 90 days or less and approximately 6.5
percent of patients took Redux for six months or more.
Analyses were conducted based on echocardiographic data from the total
patient population entered into the study and also from the core group, which
included only the matched pairs. Cardiac valve disease was defined as mild or
greater aortic valve regurgitation and/or moderate or greater mitral valve
regurgitation. Previous reports had estimated rates of cardiac valve
insufficiencies among anorexigen-treated patients of up to 30%.
Among all study participants, 1.4% of Redux patients and 0.5% of
non-treated patients (p =.63) met the FDA's definition of mitral valve
regurgitation. Among the core group of matched pairs, 1.7% of Redux patients and
0.6% of non-treated controls (p =.32) met this definition.
With respect to aortic valve regurgitation, in all patients, 5.9% of Redux
patients and 2.1% of non-treated patients (p =.08) met the FDA's definition.
Among the core group of matched pairs, 6.3% of Redux patients and 2.3% of
non-treated controls (p =.07) met this definition.
For all patients with either aortic or mitral valve regurgitation meeting
FDA criteria only, the incidence was 2.6% for controls and 7.3% for the Redux
patients (p =.04). When analyzed for valvular insufficiency of any degree
including trace, there was an increased incidence in the Redux group when
compared to the untreated control group for the aortic valve (p =.04) but not
the mitral valve (p =.28).
When potentially confounding factors were considered, such as use of
concomitant monoamine oxidase inhibitors (such as estrogens and thyroid hormone
replacements), and the patients' blood pressures at the time of their
echocardiograms, the difference in the incidence of valvular insufficiency
between Redux and non Redux treated patients became non-significant. For
example, when patients were exposed to concomitant drugs possessing monamine
oxidase inhibitory properties were excluded from the analysis, 3%
8
<PAGE> 9
of control group patients met FDA-criteria for aortic and mitral valve
regurgitation as compared with 4% in the Redux group (p = not significant).
CITICOLINE (CERAXON)
General: Citicoline (cytidine-5'-diphosphate choline, sodium) 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
places the surrounding tissue (the "penumbra") at risk for death, leading to an
extension of the size of infarct believed to result 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.
Mechanism of Action: Citicoline is believed to have multiple acute and
longer-term mechanisms of action in diminishing the effects of stroke. On an
acute basis, citicoline appears to limit infarct size by preventing the
accumulation of fatty acids, which would otherwise yield toxic oxidation
products, by preventing their release. On a longer-term basis, citicoline is
believed to promote the formation of additional membrane elements needed by
damaged neurons to restore functional activity by raising blood levels of
choline, cytidine and other phospholipid precursors, which are 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 help to re-establish normal neurochemical function in the brain.
Citicoline also appears to increase levels of acetylcholine, a neurotransmitter
believed to be associated with learning and memory functions.
Ongoing Phase 3 trial: Following the Company's withdrawal in April 1998 of
the NDA for citicoline, the Company commenced a third Phase 3 clinical trial
with this drug in June 1998. This multi-center trial, which will include an
estimated 900 patients with ischemic stroke at approximately 175 hospitals in
the U.S. and Canada, will compare the neurological function of
citicoline-treated patients with that of placebo patients at 12 weeks following
stroke. The primary endpoint is improvement in neurological function as measured
by the National Institutes of Health ("NIH") Stroke Scale. Patients will be
treated with citicoline, 2000 milligrams daily, for six weeks, with a six week
follow-up period. The Company anticipates that this study will be completed in
late 1999.
The 2000 milligram dose level is higher than the dose used in the Company's
two most recent citicoline clinical trials but was used in the Company's first
Phase 3 trial in which patients treated with this dose achieved the primary
endpoint of improved neurological function. Depending upon the evaluation of the
results from the ongoing trial, the Company will determine whether to re-submit
the NDA for citicoline to the FDA. Even if the Company does re-submit the NDA,
as to which there is no assurance, the Company is unable to predict whether or
when the FDA would grant authorization to market citicoline in the U.S. Upon
resubmission of the NDA, a new review period would commence.
NDA submission and withdrawal: The Company had submitted the NDA for
citicoline to the FDA in December 1997. Data in the NDA included the results of
two Phase 3 clinical trials conducted by the Company in the U.S., a Japanese
Phase 3 clinical trial conducted by Takeda Chemical Industries, Ltd. and
supportive clinical and post-marketing data from more than 30 countries where
citicoline has already been approved. The NDA was accepted for filing and was
assigned priority and fast-track review status. A priority review status
reflects the FDA's commitment to review the NDA within six months following
submission, and a fast-track designation indicates the FDA has determined that a
drug is intended to treat a
9
<PAGE> 10
serious or life-threatening condition that currently has an unmet medical need
and that the FDA can take actions to expedite the development and review of the
drug.
In April 1998, the Company announced that a preliminary analysis of a
100-patient Phase 3 trial with citicoline failed to meet its primary and the
principal secondary endpoint. With respect to the primary endpoint, no
statistically significant difference was detected in the reduction of infarct
size among patients with ischemic stroke who received 500 milligrams per day of
citicoline as compared with patients who received placebo. With respect to the
principal secondary endpoint, the trial did not show an improvement in
neurological function among drug-treated patients as compared with patients who
received placebo. The Company believes that a placebo response rate unexpectedly
higher than that previously reported in the scientific literature may have
accounted for the inability to detect a difference in infarct size reduction and
neurological function among drug-treated patients, as compared with patients who
received placebo. Considering statutory requirements that would have mandated an
FDA action by June 1998, the Company withdrew its NDA for citicoline in April
1998.
Review of Pivotal (Phase 3) Trial: In July 1997, the Company announced
results of its second pivotal clinical trial in the U.S. with citicoline to
treat patients suffering from ischemic stroke.
In this study, 267 patients received citicoline and 127 patients received
placebo. The primary outcome analysis of this double-blind, placebo-controlled
trial was improvement in the Barthel Index, a 100 point rating scale of
functional capabilities in neurological patients, at a time point three months
after an ischemic stroke. Patients were considered to have achieved complete or
near-complete functional recovery if they achieved a Barthel score of 95 or 100
at three months.
There was an unexpected highly significant baseline imbalance in the
percentage of placebo versus citicoline-treated patients who had mild strokes on
study entry (34% for placebo vs. 22% for citicoline (p = 0.006), due to chance.
The study was influenced by the significant preponderance of mild cases in the
placebo group. As a result of this imbalance and other statistical factors, the
primary analysis of the study, the distribution of Barthel Index scores in
citicoline vs. placebo-treated patients as a function of baseline NIH Stroke
Scale scores, did not achieve statistical significance. However, this primary
analysis was statistically invalid because the patient imbalance and other
statistical factors failed to satisfy the requirements for the correct operation
of the statistical model. Therefore, a protocol-defined responders analysis,
percentage of patients who achieve a Barthel Index greater than or equal to 95,
among patients with moderate to severe strokes, was employed.
In the responders analysis, 41% of citicoline-treated patients with an NIH
Stroke Scale on entry of greater than or equal to eight (moderate to severe
strokes) achieved a Barthel Index of greater than or equal to 95 compared to 25%
of placebo-treated patients (OC (observed cases) analysis, p = 0.02). Thus,
patients with moderate to severe stroke treated with citicoline had a 64%
greater chance of complete or near-complete recovery relative to patients with
moderate to severe stroke treated with placebo. In the LOCF (last observation
carried forward) analysis, 33% of moderate to severe citicoline patients and 21%
of moderate to severe placebo patients achieved a Barthel Index of greater than
or equal to 95 (p = 0.05), a 57% increased chance of improvement in recovery.
Overall, patients who had mild strokes on entry into the study (NIH Stroke
Scale 5 through 7) had an excellent clinical outcome regardless of placebo or
citicoline treatment. For example, approximately 80% of patients with mild
strokes who received placebo and a similar percentage of citicoline-treated
patients with mild strokes achieved a Barthel score of greater than or equal
to 95 at three months.
In another protocol-defined measure of functional clinical outcome, the
6-point Rankin scale of physician-rated global assessment was utilized. A Rankin
score of 0 or 1 at study completion indicated complete or
10
<PAGE> 11
near-complete lack of disability. Among patients with moderate to severe
strokes, 24% of citicoline-treated patients vs. 11% of placebo treated patients
achieved a Rankin score of 0 or 1 (OC analysis, p = 0.02), a 118% improvement in
outcome. In the LOCF analysis, 19% of moderate to severe citicoline patients and
11% of moderate to severe placebo patients had a Rankin scale of 0 or 1, a 73%
improvement in outcome (p = 0.08).
A preliminary safety review indicated that citicoline was well tolerated.
There did not appear to be any adverse events that differed significantly in
frequency from placebo-treated patients. The mortality rates for drug- treated
and placebo-treated patients were identical (18% in each group).
Review of Pivotal (Phase 2/3) Trial: Interneuron's initial pivotal study of
citicoline in stroke was reported in 1996. Findings from that trial were
published in Neurology in July 1997.
The primary efficacy outcome in this study of 259 patients was improvement
in neurological function, as assessed by the Barthel Index. Among all patients
who received 500 milligrams daily of citicoline, 53% achieved a score of greater
than or equal to 95 on the Barthel Index at 12 weeks, indicative of complete or
near-complete recovery from stroke, compared with 33% of placebo-treated
patients, a 61% improvement in outcome (p < 0.04).
Patients in both the 500 milligram and 2000 milligram groups exhibited
significantly greater (p < 0.05) improvement on the Barthel Index at week 12
than placebo-treated patients. In addition, more patients in the 500 milligram
and 2000 milligram groups exhibited normal or near normal scores in mental
function (p < 0.04), as measured by the Mini-Mental State Exam, which grades the
cognitive state of patients.
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
versus 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, a 113% of improvement in outcome (p < 0.04).
In addition, global neurologic status, assessed by the Rankin Scale mean
scores, was significantly improved (p < 0.04) with citicoline treatment compared
to placebo.
Efficacy outcome measures for the 1000 milligram daily group did not reach
statistical significance in this trial. Patients in the 1,000 milligram group
had a higher proportion of chronic pre-existing cardiac and pulmonary disorders.
These confounding variables may explain the performance of the 1000 milligram
group in the trial.
There was no significant difference in the incidence of death among the
four treatment groups in the trial. All doses of citicoline were well tolerated,
as indicated by analyses of adverse events and laboratory findings. The only
statistically significant differences among citicoline-treated patients versus
placebo-treated patients were an increase in accidental injuries, e.g., falling
down. However, the 500 milligram dose citicoline group did not significantly
differ from the placebo group in these parameters.
Manufacturing and Marketing: As a result of the Company's withdrawal of its
citicoline NDA, the related additional time and expense for product development,
and the Company's limited cash resources, the Company is reevaluating its
commercialization strategy for citicoline, for which the Company has selected
the tradename CerAxon. The Company requires additional funds for manufacturing,
distribution, marketing and selling efforts, the amount of which will depend
upon whether the Company markets citicoline itself or enters into a corporate
collaboration and the terms of any such collaboration. The Company has no
11
<PAGE> 12
commitments or arrangements to obtain additional funds and there can be no
assurance such funds can be obtained on terms favorable to the Company or at
all.
The Company will be dependent upon third party suppliers of citicoline bulk
compound, finished product and packaging for manufacturing in accordance with
the Company's requirements and current U.S. Good Manufacturing Practices
("cGMP") regulations, as well as on third party arrangements for the
distribution of citicoline. Supplies of citicoline finished product used for
clinical purposes have been and are being produced on a contract basis by third
party manufacturers. The Company does not have an agreement with a manufacturer
for supply of commercial quantities of finished product and there can be no
assurance such agreement can be obtained on terms favorable to the Company or at
all, which could adversely affect the Company's ability to commercialize
citicoline on a timely and cost-effective basis. The Company is subject to an
agreement with Ferrer Internacional S.A. ("Ferrer"), a Spanish pharmaceutical
company which licensed certain patent rights relating to citicoline to the
Company, requiring the Company to purchase from Ferrer citicoline bulk compound
for commercial purposes at fixed prices, subject to certain conditions. Any
citicoline manufacturing facilities are subject to FDA inspection. There can be
no assurance the Company can or will establish on a timely basis, or maintain,
manufacturing capabilities of bulk compound and finished product required to
obtain regulatory approval or that any facilities used to produce citicoline
will have complied, or will be able to maintain compliance, with cGMP or that
such suppliers will be able to meet manufacturing requirements on a timely basis
or at all. See "Risk Factors--Uncertainties Relating to Citicoline" and "--Need
for Additional Funds".
Licensing and Proprietary Rights: In January 1993, the Company licensed
from Ferrer 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, in exchange for royalties
based on sales. 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, and
post-stroke rehabilitation. Although the claim of the licensed patent is broadly
directed to the treatment of inadequate release of brain acetylcholine, there
can be no assurance this patent will afford protection against competitors of
citicoline to treat ischemic stroke.
In June 1998, the Company amended its agreement with Ferrer to extend to
January 31, 2002 the date upon which Ferrer may terminate this license agreement
if FDA approval of citicoline is not obtained. The agreement provides for such
date to be extended for up to two years if the Company provides information to
Ferrer which tends to establish that the Company has carried out the steps for
obtaining such approval and if such approval has not been obtained for reasons
beyond the Company's control.
In September and October 1998, two U.S. patents were granted to the Company
relating to the use of citicoline in the protection of brain tissue from
cerebral infarction following ischemic stroke. In June 1998, the Company
licensed worldwide rights (outside the U.S. and Canada) to corresponding foreign
patent applications to Ferrer. In exchange, the Company will be entitled to
royalties from Ferrer on certain exports to, and sales of, the solid oral form
of citicoline in certain countries upon its approval in each country in the
territory licensed to Ferrer.
In addition to any proprietary rights provided by these patents, the
Company intends to pursue market exclusivity under the Drug Price Competition
and Patent Term Restoration Act of 1984 (commonly referred to as the
Waxman-Hatch Act) in commercializing citicoline for ischemic stroke. See
"Government Regulation".
12
<PAGE> 13
PAGOCLONE
General: Panic disorder is a severe anxiety condition characterized by
panic attacks, acute episodes of anxiety comprised of distressing symptoms, such
as difficulty breathing, sweating, heart palpitations, feeling dizzy or faint,
and fear of losing control. There are approximately 2.5 million patients in the
U.S. with panic disorder and over 20 million patients with anxiety disorders.
Anxiety disorders, including panic disorder, are believed to be associated with
excessive neuronal activity resulting from a decrease in the function of the
major inhibitory neurotransmitter called GABA (gamma amino butyric acid).
Pagoclone is under development by the Company as a drug to treat
panic/anxiety disorders. The Company believes that pagoclone, a novel GABA
modulator and a member of the cyclopyrrolone class of compounds, increases the
action of GABA, thus reducing excess neuronal activity and alleviating symptoms
of panic and anxiety. 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.
Current pharmacological treatments for anxiety and panic disorders include
serotonin agonists such as BuSpar, and benzodiazepines, such as Valium and
Xanax, as well as selective serotonin reuptake inhibitors such as Paxil, Zoloft
and Prozac. Although benzodiazepines are effective in relieving anxiety
symptoms, they may cause side effects such as sedation, hangover, dizziness and
tolerance with continuing use, and they have the potential for addiction. In
addition, the sedative/hypnotic effects of benzodiazepines are generally
increased by alcohol intake, which may lead to serious side effects that may
include coma.
Phase 2-3 clinical trial: In August 1998, the Company announced results of
its Phase 2/3 trial showing that treatment with pagoclone statistically
significantly reduced the frequency of panic attacks among patients suffering
from panic disorder. In addition, pagoclone was well-tolerated by these
patients, with no evidence of sedation and no apparent withdrawal syndromes in
this study, which included a tapering-off period.
The double-blind, placebo-controlled, parallel group study involved 277
patients at six clinical sites in the U.S. Patients were enrolled in the study
following confirmed diagnoses of panic disorder. The number of attacks
experienced by each patient during a two-week screening period prior to
enrollment represented the baseline for subsequent comparison of panic attack
frequency. Following the screening period, patients were randomized to receive
one of three doses of pagoclone orally (.15 milligrams/day, .30 milligrams/day
or .60 milligrams/day) or placebo for eight weeks. The primary outcome
measurement was the change from baseline in the number of panic attacks seen at
the eight week time point.
This primary analysis, conducted on a last observation carried forward
(LOCF) basis, showed that patients in the .15 milligrams/day group experienced a
43% reduction in the number of panic attacks relative to patients on placebo (p
=0.141), that patients in the .30 milligrams/day group experienced a 70%
reduction relative to patients on placebo (p =0.021), and that patients in the
.60 milligrams/day group experienced a 52% reduction (p =0.098) relative to
patients on placebo.
Pagoclone was well tolerated with a low incidence of side effects in all
dosage groups and no clinically significant differences from placebo. Sedation,
a major liability of benzodiazepine drugs, was evaluated by use of the Stanford
Sleepiness Scale. There were no differences observed between pagoclone and
placebo using this scale. In addition, there were no evident withdrawal effects
seen at the end of the study as determined by the Rickels Withdrawal Scale. Of
note, other common side effects seen with existing classes of anti-anxiety drugs
were not significantly different between pagoclone patients and patients
receiving
13
<PAGE> 14
placebo in this trial. These traditional side effects include sedation, lack of
mental acuity, withdrawal and rebound anxiety related to the benzodiazepine
class of drugs, and agitation, insomnia and sexual dysfunction related to
selective serotonin reuptake inhibitors.
Pilot Study: In November 1997, the Company announced that data from a pilot
study among 16 patients suffering from panic attacks showed that those who were
treated with three doses per day, orally, of pagoclone experienced a marked
reduction in the number of their panic attacks compared to those who received
placebo. This double-blind, placebo controlled crossover study was conducted by
a team of researchers in the U.K. Pagoclone produced a significant reduction
(40%, p=0.012) in the total number of panic attacks over a two week treatment
period and a reduction (40%, p=0.006) in the average number of panic attacks per
day compared to the pre-treatment period. No significant change in the total
number of panic attacks was observed during placebo treatment.
Licensing and Proprietary Rights: In 1994, the Company licensed from RPR
exclusive worldwide rights to pagoclone, a patented compound, in exchange for
license fees, milestone payments and royalties based on sales. See "Patents and
Proprietary Rights."
Further Development: Based on the results of the Company's Phase 2/3
clinical trial on pagoclone, the Company believes it has identified an optimal
dose for Phase 3 clinical testing. However, the Company requires substantial
additional funds to complete development of pagoclone and intends to pursue a
corporate collaboration or seek additional capital to fund development and
commercialization of the drug and to conduct manufacturing and marketing
activities. There can be no assurance the Company will be successful in entering
into any collaboration or obtaining other financing, or as to the terms of any
such arrangements. If the Company is not able to obtain a corporate
collaboration or other financing, the Company does not intend to conduct Phase 3
clinical testing of pagoclone and, accordingly, development of pagoclone would
be significantly delayed or curtailed.
OTHER INTERNEURON PRODUCTS
AnatoMark: In July 1998, the Company received FDA authorization for the
marketing in the U.S. of a medical device called the AnatoMark Non-Invasive Head
Reference System ("AnatoMark"). AnatoMark is designed to provide anatomical
reference markers during brain imaging to enable reproducible alignment of
multiple successive images. No invasive procedure is required as is typical with
other devices used in brain imaging. The Company introduced AnatoMark in
December 1998. The product is being manufactured and assembled by third parties
on behalf of the Company. The Company licensed exclusive worldwide rights to
AnatoMark from Brigham and Women's Hospital, Inc., Boston, Massachusetts in
exchange for a license fee and royalties on net sales. Research is ongoing to
develop software to assist in the automatic adjustment of imaging machines using
the AnatoMark System.
The Company is developing or has rights to a number of other products in
varying stages of development. These include the following:
IP 501: During 1997, the Company obtained an exclusive option to license a
compound (designated by the Company as IP 501) for the treatment and prevention
of liver diseases, including alcohol-induced cirrhosis and Hepatitis C. The
option grants Interneuron the right to obtain an exclusive license on specified
terms, subject to U.S. government uses, in North America, Japan and Korea, to an
issued U.S. patent and U.S. and international patent applications, following
Interneuron's review of future clinical data. This orally-administered compound
is being studied in a Phase 3 clinical study sponsored by the Veterans
Administration. All 800 patients who will be included in the study have been
enrolled. Completion of the study is expected in mid-2000. The study is designed
to have periodic interim analyses which could lead
14
<PAGE> 15
to earlier termination if a significant positive drug effect is identified. The
primary endpoint of the study is improvement in liver histology, or condition,
among drug-treated pre-cirrhotic patients compared with placebo patients, as
measured by serial liver biopsies.
PACAP: In April 1998, Interneuron licensed from Tulane University
exclusive, worldwide rights to a U.S. patent and U.S. and foreign patent
applications owned by Tulane relating to a novel neuropeptide, known as PACAP
(pituitary adenylate cyclase activating polypeptide). Limited preclinical data
suggests the potential of PACAP as a treatment for stroke and other
neurodegenerative diseases. The Company is conducting preclinical testing and,
depending upon the results, will determine whether to conduct further studies.
See "Agreements".
LidodexNS: In December 1996, the Company and Algos entered into an
agreement for the development and commercialization of LidodexNS, a combination
of lidocaine and, dextromethorphan, that may offer the potential for relief of
acute migraine headache through intranasal administration. The agreement
establishes a multi-stage development collaboration between Algos and
Interneuron and licenses to Interneuron rights, co-exclusive with Algos, to
manufacture and market the combined agent. The Company has conducted preclinical
toxicity studies and is evaluating additional preclinical studies.
The Company does not have sufficient funds to develop and commercialize any
of the foregoing potential products. Depending upon ongoing preclinical or
clinical test results, the Company may discontinue or defer development of any
or all of these projects or to seek a corporate collaboration in which a third
party assumes responsibility and funding for drug development, manufacturing and
marketing.
INTERCARDIA, INC.
Intercardia was formed in 1994 and completed its initial public offering in
February 1996. Intercardia focuses on the discovery and development of products
to treat cardiovascular inflammatory and infectious diseases and disorders. In
May 1998, Intercardia acquired Transcell, formerly a majority-owned subsidiary
of Interneuron.
BEXTRA (bucindolol)
General: Intercardia's most advanced product is BEXTRA (bucindolol HCl), a
drug in Phase 3 clinical trials for the treatment of congestive heart failure
("CHF"). CHF is a syndrome of progressive degeneration of cardiac function
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.
Bucindolol is a non-selective beta-blocker with mild vasodilating
properties. The Company believes that vasodilating beta-blockers such as
bucindolol represent a promising approach to the treatment of CHF.
Competitive Drugs: One beta-blocker, carvedilol, was approved by the FDA
and launched in the U.S. by SmithKline Beecham PLC, under the trademark Coreg,
for the treatment of CHF. Carvedilol, a non-selective beta-blocker with moderate
vasodilating properties, has also been approved for the treatment of CHF in
Europe and other markets. Other pharmaceutical companies are also developing
beta-blockers as a treatment for CHF.
15
<PAGE> 16
In March 1998, Germany-based Merck KGaA announced early termination of the
CIBIS II trial which studied bisoprolol, a beta-1 receptor selective
beta-blocker, as a treatment for CHF patients in Europe. Merck KGaA reported
that in the trial, which enrolled 2,647 patients, those receiving bisoprolol had
a significantly higher survival rate than those receiving customary treatment.
Bisoprolol is currently marketed in the U.S. by Wyeth-Ayerst for hypertension.
In November 1998, Astra Pharmaceuticals announced preliminary results and
early termination of a 4,000 patient mortality study known as MERIT, evaluating
metoprolol succinate, a beta-1 receptor selective beta-blocker. The preliminary
results indicated that metoprolol significantly reduced mortality and improved
survival of patients with CHF. Metoprolol is marketed as Toprol XL and other
trademarks for hypertension and angina.
As a result, if approved, BEXTRA could be the third or fourth beta-blocker
therapy to enter the U.S. market for CHF. To succeed in a competitive market,
BEXTRA will need to be differentiated from other beta-blocker therapies and
there can be no assurance that the data from BEST will provide the basis for
such differentiation. In addition, the price of the different therapies may
become important as competition increases and the pressure to lower the price of
BEXTRA may increase. In addition to competition from other beta-blockers, the
Company is aware of other types of drugs being developed for CHF. See
"Competition."
BEST Study: A Phase 3 clinical trial began in June 1995 among patients with
CHF, to test whether the addition of bucindolol to traditional therapy for CHF
will reduce mortality in patients with moderate to severe CHF. The Beta-blocker
Evaluation of Survival Trial, known as BEST, is being conducted by the National
Institutes of Health ("NIH") and the Department of Veterans Affairs ("VA"). The
BEST study is designed to enroll up to 2,800 patients (of which at least 33% are
recommended to be female), having moderate to severe symptoms (NYHA classes III
and IV), at approximately 90 clinical centers throughout the U.S. and Canada.
Approximately 2,640 patients have been enrolled in BEST and enrollment is
scheduled to end December 31, 1998. The protocol for BEST calls for a follow-up
of 18 months or more for each patient.
An independent Data and Safety Monitoring Board is periodically monitoring
the progress, outcomes, toxicity, safety and other data of BEST on a
confidential basis. The Data and Safety Monitoring Board is authorized to
terminate the study early, either for safety reasons or because the benefit of
the drug has been demonstrated. The Company was informed that the Data and
Safety Monitoring Board most recently met in November 1998 to review interim
study data and recommended that the study continue.
The NIH and VA have committed up to $15,750,000 primary funding for BEST.
Intercardia has provided additional funding for the study and, as a result of
the termination of the Astra Merck Collaboration, will be solely responsible for
the non-government funded portion of the development costs in the U.S.
Intercardia estimates additional BEST support costs of approximately $6,000,000
during fiscal 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Because BEST is sponsored by the NIH and the VA, Intercardia does not
control the timing, operation, or analysis of the study. The government sponsors
are not required to give Intercardia the database from the study until a
manuscript has been prepared and accepted for publication by a scientific
journal. There can be no assurance that the results of BEST will be positive,
that bucindolol will receive marketing approval in any country on a timely basis
or at all, or that, if approved, bucindolol will successfully compete in the
market. If bucindolol does not receive regulatory approval, the Company would be
materially adversely affected.
16
<PAGE> 17
BEAT: In collaboration with Intercardia, Knoll has initiated BEAT, a study
of bucindolol's use in treating patients who have recently suffered an acute
myocardial infarction and as a result have reduced heart function. BEAT is a
randomized double-blind, placebo-controlled study designed to expand the
suitable patient population for BEXTRA. It is scheduled to enroll 2,000 patients
in multiple investigative centers in Denmark and the United Kingdom.
Approximately 75 patients have been enrolled in BEAT.
BEAT is designed to show whether treating patients with BEXTRA in the
beginning of the downward spiral of heart failure, which often follows a heart
attack, reduces overall mortality. A minimum follow-up period of two years is
required for each patient. There can be no assurance that the study will be
completed at all or in a timely manner, that the results will be positive, or
that any commercial benefit can be obtained from the results.
BEXTRA Marketing
U.S. Market: Intercardia holds development and marketing rights for
bucindolol in the U.S. following the September 1998 termination of a
collaboration agreement among CPEC, Intercardia and Astra Pharmaceuticals, L.P.
(formerly Astra-Merck, Inc.) ("Astra Pharmaceuticals"), in connection with the
restructuring of Astra-Merck, Inc. The original agreement, entered into in
December 1995, related to the development, commercialization and marketing in
the U.S. of a twice-daily formulation of bucindolol for the treatment of CHF.
In connection with the termination of this agreement and resolution of an
earlier dispute relating to responsibility for funding certain costs, Astra
Pharmaceuticals made a $4,000,000 payment to CPEC. As a result, Intercardia
has assumed responsibility for the U.S. development and commercialization for
BEXTRA. Intercardia requires a corporate collaboration or additional funds for
the commercialization of BEXTRA and is currently exploring possible
development, commercialization and marketing collaborations. See
"Agreements--Intercardia Agreements".
Other Markets: In December 1996, Intercardia entered into an agreement with
Knoll ("the Knoll Collaboration") relating to the development, manufacture and
marketing of bucindolol for the treatment of CHF in all countries with the
exception of the U.S. and Japan (the "Territory"). Under the terms of the Knoll
Collaboration, Knoll made total payments to CPEC of $3,480,000 in fiscal 1997.
Knoll agreed to make future payments to CPEC upon the achievement of product
approval and net sales milestones.
Intercardia and Knoll agreed to share the development and marketing costs
of bucindolol in the Territory. In general, Knoll agreed to pay approximately
60% of the development and marketing costs prior to product launch, and
Intercardia agreed to pay approximately 40% of such costs, subject to certain
maximum dollar limitations. If the product is approved, CPEC will be entitled to
a royalty equal to 40% of net profits, as defined in the agreement, and would be
responsible for, and pay to Knoll, 40% of any net loss, as defined. In June
1998, Knoll initiated the BEAT study, a Phase 3 clinical trial in Europe, and
Intercardia is required to fund 40% of the study's costs.
Once-Daily Formulation: In April 1996, Intercardia entered into an
agreement with SkyePharma AG ("SkyePharma"), formerly Jago Pharma AG, to
determine the feasibility of developing a once-daily formulation of bucindolol
using SkyePharma proprietary technology. Intercardia is funding this activity,
with partial reimbursement from Knoll. If the formulation is successfully
developed, Intercardia is required to pay milestone fees as well as royalties to
SkyePharma on net sales of the once-daily formulation, until the expiration of
the relevant patent on a country-by-country basis. The rights to the once-daily
formulation of bucindolol for the Knoll Territory were exclusively licensed to
Knoll. Current FDA guidelines for approval of a new formulation require at least
one Phase 3 clinical trial using the formulation, which would be expensive and
time consuming. There is no assurance this formulation will be developed,
receive FDA approval or enhance the competitive position of bucindolol.
17
<PAGE> 18
Licensing; Proprietary Rights: CPEC, Inc. ("CPEC"), of which 80% is owned
by Intercardia and approximately 20% is owned by Interneuron, licensed from
Bristol-Myers Squibb Company ("BMS") worldwide rights to develop and
commercialize bucindolol for use in treating CHF, in exchange for royalties
based on sales, generally for 15 years after first commercial sale. The U.S.
composition of matter patent on bucindolol expired in November 1997. Assuming
FDA approval is obtained, Intercardia intends to pursue five years' market
exclusivity under the Waxman-Hatch Act. Intercardia is developing a once-daily
formulation in collaboration with SkyePharma. See"Risk Factors - Uncertainty
Regarding Waxman Hatch Act."
Intercardia Research Laboratories
Overview: Following the merger of Transcell with and into Intercardia, the
operations formerly conducted by Transcell are now conducted by a division of
Intercardia known as Intercardia Research Laboratories, based in Princeton, New
Jersey. Intercardia Research Laboratories is engaged in the discovery and
development of drugs based on synthetic carbohydrate chemistry technology
originating from Princeton University scientists Daniel Kahne, Ph.D., and
Suzanne Walker-Kahne, Ph.D., who are also minority stockholders or optionholders
of Intercardia. This platform technology enables carbohydrate-based
combinatorial libraries of compounds to be generated on a solid support for uses
in drug discovery. Although the Company believes the platform technology has
potential application to a variety of therapeutic areas, Intercardia Research
Laboratories is initially targeting the discovery and development of compounds
that can be used as anti-bacterial or anti-fungal agents. Several projects are
underway to design proprietary analogues of known anti-infective agents to
improve their efficacy, safety or pharmacokinetics profile. Two of these
projects are funded in part by Merck. Intercardia requires substantial
additional funds for the development and commercialization of this technology,
which is in early stages of development.
Transcell Acquisition: On May 8, 1998, the merger of Transcell with and
into Intercardia and the acquisition by Intercardia of certain related
technology rights owned by Interneuron was completed and, simultaneously,
Interneuron contributed to Transcell's capital all of Transcell's indebtedness
and payables to Interneuron (approximately $18,698,000) (the "Transcell
Acquisition"). Consideration given by Intercardia consisted of (i) Intercardia
common stock payable to the former Transcell stockholders, including
Interneuron, in three installments with an aggregate market value at closing of
approximately $14,200,000, of which $3,000,000 was payable at closing as an
initial payment to Interneuron for certain of its technology rights and
continued guarantees of certain Transcell leases (the "Initial
Technology/Guarantee Payment"), and (ii) the issuance of options and warrants to
purchase 259,488 shares of Intercardia common stock to Transcell employees and
consultants in exchange for their options and warrants to purchase Transcell
capital stock.
Accordingly, in connection with the first installment of the merger
consideration, Intercardia issued an aggregate of 320,151 shares of common
stock, of which 191,383 shares were issued to Interneuron. In addition,
Intercardia issued 174,672 shares to Interneuron as the Initial
Technology/Guarantee Payment. Intercardia also agreed to pay Interneuron a
royalty on sales of certain products that may be developed under the Merck
Agreement. The second and third installments of the merger consideration will be
made in August 1999 and February 2000, respectively, and each installment will
consist of the issuance of $3,000,000 of Intercardia common stock, as then
valued. Interneuron owned approximately 61% and 62% of the outstanding capital
stock of Intercardia before and immediately after the Transcell Acquisition,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Merck Agreement: In July 1997, Transcell, Interneuron and Merck entered
into a Research Collaboration and License Agreement (the "Merck Agreement")
relating to the discovery, development and commercialization of novel
antibacterial agents.
18
<PAGE> 19
The initial focus of this collaboration is the discovery and biological
evaluation of analogues of anti-bacterial compounds selected from two distinct
structural classes and the license to Merck of any products arising out of the
two research programs.
Under the Merck Agreement, Merck made an initial licensing payment, agreed
to provide research support over two years, and agreed to provide additional
payments based upon the achievement of defined clinical and regulatory
milestones for each program. To date, Intercardia's costs of conducting the
program have exceeded revenues received under the Merck Agreement and this trend
may continue. Merck agreed to pay royalties on net sales of any products that
may be developed based on the research programs. Certain of the rights licensed
to Merck are based on exclusive licenses held by Intercardia from Princeton
University, which has received and will be entitled to varying percentages of
certain payments and royalties based on sales.
In connection with the Transcell Acquisition, Intercardia was assigned and
assumed all of Transcell's and Interneuron's rights and obligations under the
Merck Agreement partially in exchange for Intercardia's payment to Interneuron
of the Initial Technology/Guaranty Payment and agreement to pay Interneuron
royalties on sales of products developed under the Merck Agreement.
Licensing; Proprietary Rights: As a result of the Transcell Acquisition,
Intercardia owns or licenses from Princeton University 11 issued patents in the
United States relating to its combinatorial carbohydrate technology. A number of
patent applications are pending. Intercardia has rights to license inventions
arising out of research sponsored at Princeton University.
Other Products under Development and Early-Stage Programs
In July 1998, Intercardia licensed worldwide rights (except for Japan and
South Korea) to a patented compound known as OP2000 from Opocrin S.p.A., a
pharmaceutical company in Modena, Italy. Intercardia intends to investigate the
use of OP2000, an oligosaccharide product derived from heparin, as a drug for
the treatment of inflammatory bowel disease. Intercardia will be responsible for
conducting clinical trials for OP2000 and made a $1,000,000 payment to Opocrin
upon execution of the license agreement.
Intercardia has established and may establish additional subsidiaries in
specific areas. Intercardia's 66%-owned subsidiary, Aeolus Pharmaceuticals,
Inc., is conducting catalytic antioxidant small molecule research. Intercardia
believes these antioxidants have the potential to address a broad range of
conditions that result from toxicities associated with excess oxygen free
radicals. Certain components of the technology used in this program are licensed
from Duke University.
Intercardia's approximately 80% owned subsidiary, Renaissance Cell
Technologies, Inc., is conducting research in the area of hepatic stem cells.
Renaissance entered into an agreement with the University of North Carolina at
Chapel Hill ("UNC") to sponsor research on hepatic stem cells in exchange for an
option to an exclusive license to products resulting from the research. As of
September 30, 1998, Renaissance was obligated to pay UNC $338,000 to fund
research.
Intercardia does not have sufficient funds to develop, commercialize,
manufacture and market its potential products and intends to seek to enter into
collaborative agreements with other companies to do so. There can be no
assurance it will be successful in obtaining or retaining any such
collaborations.
Clayton I. Duncan is President and Chief Executive Officer of Intercardia,
which had 54 full-time employees as of September 30, 1998. As of September 30,
1998, Interneuron owned approximately 62% of the outstanding common stock of
Intercardia, and approximately 47% on a fully-diluted basis. In certain
19
<PAGE> 20
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%.
INTERNUTRIA, INC.
In September 1998, Interneuron adopted a plan to discontinue operations at
its InterNutria, Inc. subsidiary. Although the Company is currently continuing
to fill minimal orders for InterNutria's products, primarily PMS Escape, active
promotion of InterNutria's products has ceased. InterNutria had commenced a
national launch of PMS Escape in September 1997. Although the Company is
currently seeking to sell InterNutria or all or a portion of its assets, there
can be no assurance the Company will be successful in doing so. The Company does
not expect to generate any significant proceeds from any such sale.
The operations of InterNutria resulted in substantial losses to the Company
and, during fiscal 1998, the Company incurred losses from discontinued
operations relating to InterNutria of approximately $19,500,000, including
charges during the last quarter of fiscal 1998 relating to the plan to
discontinue operations at InterNutria. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note M of Notes to the
Consolidated Financial Statements.
PROGENITOR, INC.
Progenitor was formed in February 1992 and completed its initial public
offering in August 1997. Concurrently with the Progenitor IPO, Progenitor
completed the acquisition of Mercator Genetics, Inc., a privately held genomics
company. As a result, Interneuron's percentage ownership of Progenitor was
reduced to approximately 37% and, at September 30, 1998, Interneuron owned
approximately 36% of Progenitor's outstanding common stock.
Progenitor had 55 full-time employees as of September 30, 1998. In December
1998, Progenitor announced its intention to implement an immediate cessation of
operations. Progenitor did not have sufficient funds to meet its obligations and
cash requirements and was unable to raise additional funds. Progenitor's market
valuation had been substantially reduced and the Company can not viably sell any
of its holdings of Progenitor securities. Beginning in August 1997, the Company
no longer consolidated the financial statements of Progenitor but included
Progenitor in the Company's financial statements using the equity method of
accounting. As of September 30, 1998, the Company had reduced to zero its
investment in Progenitor.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note P of Notes to the Consolidated Financial
Statements.
MANUFACTURING AND MARKETING
General
The Company's ability to conduct clinical trials on a timely basis, to
obtain regulatory approvals and to commercialize its products will depend in
part upon its ability to manufacture its products, either directly or through
third parties, at a competitive cost and in accordance with applicable FDA and
other regulatory requirements, including cGMP regulations. The Company has no
manufacturing facilities and limited marketing capabilities. In general, the
Company intends to seek to contract with third parties to manufacture and market
products requiring broad marketing capabilities and for overseas marketing.
20
<PAGE> 21
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, equity
investment, co-marketing, joint venture or other financial interest.
Accordingly, the Company will be dependent on such third parties for the
manufacturing and marketing of products subject to the collaboration. There can
be no assurance the Company will be able to obtain or retain third-party
manufacturing and marketing collaborations on acceptable terms, or at all, which
may delay or prevent the commercialization of products under development. Such
collaborative arrangements could result in lower revenues and profit margins
than if the Company marketed a product itself.
In the event the Company determines to establish its own manufacturing or
marketing capabilities, it would require substantial additional funds. In the
event the Company is able to obtain additional funds, as to which there can be
no assurance, the Company may seek to market certain products, by developing an
internal sales force or through contract sales representatives, directly to
selected groups of physician specialists likely to prescribe or recommend the
product. In such event, the Company would likely be responsible for all costs
associated with developing, manufacturing and marketing the product.
Assuming final approval of the Redux Settlement Agreement, the Company will
be required to pay to the settlement fund up to an aggregate of $55,000,000 of
royalties based on sales of Interneuron products and on certain other payments
received by the Company in connection with product sales during the seven year
period following the time when the settlement becomes final. See
"Agreements--Redux Agreements--Settlement Agreement" and "Legal Proceedings".
Citicoline
As a result of the Company's withdrawal of the citicoline NDA, the
additional time and expense required for citicoline product development, and the
Company's limited cash resources, the Company is reevaluating its
commercialization strategy for citicoline. The Company requires additional funds
for manufacturing, distribution, marketing and selling efforts, the amount of
which will depend upon whether the Company markets citicoline itself or enters
into a corporate collaboration and the terms of any such collaboration. The
Company has no commitments or arrangements to obtain additional funds and there
can be no assurance such funds can be obtained on terms favorable to the Company
or at all.
The Company will be dependent upon third party suppliers of citicoline bulk
compound, finished product and packaging for manufacturing in accordance with
the Company's requirements and cGMP regulations, as well as on third party
arrangements for the distribution of citicoline. Supplies of citicoline finished
product used for clinical purposes have been produced on a contract basis by
third party manufacturers. The Company does not have arrangements with a
manufacturer for supply of commercial quantities of finished product and there
can be no assurance such agreement can be obtained on terms favorable to the
Company or at all, which could adversely affect the Company's ability to
commercialize citicoline on a timely and cost-effective basis. The Company is
subject to an agreement with Ferrer requiring the Company to purchase from
Ferrer citicoline bulk compound for commercial purposes at fixed prices, subject
to certain conditions. There can be no assurance the Company can or will
establish on a timely basis, or maintain, manufacturing capabilities of bulk
compound and finished product required to obtain regulatory approval or that any
facilities used to produce citicoline will have complied, or will be able to
maintain compliance, with cGMP or that such suppliers will be able to meet
manufacturing requirements on a timely basis or at all. See "Risk
Factors--Uncertainties Relating to Citicoline" and "--Need for Additional
Funds".
21
<PAGE> 22
BEXTRA
Following the termination of its agreement with Astra Pharmaceuticals,
Intercardia has assumed responsibility for the U.S. development and
commercialization for BEXTRA and is currently exploring possible development,
commercialization and marketing collaborations for BEXTRA, as well as the
selection of a third-party manufacturer for BEXTRA.
Intercardia has an agreement with Knoll for the development and
commercialization of bucindolol in all countries except the U.S. and Japan.
Intercardia is responsible for 40% of development and marketing costs and is
entitled to receive 40% of net profits, or pay 40% of net losses, as defined in
the agreement. See "Agreements - Intercardia Agreements".
Redux
With respect to the marketing and manufacture of Redux, the Company
sublicensed U.S. marketing rights to AHP, while retaining copromotion rights.
Redux was launched in June 1996 and withdrawn in September 1997. The Company
relied on AHP to target the obesity market and for distribution and advertising
and promotional activities. The Company copromoted Redux through an
approximately 30-person sales force to selected diabetologists,
endocrinologists, bariatricians, nutritionists and weight management
specialists, subject to certain restrictions. Under a contract manufacturing
agreement, Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer") produced on
behalf of Interneuron commercial scale quantities of the finished dosage
formulation of Redux in capsule form.
COMPETITION
General
The pharmaceutical industry is 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 significantly
greater experience in conducting clinical trials and other regulatory approval
procedures and manufacturing and marketing pharmaceutical products than the
Company. In the event the Company markets any products directly, it will compete
with companies with well-established distribution networks and market position.
See "Manufacturing and Marketing".
There can be no assurance that products under development or introduced by
others will not adversely affect sales of any products developed by the Company,
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 or which are
safer and more effective than those under development by the Company. Advances
in current treatment methods may also adversely affect the market for such
products. The approval and introduction of therapeutic products that compete
with compounds being developed by the Company could also adversely affect the
Company's ability to attract and maintain patients in clinical trials for the
same indication or otherwise successfully complete its clinical trials.
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 qualified
22
<PAGE> 23
scientific personnel. The Company expects technological developments in its
fields of product development to occur at a rapid rate and expects competition
to intensify as advances in these fields are made.
Citicoline
Activase, marketed by Genentech, Inc. for the treatment of acute ischemic
stroke within three hours of symptom onset, is the first therapy to be indicated
for the management of stroke. Activase is a genetically engineered version of
the naturally occurring tissue plasminogen activator (t-PA). The Company is
aware of certain drugs under development for stroke that did not achieve
positive results in announced clinical trials and of a number of other drugs
under development for stroke that are currently in clinical trials, including
clomethiazole by Astra Pharmaceuticals, a glycine antagonist compound by Glaxo
Wellcome plc, antifibrinogen by Knoll and Fiblast by AHP. Based on existing
clinical data on citicoline, the Company believes citicoline may be an
attractive post-stroke therapy, particularly in patients with moderate to severe
strokes, due to its potentially broader, 24-hour post-stroke therapeutic window.
BEXTRA
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. One competitive beta-blocker has been approved by the FDA for use
in treating CHF and two companies have announced positive results from pivotal
clinical trials of two other beta-blockers in CHF patients. Substantial
educational efforts may be required to convince physicians of the therapeutic
benefits of bucindolol.
If approved, BEXTRA could be the third or fourth beta-blocker therapy to
enter the U.S. market for CHF. To succeed in a competitive market, Intercardia
believes that BEXTRA will need to be differentiated from other beta-blocker
therapies, and there can be no assurance that the data from BEST will provide
the basis for such differentiation. In addition, the price of the different
therapies may become important, and as competition increases, the pressure to
lower the price of BEXTRA may increase. There can be no assurance that
Intercardia will be able to market BEXTRA on a profitable basis.
Carvedilol, a non-selective beta-blocker with moderate vasodilating
properties was launched in the United States by SmithKline Beecham as the
product Coreg for the treatment of CHF. Carvedilol also is approved for the
treatment of CHF in Europe and other markets. Coreg is being marketed by
SmithKline Beecham directly and through a co-promotion with Hoffman-LaRoche Inc.
Other pharmaceutical companies are developing beta-blockers as a treatment
for CHF. In March 1998, Germany-based Merck KGaA announced early termination of
the CIBIS II trial which studied bisoprolol as a treatment for CHF patients in
Europe. Merck KGaA reported that in the trial, which enrolled 2,647 patients,
those receiving bisoprolol had a significantly higher survival rate than those
receiving customary treatment. Bisoprolol is a beta-1 receptor selective
beta-blocker marketed in the United States by Lederle for hypertension. The
Company does not know whether an application for bisoprolol's use in treating
CHF will be filed in the United States or any other country. Even if an
application is not filed, physicians could prescribe bisoprolol for this use on
an "off-label" basis in countries where it has already been approved for a
different indication. "Off-label" use of bisoprolol could reduce the market for
bucindolol, especially if bisoprolol is less expensive than bucindolol.
Astra Pharmaceuticals announced in November 1998 preliminary results of a
mortality study ("MERIT") evaluating the beta-1 receptor selective beta-blocker
metoprolol succinate. The preliminary results indicated that metoprolol
significantly reduced mortality and improved survival of patients with CHF. The
study was
23
<PAGE> 24
stopped early based on a scheduled interim analysis by the independent safety
monitoring committee. Metoprolol is marketed as Toprol XL for hypertension and
angina. If metoprolol is approved for use in treating CHF, Astra
Pharmaceuticals, the Company's former collaborator for bucindolol, is expected
to market the product. Under FDA "user fee" guidelines, a supplemental NDA for
metoprolol is subject to a six month review by the FDA, compared to the 12 month
review targeted for initial NDAs. Metoprolol therefore could be approved for use
in treating CHF before bucindolol (assuming BEST results are positive).
Pagoclone
Current therapy for anxiety or panic disorders generally includes
benzodiazepines, such as Valium and Xanax, serotonin agonists such as BuSpar,
and selective serotonin reuptake inhibitors such as Paxil, Zoloft and Prozac. In
addition, the Company is aware of competitors which market certain prescription
drugs for indications other than anxiety who are planning to seek an expansion
of labeling to include anxiety as an indication. The Company is aware that other
companies are developing compounds for anxiety that are in preclinical or
clinical development. The Company requires substantial additional funds or a
corporate collaboration to develop and commercialize Pagoclone and its failure
to obtain such funds would delay and possibly prevent the drug's development.
Any significant delay in development of pagoclone could adversely affect the
competitive position of the drug, assuming FDA approval were obtained.
24
<PAGE> 25
AGREEMENTS
Redux Agreements
Settlement Agreement: On September 25, 1998, the U.S. District Court for
the Eastern District of Pennsylvania (the "Court") preliminarily approved an
Agreement of Compromise and Settlement (the "Settlement Agreement") between
Interneuron and the Plaintiffs' Management Committee, consisting of attorneys
designated by the Court to represent plaintiffs in the multi-district litigation
relating to Redux, relating to the settlement of all product liability
litigation and claims against the Company related to Redux. The Court also
conditionally certified a limited fund class action. A fairness hearing on the
settlement has been scheduled for February 25, 1999.
The limited fund class action established by this settlement includes all
persons in the United States who used Redux, and certain other persons such as
their family members, who would be bound by the terms of the settlement.
Membership in the class is mandatory for all persons included within the class
definition.
Under the terms of the proposed settlement, class members asserting claims
against Interneuron will be required to seek compensation only from the
settlement fund and their lawsuits against Interneuron will be dismissed. By
agreeing to the proposed settlement, Interneuron does not admit liability to any
plaintiffs or claimants. Under the Settlement Agreement, the released parties
include, among other parties, Interneuron, Boehringer (except for claims arising
from defects in the manufacture or packaging of Redux) and their respective
affiliates and stockholders (in their capacity as stockholders).
The Settlement Agreement requires Interneuron to deposit a total of
approximately $15,000,000 in three installments into a settlement fund. The
first installment of $2,000,000 was deposited into the settlement fund in
September 1998. A second installment of $3,000,000 is to be made after the
Settlement Agreement is approved by the Court, which would follow the fairness
hearing. These installments will be returned to Interneuron if the settlement
does not become final. A third installment of $10,000,000, plus interest, is to
be made after the settlement becomes final.
In addition, the proposed settlement provides for Interneuron to cause all
remaining and available product liability insurance proceeds related to Redux to
be deposited into the settlement fund. As part of the Settlement Agreement,
Interneuron and the Plaintiffs' Management Committee also entered into a Royalty
Agreement. Under the Royalty Agreement, Interneuron agreed to make royalty
payments to the settlement fund, in the total amount of $55,000,000, based upon
sales of Interneuron products and other revenues, over a seven year period
beginning after the settlement becomes final. Royalties will be paid at the rate
of 7% of gross sales of Interneuron products sold by Interneuron, 15% of cash
dividends received by Interneuron from its subsidiaries related to product
sales, and 15% of license revenues (including license fees, royalties or
milestone payments) received by Interneuron from a sublicensee related to
product sales. All Interneuron products will be subject to this royalty during
the applicable term.
If, at the end of that seven year period, the amount of royalty payments
made by Interneuron is less than $55,000,000, the settlement fund will receive
shares of Interneuron stock ("Royalty Shares") in an amount equal to the unpaid
royalty balance divided by $7.49 per share, subject to adjustment under certain
circumstances such as stock dividends or distributions. In the event Interneuron
merges with or sells all or substantially all of its assets to another
corporation prior to payment of the $55,000,000 of royalties, the settlement
fund shall be entitled to receive the kind and amount of shares of stock or
other securities or property to which a holder of the number of shares of Common
Stock (calculated based on the unpaid royalty balance at such time) would have
been entitled to at the time of the transaction.
25
<PAGE> 26
Interneuron has the right of first refusal to purchase Royalty Shares in
the event of any proposed transfer by the settlement fund and any transfers by
the settlement fund must be in accordance with the volume restrictions contained
in Rule 144(e) of the Securities Act of 1933, as amended. In addition, the
settlement fund agreed to vote any Royalty Shares held by it in the same manner
and proportion as the other holders of outstanding securities of Interneuron
entitled to vote on any matter.
The Company will record initial charges to operations for the estimated
fair value of the Company's obligations under the Settlement Agreement,
exclusive of insurance proceeds, at such time as the Company can determine that
it is probable that the conditions to final settlement have been or will be met,
which is expected to be subsequent to the Fairness Hearing and to the Supreme
Court ruling in Ortiz. The settlement will not become final until approved by
the Court and the time for filing appeals has passed or all appeals have been
exhausted. See Note H of Notes to Consolidated Financial Statements.
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 copromotion rights. In 1994 AHP acquired American Cyanamid Company.
The agreements are for a term of 15 years commencing on the date dexfenfluramine
is first commercially introduced by AHP, subject to earlier termination.
Under the AHP Agreements, AHP purchased preferred stock of the Company for
an aggregate purchase price of $3,500,000. As of September 30, 1998, AHP owned
shares of Interneuron preferred stock convertible into an aggregate of 622,222
shares of Common Stock.
The AHP Agreements provide for base royalties to the Company of 11.5% of
AHP's net sales of Redux (equal to the royalty required to be paid by the
Company to Servier) and for "additional" royalties, the applicable rates of
which during fiscal 1997 ranged from 5% of the first $50,000,000 of net sales to
10% of net sales over $150,000,000.
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.
AHP has the right to terminate its sublicense upon 12 months notice to the
Company. The AHP Agreements provide that Servier has the right to withdraw its
consent to the sublicense under certain circumstances. Servier consented to the
AHP acquisition of American Cyanamid Company.
The AHP Agreements provide that AHP could 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 copromotion
agreement with Wyeth-Ayerst (the "Copromotion Agreement"). The Copromotion
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. Interneuron was also entitled to varying percentages of
profit derived from sales generated by its sales force, after deducting certain
costs.
Redux was withdrawn from the market in September 1997. As a result,
Interneuron terminated its sales force and received no revenues from AHP in
fiscal 1998.
26
<PAGE> 27
Under the AHP Agreements, under certain circumstances, the Company is
required to indemnify AHP, and the Company is entitled to indemnification by AHP
against certain claims, damages or liabilities incurred in connection with
Redux. The cross indemnification between the Company and AHP generally relates
to the activities and responsibilities of each company. See "Risk Factors --
Risks Relating to Redux Litigation".
During fiscal 1997, the Company entered into agreements with AHP and
Servier for the development and commercialization in the U.S. of a sustained
release, once-a-day form of Redux. Interneuron and AHP each paid Servier
$2,000,000 in connection with the signing of the agreement. Following the
withdrawal of Redux, this program was discontinued.
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 of 11.5% of net
sales, with certain required minimum royalties. 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 supplied the Company with all of the Company's bulk
chemical requirements for dexfenfluramine for incorporation into the finished
dosage formulation. Interneuron agreed to indemnify Servier under certain
circumstances. See "Risk Factors -- Risks Relating to Redux Litigation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Boehringer Ingelheim Agreement: In November 1995, the Company entered into
an approximately three-year manufacturing agreement with Boehringer under which
Boehringer supplied, and the Company purchased all of its requirements for Redux
capsules from Boehringer. The contract contained certain minimum purchase and
insurance commitments by the Company and required conformance by Boehringer to
the FDA's cGMP regulations. Interneuron agreed to indemnify Boehringer under
certain circumstances. Boehringer is a released party under the Settlement
Agreement, except for specified claims. See "Legal Proceedings".
Citicoline
In January 1993, the Company entered into a license and supply agreement
with Ferrer, as amended in June 1998 (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 and 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. 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 the insolvency or bankruptcy of
Interneuron, in the event more than 50% of the ownership of Interneuron is
transferred to a non-affiliated third party or in the event FDA approval of
citicoline is not obtained by January 31, 2002. The agreement provides for
27
<PAGE> 28
such date to be extended for up to two years if the Company provides information
to Ferrer which tends to establish that the Company has carried out the steps
for obtaining such approval and if such approval has not been obtained for
reasons beyond the Company's control. The agreement requires Interneuron to use
diligent efforts to obtain regulatory approval.
In June 1998, the Company licensed to Ferrer worldwide rights, except in
the U.S. and Canada, to the Company's patent rights relating to the use of
citicoline in the protection of brain tissue from cerebral infarction following
ischemic stroke. In exchange, the Company will be entitled to royalties from
Ferrer on certain exports to, and sales of, the solid oral form of citicoline in
certain countries upon its approval in each country. See "Patents and
Proprietary Rights".
Pagoclone
In February 1994, the Company licensed from RPR exclusive worldwide rights
for the manufacture, use and sale of pagoclone under patent rights and know-how
related to the drug. The trademark will be owned by Interneuron. In exchange,
the Company paid RPR a license fee and agreed to make milestone payments based
on clinical and regulatory developments, and royalties based on net sales. This
license agreement provides that it is terminable in certain circumstances such
as material breach or insolvency. Unless earlier terminated, the license ends
with respect to each country in the territory upon the expiration of the last to
expire applicable patent in that country. The Company agreed to conduct at its
expense and be responsible for all clinical trials with respect to pagoclone and
all related regulatory submissions. Under the agreement, RPR has supplied
limited quantities of raw materials and finished product for use in clinical
trials. Interneuron granted RPR an option to sublicense from Interneuron under
certain conditions rights to market pagoclone in France. Interneuron agreed to
indemnify RPR against claims and other damages resulting from the testing,
manufacture, use and sale of pagoclone and is required to maintain product
liability insurance.
IP 501
During 1997, the Company obtained an exclusive option to license a compound
(designated by the Company as IP 501) for the treatment and prevention of liver
diseases, including alcohol-induced cirrhosis and Hepatitis C. The option grants
Interneuron the right to obtain an exclusive license on specified terms, subject
to U.S. government uses, in North America, Japan and Korea, to an issued U.S.
patent and U.S. and international patent applications, following Interneuron's
review of data from an ongoing government-sponsored Phase 3 clinical trial.
PACAP
In April 1998, the Company licensed from Tulane University exclusive,
worldwide rights to a U.S. patent and U.S. and foreign patent applications owned
by Tulane relating to a novel neuropeptide, known as PACAP (pituitary adenylate
cyclase activating polypeptide). Preclinical data suggests the potential of
PACAP as a treatment for stroke and other neurodegenerative diseases. Under
terms of the license, the Company paid Tulane an upfront licensing fee, and
agreed to fund research over a two-year period, make additional payments based
on the achievement of clinical and regulatory review milestones and to pay
Tulane royalties on net sales of any product developed from this program.
Lilly License
In June 1997, the Company entered into an agreement with Eli Lilly and
Company and Eli Lilly S.A. ("Lilly") relating to the sublicense by the Company
to Lilly of a U.S. patent and worldwide patent application rights covering the
use of fluoxetine to treat disturbances of appetite and mood associated with
28
<PAGE> 29
premenstrual syndrome. Prozac (fluoxetine hydrochloride), Lilly's
antidepressant, is not currently approved to treat this indication. The Company
received an up-front license fee of $1,000,000, and is entitled to additional
payments based upon the achievement of development and regulatory milestones and
royalties based upon net sales.
The patent rights to the use of fluoxetine in treating premenstrual
syndrome are licensed by the Company from MIT. The use of fluoxetine to treat
PMS was discovered by Judith Wurtman, Ph.D., and Richard J. Wurtman, M.D.,
scientific founder of Interneuron, both of MIT.
Lidodex
In December 1996, the Company entered into an agreement with Algos for the
development and commercialization of a combination pharmacological product known
as LidodexNS, for the treatment of acute migraine headache. The agreement
establishes a multi-stage development collaboration between Algos and
Interneuron and licenses to Interneuron rights, co-exclusive with Algos, to
manufacture and market the combined agent. This collaboration will include
certain pre-clinical studies, clinical trials and regulatory review activities
overseen by a joint steering committee. The companies agreed to share in the
marketing and profits of LidodexNS.
Intercardia Agreements
Termination of Astra Merck Agreement: In September 1998, Intercardia, CPEC
and Astra Pharmaceuticals terminated the Marketing and Development Collaboration
and License Agreement relating to the U.S. development and commercialization of
the twice-daily formulation of bucindolol for the treatment of CHF, in
connection with the restructuring of Astra Merck, Inc. The original agreement
was entered into in December 1995. In connection with the termination of this
agreement and resolution of an earlier dispute relating to responsibility for
funding certain costs, Astra Pharmaceuticals made a $4,000,000 payment to CPEC.
As a result, Intercardia has assumed responsibility for the U.S. development and
commercialization for BEXTRA. Intercardia requires a corporate collaboration or
additional funds for the commercialization of BEXTRA and is currently exploring
possible development, commercialization and marketing collaborations.
Pursuant to the Astra Merck Collaboration, Astra Pharmaceuticals made a
$5,000,000 payment to CPEC, assumed responsibility for certain obligations of
CPEC and committed an amount 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. Intercardia and CPEC paid Astra Pharmaceuticals an aggregate of
$10,000,000 in December 1997 (of which a portion was paid by Interneuron,
reflecting its percentage ownership interest in CPEC, as a loan to CPEC). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BASF Pharma/Knoll, AG Agreement: In December 1996, Intercardia entered into
an agreement with Knoll (the "Knoll Collaboration") relating to the development,
manufacture and marketing of bucindolol for the treatment of CHF in all
countries with the exception of the U.S. and Japan. The Knoll Collaboration
relates to both the twice-daily bucindolol formulation and the once-daily
bucindolol formulation currently under development. Under the terms of the Knoll
Collaboration, Knoll has made payments totaling approximately $3,628,000 to CPEC
which were recognized as contract and license fee revenue. Knoll agreed to make
future payments to CPEC upon the achievement of product approval and sales
milestones.
29
<PAGE> 30
Intercardia and Knoll agreed to share the development and marketing costs
of bucindolol in the Territory. In general, Knoll agreed to pay approximately
60% of the development and marketing costs prior to product launch, and
Intercardia agreed to pay approximately 40% of such costs, subject to certain
maximum dollar limitations. CPEC will be entitled to a royalty equal to 40% of
net profits, as defined in the Knoll Collaboration, and would be responsible
for, and pay to Knoll, 40% of any net loss, as defined.
The Knoll Collaboration is to continue for 15 years after the first
commercial sale with respect to each country in the Knoll Territory, subject to
two additional five-year renewals at Knoll's option. Knoll has the right to
terminate the Knoll Collaboration at any time prior to the termination of BEST
and within 60 days after the BEST primary end-point results are reported to
Knoll. Because a significant portion of Intercardia's development,
commercialization and marketing activities relating to bucindolol in the Knoll
Territory are conducted and funded by Knoll, Intercardia is substantially
dependent upon this arrangement for the success of bucindolol in the Knoll
Territory.
Bristol-Myers Squibb Agreement: Through CPEC, Intercardia has an exclusive
worldwide license from BMS to bucindolol for pharmaceutical therapy for
congestive heart failure and left ventricular function. The license requires
Intercardia to conduct all appropriate clinical trials 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 expiration, or 15 years after
first commercial sale of bucindolol (subject to two five-year renewals at
Intercardia's option). CPEC's royalty obligations extend beyond the expiration
date of the underlying patent, which may materially adversely affect BEXTRA's
competitive position in the event a generic version of bucindolol is introduced.
SkyePharma Development and License Agreement: In April 1996, Intercardia
entered into an agreement with SkyePharma to determine the feasibility of
developing a once-daily formulation of bucindolol using SkyePharma proprietary
technology. If the formulation is successfully developed, Intercardia is
required to pay milestone fees as well as royalties to SkyePharma on net sales
of the once-daily formulation, until the expiration of the relevant patent on a
country-by-country basis (or 15 years, if no patent is issued in that country).
If Intercardia elects not to proceed with development of a formulation that has
been shown to be feasible, SkyePharma may develop the formulation unless
Intercardia makes a $500,000 payment.
Merck Agreement: In July 1997, Transcell, Interneuron and Merck entered
into a Research Collaboration and License Agreement (the "Merck Agreement")
relating to the discovery, development and commercialization of novel
antibacterial agents. In connection with the Transcell Acquisition, Intercardia
was assigned and assumed all of Transcell's and Interneuron's rights and
obligations under the Merck Agreement, partially in exchange for payment to
Interneuron of the Initial Technology/Guaranty Payment and royalties based on
sales of any products developed under the Merck Agreement. The initial focus of
this collaboration is the discovery and biological evaluation of analogues of
anti-bacterial compounds selected from two distinct structural classes and the
license to Merck of any products arising out of the two research programs.
Intercardia agreed to utilize its combinatorial technologies to prepare
libraries of carbohydrate derivative compounds for biological evaluation and
further development.
Under the Merck Agreement, Merck made initial option and license payments
aggregating $2,500,000, agreed to provide research support over two years, and
agreed to provide additional payments based upon the achievement of defined
clinical development and regulatory milestones for each program. In addition,
Merck agreed to pay royalties on net sales of any products that may be developed
based on the research programs.
30
<PAGE> 31
Certain of the rights licensed to Merck are based on exclusive licenses or
rights held by Intercardia from Princeton University, which has received and
will be entitled to varying percentages of certain payments and royalties
received from Merck. In connection with the Transcell Acquisition, Intercardia
also agreed to pay Interneuron a royalty on net sales of products subject to the
Merck Agreement.
Princeton Licenses: In connection with the Transcell Acquisition,
Intercardia was assigned and assumed license agreements previously entered into
between Princeton and each of Transcell and Interneuron granting exclusive
worldwide licenses to specified patent applications and any patents that issue
therefrom covering a significant portion of Intercardia's carbohydrate chemistry
technology, including any derivative patent applications or patents that issue,
in exchange for a license fee, annual maintenance fees, milestone payments and
royalties based on sales. The license agreements require Intercardia to use its
best efforts to commercialize the licensed products or processes, including in
certain cases satisfying milestones.
PATENTS AND PROPRIETARY RIGHTS
Citicoline
The compound citicoline is not covered by a composition of matter patent.
Interneuron licensed from Ferrer a U.S. patent covering the administration of
citicoline to treat patients afflicted with conditions associated with the
inadequate release of brain acetylcholine that 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 and post-stroke
rehabilitation. Although the claim of the licensed patent is broadly directed to
the treatment of inadequate release of brain acetylcholine, there can be no
assurance this patent will afford protection against competitors of citicoline
to treat ischemic stroke.
U.S. patents were issued to Interneuron in September and October 1998
relating to use of citicoline in the protection of brain tissue from cerebral
infarction following ischemic stroke. The Company licensed rights to this patent
to Ferrer worldwide except in the U.S. and Canada, in exchange for which the
Company will be entitled to royalties from Ferrer on certain exports to, and
sales of, the solid oral form of citicoline in certain countries upon its
approval in each country. Additional domestic and international patent
applications have been filed by the Company.
In addition to any proprietary rights provided by these patents, the
Company intends to rely on the provisions of the Waxman-Hatch Act to obtain a
period of marketing exclusivity in the U.S., if the FDA approves citicoline for
marketing in the U.S., although there is no assurance market exclusivity will be
granted. The Waxman-Hatch Act 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 NDAs supported by pivotal studies) for such drug. The applicable period is
five years in the case of drugs containing an active ingredient not previously
approved. See "Risk Factors--Uncertainty Regarding Waxman-Hatch Act".
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.
31
<PAGE> 32
Other Interneuron Products
Interneuron has an option to license a U.S. patent issued on February 8,
1994, relating to a phospholipid found in lecithin, which in turn is obtained
from soya bean oil. Three claims of this patent relate to methods of preventing
or treating liver cirrhosis in mammals by administering an effective amount of
the compound. European and Japanese counterparts are pending.
Under its agreement with Tulane University, the Company has rights under
several U. S. patents and patent applications, owned by Tulane or co-owned by
Tulane and Takeda, which are directed to PACAP polypeptides, their compositions
and methods of use for the treatment or prevention of brain damage. The Company
also has rights under a number of European, Canadian and Japanese counterparts
of these domestic patents and patent applications, which counterparts were filed
generally in 1990.
Intercardia
CPEC has licensed from BMS a compound patent on bucindolol which expired
in November 1997. Intercardia intends to pursue up to five years of market
exclusivity under the Waxman-Hatch Act, although there can be no assurance such
exclusivity will be obtained, and also may develop a once-daily formulation of
the drug. See "Government Regulation."
As a result of the Transcell Acquisition, Intercardia owns or licenses from
Princeton University 11 issued patents in the United States relating to its
combinatorial carbohydrate technology. A number of patent applications are
pending. Intercardia has rights to license inventions arising out of research
sponsored at Princeton University.
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 was sublicensed by the Company to
AHP. Use of dexfenfluramine for the treatment of abnormal carbohydrate craving
was patented by Drs. Richard Wurtman and Judith Wurtman. Dr. Richard Wurtman is
a consultant to and a director of Interneuron. This use patent was assigned to
MIT and licensed by MIT to Servier, and pursuant to the Servier Agreements, was
licensed to the Company.
General
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 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
32
<PAGE> 33
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 may also 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 prior to
commercialization by the FDA and by comparable agencies in most foreign
countries. 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, although the phases may
overlap. 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, among other things. 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.
With certain exceptions, once successful clinical testing is completed, the
sponsor can submit an NDA for approval of a drug. The process of completing
clinical trials for a new drug is likely to take a number of years and require
the expenditure of substantial resources. There can be no assurance that the FDA
or any foreign health authority will grant an approval on a timely basis, or at
all. The FDA may deny an NDA, in its sole discretion, if it determines that its
regulatory criteria have not been satisfied or may require additional testing or
information. Among the conditions for marketing approval is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform to cGMP regulations. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, money and effort in the
area of production, quality control and quality assurance to ensure full
technical compliance. Manufacturing establishments, both foreign and domestic,
also are subject to inspections by or under the authority of the FDA and by
other federal, state, local or foreign agencies.
Even after initial FDA or foreign health authority approval has been
obtained, further studies, including Phase 4 post-marketing studies, may be
required to provide additional data on safety and will be required to gain
approval for the use of a product as a treatment for clinical indications other
than those for which the product was initially tested. Also, the FDA or foreign
regulatory authority will require post-marketing
33
<PAGE> 34
reporting to monitor the side effects of the drug. Results of post-marketing
programs may limit or expand the further marketing of the products. Further, if
there are any modifications to the drug, including any change in indication,
manufacturing process, labeling or manufacturing facility, an application
seeking approval of such changes may be required to be submitted to the FDA or
foreign regulatory authority.
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 development and FDA review of the product. 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.
The Company believes that citicoline may be entitled to patent extension
and each of citicoline and bucindolol may be entitled to five years of market
exclusivity 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 patent extension or market exclusivity.
Foods and Dietary Supplements:
Foods with health-related claims are subject to regulation by the FDA as
conventional 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 were dietary supplements pursuant
to the Dietary Supplement Health Education Act of 1994 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 conventional food or as 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 or unless the claim has been
endorsed by a scientific body of the U.S. Government with official
responsibility for public health protection and the FDA receives prior notice of
the use of such claim.
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.
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 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. 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.
Devices:
34
<PAGE> 35
The AnatoMark device manufactured and marketed by the Company is also
subject to regulation by the FDA. The FDA requires manufacturers of medical
devices to comply with applicable laws and regulations governing the testing,
manufacturing, labeling, marketing and distribution of medical devices. Devices
are generally subject to varying levels of regulatory control.
One process, which was applicable to AnatoMark, applies to any new device
that is substantially equivalent to a device first marketed prior to May 1976
and does not require pre-market approval. In this case, FDA permission to
distribute the device can be accomplished by submission of a pre-market
notification submission (a "510(k) Submission"), and issuance by the FDA of an
order permitting commercial distribution. A 510(k) Submission must provide
information supporting its claim of substantial equivalence. If clinical data
from human experience is required to support a 510(k) Submission, this data must
be gathered in compliance with investigational device exemption regulations for
investigations performed in the United States. The FDA must issue an order
finding substantial equivalence before commercial distribution can occur.
Changes to existing devices which do not significantly affect safety or
effectiveness can generally be made by the Company without additional 510(k)
Submissions. The Company's AnatoMark device received FDA authorization for
marketing in July 1998.
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, 1998, Interneuron and Intercardia had 92 full-time
employees, including 38 at Interneuron and 54 at Intercardia. The Company
adopted a plan to discontinue InterNutria's operations in September 1998.
InterNutria had seven employees at such time. At September 30, 1998, Progenitor
had 55 employees. However, in December 1998, Progenitor announced its intention
to terminate its operations. None of the Company's employees is represented by a
labor union and Interneuron believes its employee relations are satisfactory.
The Company is highly dependent upon certain key personnel and believes its
future success will depend in large part on its ability to retain such
individuals and attract other highly skilled management, marketing and
scientific personnel. See "Risk Factors - Risks Relating to Redux Litigation."
Item 2. Properties
The Company leases an aggregate of approximately 43,300 square feet of
office space in Lexington, MA. The lease expires in April 2002 and provides for
annual rent of approximately $696,000. The Subsidiaries (excluding Progenitor)
are parties to office and laboratory leases providing for aggregate annual
rental of approximately $1,225,000. The Company has guaranteed certain
Subsidiaries' obligations under lease arrangements.
35
<PAGE> 36
Item 3. Legal Proceedings
Product Liability Litigation
The Company has been named, together with other pharmaceutical companies,
as a defendant in approximately 779 legal actions, many of which purport to be
class actions, in federal and state courts relating to the use of Redux. The
actions generally have been brought by individuals in their own right or on
behalf of putative classes of persons who claim to have suffered injury or who
claim that they may suffer injury in the future due to use of one or more weight
loss drugs including Pondimin (fenfluramine), phentermine and Redux. Plaintiff's
allegations of liability are based on various theories of recovery, including,
but not limited to, product liability, strict liability, negligence, various
breaches of warranty, conspiracy, fraud, misrepresentation and deceit. These
lawsuits typically allege that the short or long-term use of Pondimin and/or
Redux, independently or in combination (including the combination of Pondimin
and phentermine popularly known as "fen-phen"), causes, among other things,
primary pulmonary hypertension, valvular heart disease and/or neurological
dysfunction. In addition, some lawsuits allege emotional distress caused by the
purported increased risk of injury in the future. Plaintiffs typically seek
relief in the form of monetary damages (including economic losses, medical care
and monitoring expenses, loss of earnings and earnings capacity, other
compensatory damages and punitive damages), generally in unspecified amounts, on
behalf of the individual or the class. In addition, some actions seeking class
certification ask for certain types of purportedly equitable relief, including,
but not limited to, declaratory judgments and the establishment of a research
program or medical surveillance fund. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation issued an Order allowing for the transfer or
potential transfer of the federal actions to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings.
Proposed Settlement of Product Liability Litigation: On September 25, 1998,
the U.S. District Court for the Eastern District of Pennsylvania (the "Court")
preliminarily approved an Agreement of Compromise and Settlement (the
"Settlement Agreement") between Interneuron and the Plaintiffs' Management
Committee, consisting of attorneys designated by the Court to represent
plaintiffs in the multi-district litigation relating to Redux, relating to the
settlement of all product liability litigation and claims against the Company
related to Redux. The Court also conditionally certified a limited fund class
action. The Court order followed a letter of understanding outlining terms of
the settlement announced on September 3, 1998 and execution of the formal
settlement agreement between the Company and the Plaintiffs' Management
Committee. A fairness hearing on the settlement has been scheduled for February
25, 1999.
On November 3, 1998, the Court issued a stay halting all product liability
litigation, pending and future, in state courts against the Company related to
Redux. This followed the issuance of a similar stay halting Redux product
liability litigation in federal courts on September 3, 1998. These stays will
remain effective until the fairness hearing scheduled for February 25, 1999 and
may be extended pending the outcome of this hearing.
The limited fund class action established by this settlement includes all
persons in the United States who used Redux, and certain other persons such as
their family members, who would be bound by the terms of the settlement.
Membership in the class is mandatory for all persons included within the class
definition.
Under the terms of the proposed settlement, class members asserting claims
against Interneuron will be required to seek compensation only from the
settlement fund and their lawsuits against Interneuron will be dismissed. By
agreeing to the proposed settlement, Interneuron does not admit liability to any
plaintiffs or claimants. Under the Settlement Agreement, the released parties
include, among other parties, Interneuron, Boehringer (except for claims arising
from defects in the manufacture or packaging of Redux) and their respective
affiliates and stockholders (in their capacity as stockholders).
Summary of Settlement Agreement: The settlement agreement requires
Interneuron to deposit a total of approximately $15,000,000 in three
installments into a settlement fund. The first installment of $2,000,000
36
<PAGE> 37
was deposited into the settlement fund in September 1998. A second installment
of $3,000,000 is to be made after the settlement agreement is approved by the
Court, which would follow the fairness hearing. These installments, less certain
expenses, will be returned to Interneuron if the settlement does not become
final. A third installment of $10,000,000, plus interest, is to be made after
the settlement becomes final.
In addition, the proposed settlement provides for Interneuron to cause all
remaining and available product liability insurance proceeds related to Redux to
be deposited into the settlement fund. As part of the Settlement Agreement,
Interneuron and the Plaintiffs' Management Committee also entered into a Royalty
Agreement. Under the Royalty Agreement, Interneuron agreed to make royalty
payments to the settlement fund, in the total amount of $55,000,000, based upon
sales of Interneuron products and other revenues, over a seven year period
beginning after the settlement becomes final. Royalties will be paid at the rate
of 7% of gross sales of Interneuron products sold by Interneuron, 15% of cash
dividends received by Interneuron from its subsidiaries related to product
sales, and 15% of license revenues (including license fees, royalties or
milestone payments) received by Interneuron from a sublicensee related to
product sales. All Interneuron products will be subject to this royalty during
the applicable term. If, at the end of that seven year period, the amount of
royalty payments made by Interneuron is less than $55,000,000, the settlement
fund will receive shares of Interneuron Common Stock ("Royalty Shares") in an
amount equal to the unpaid royalty balance divided by $7.49 per share, subject
to adjustment under certain circumstances such as stock dividends or
distributions.
In the event Interneuron merges with or sells all or substantially all of
its assets to another corporation prior to payment of the $55,000,000 of
royalties, the settlement fund shall be entitled to receive the kind and amount
of shares of stock or other securities or property to which a holder of the
number of shares of Common Stock (calculated based on the unpaid royalty balance
at such time) would have been entitled to at the time of the transaction.
Interneuron has the right of first refusal to purchase Royalty Shares in the
event of any proposed transfer by the settlement fund and any transfers by the
settlement fund must be in accordance with the volume restrictions contained in
Rule 144(e) of the Securities Act of 1933, as amended. In addition, the
settlement fund agreed to vote any Royalty Shares held by it in the same manner
and proportion as the other holders of outstanding securities of Interneuron
entitled to vote on any matter.
Conditions to Final Settlement: The settlement will not become final until
approved by the Court and the time for filing appeals has passed or all appeals
have been exhausted. In this case, in order to approve the settlement, the Court
must make a determination that the proposed settlement is fair and reasonable
and meets each of the prerequisites for a class action generally, and for a
"limited fund" class action in particular, all as required by the Federal Rules
of Civil Procedure. Pursuant to these rules, notice of the proposed settlement
was provided to potential class members in November 1998, and the Court has
scheduled a Fairness Hearing for February 25, 1999 (the "Fairness Hearing"). At
the Fairness Hearing, proponents and opponents of the proposed settlement will
be given an opportunity to present written and oral arguments in favor of or
against the settlement. Following the Fairness Hearing, the Court must determine
if the case is properly certified as a limited fund class action, and if so,
whether the terms of the Settlement Agreement are fair and reasonable.
The Company may withdraw from the Settlement Agreement, or the Settlement
Agreement may otherwise terminate, under any of the following conditions: (i)
final approval of the Settlement Agreement is not entered by the Court; (ii)
class certification and/or approval of the Settlement Agreement is overturned on
appeal for any reason; (iii) pending and future litigation against the Company
or any other party released by the Settlement Agreement ("Released Parties") is
not permanently enjoined on the final approval date; (iv) the class action and
all pending multi-district lawsuits against the Released Parties are not
dismissed with prejudice on the final approval date; (v) an order is not entered
by the Court permanently barring contribution and indemnity claims by other
defendants in the diet drug litigation; and (vi) Interneuron is unable to compel
tender of its insurance proceeds.
37
<PAGE> 38
On November 20, 1998, one of the insurers filed an action against Servier
and the Company in the Court, pursuant to the federal interpleader statute. The
insurer alleges that both Servier and the Company have asserted claims against a
commercial excess insurance policy issued by the insurer to Interneuron with
limits of $5,000,000 in excess of $20,000,000. The insurer has deposited the
limits of the policy into the registry of the Court.
There can be no assurance that after the Fairness Hearing the Court will
approve the settlement, and even if the settlement is approved by the Court,
opponents of the settlement may appeal the Court's opinion to the United States
Court of Appeals for the Third Circuit. In addition, there is a case pending
before the United States Supreme Court (Ortiz v. Fibreboard Corporation et al.)
("Ortiz"), that may influence the Court's decision or the outcome of any appeal
that might be taken. Oral argument in the Ortiz case was heard on December 8,
1998 and the Supreme Court is likely to render its opinion between January and
June 1999. Although factually distinguishable in many respects from the
Company's proposed settlement, Ortiz involves an appeal from a mandatory,
putative "limited fund" class action settlement. There can be no assurance that
the Supreme Court's rulings in Ortiz will not significantly influence, or
potentially result in the overturning of, the Settlement Agreement.
Future Charges to Operations: The Company will record initial charges to
operations for the estimated fair value of the Company's obligations under the
Settlement Agreement, exclusive of insurance proceeds, at such time as the
Company can determine that it is probable that the conditions to final
settlement have been or will be met, which is expected to be subsequent to the
Fairness Hearing and to the Supreme Court ruling in Ortiz. The amount of the
liability to be recognized by the Company pursuant to the Settlement Agreement
is likely to be significant and to materially adversely affect the Company's net
worth. Additionally, if the Company records such charges prior to the final
settlement date, then on the date the Settlement Agreement becomes final, the
Company will determine if there was any increase in the fair value of the equity
conversion feature of the Royalty Agreement and record any such increase as an
additional charge to operations. From the date the Company records the charge
and related liability for the settlement and through the term of the Royalty
Agreement, the Company will record charges to accrete the liability attributable
to the royalty feature of the Royalty Agreement up to the amount of royalties
the Company expects to pay pursuant to the Royalty Agreement over the time the
Company expects to make such royalty payments. Payments to be made by the
Company pursuant to the Settlement Agreement could have a material adverse
effect on the operations and financial condition of the Company. See Note H of
Notes to Consolidated Financial Statements.
Securities Litigation
The Company and certain present or former directors and/or officers of the
Company have been named as defendants in nine lawsuits filed in the United
States District Court for the District of Massachusetts by alleged purchasers of
the Company's Common Stock, purporting to be class actions. The lawsuits claim
among other things, that the Company violated the federal securities laws by
publicly disseminated materially false and misleading statements concerning the
prospects and safety of Redux, resulting in the artificial inflation of the
Company's Common Stock price during various alleged class periods.
On January 23, 1998, the Court entered an order consolidating all of these
actions for pretrial purposes. The plaintiffs subsequently filed a First Amended
And Consolidated Class Action Complaint [Corrected Version] (the "Complaint")
containing substantially similar substantive allegations against the Company,
one current officer and director and one current director and alleging a class
period of December 19, 1996 through September 15, 1997. The Complaint does not
specify the amount of alleged damages plaintiffs seek to recover. On May 11,
1998, the defendants moved to dismiss the Complaint. On August 14, 1998, the
Company received notice that the defendants' motion to dismiss was denied.
The Court held a Case Management Conference on September 23, 1998, and
issued a procedural order on that same day establishing a schedule for class
certification briefing, fact and expert discovery, dispositive
38
<PAGE> 39
motions briefing and trial. Trial is scheduled for April 2000. The Company is
vigorously pursuing its defenses to these actions.
General
Under certain circumstances, the Company may be required to indemnify
Servier, Boehringer and AHP, and the Company may be entitled to indemnification
by AHP, against certain claims, damages or liabilities incurred in connection
with Redux. The cross indemnification between the Company and AHP generally
relates to the activities and responsibilities of each company.
Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend the product liability,
securities and similar actions vigorously, the Company has been required and may
continue to be required to devote significant management time and resources to
these legal actions. Payments under the Settlement Agreement will adversely
affect the Company's financial condition and results of operations. If the
Settlement Agreement is overturned or not made final, the ongoing Redux-related
product liability litigation would then proceed against the Company. In this
event, the existence of such litigation may continue to materially adversely
affect the Company's business, including its ability to obtain sufficient
financing to fund operations. In addition, although the Company is unable to
predict the outcome of any such litigation, in the event the proposed settlement
does not become final and in the event of successful uninsured or insufficiently
insured claims, or in the event a successful indemnification claim was made
against the Company, the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, the costs and
uncertainties associated with these legal actions have had, and may continue to
have, an adverse effect on the market price of the Company's common stock and on
the Company's ability to obtain corporate collaborations or additional financing
to satisfy cash requirements, to retain and attract qualified personnel, to
develop and commercialize products on a timely and adequate basis, to acquire
rights to additional products, and to obtain product liability insurance for
other products at costs acceptable to the Company, or at all, any or all of
which may materially adversely affect the Company's business, financial
condition and results of operations. See "Risk Factors" and Note H of Notes to
Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
EXECUTIVE OFFICERS
The following table sets forth the names and positions of the executive
officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Lindsay A. Rosenwald, M.D. 43 Chairman of the Board of Directors
Glenn L. Cooper, M.D. 45 President, Chief Executive Officer and Director
Mark S. Butler 52 Executive Vice President, Chief Administrative
Officer and General Counsel
Bobby W. Sandage, Jr., Ph.D. 45 Executive Vice President, Research and
Development and Chief Scientific Officer
</TABLE>
39
<PAGE> 40
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 founder and
Chairman of Paramount Capital Investments, LLC, a biotechnology, biomedical and
biopharmaceutical merchant banking firm, since 1995, the founder and Chairman of
Paramount Capital, Inc., an investment banking firm, since February 1992, and
the founder and Chairman of Paramount Capital Asset Management, Inc. a money
management firm specializing in the life sciences industry since June 1994. 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: BioCryst Pharmaceuticals, Inc., Neose Technologies, Inc., Sparta
Pharmaceuticals, Inc., VIMRx Pharmaceuticals, Inc. and is 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. Dr. Cooper is a director of Genta
Incorporated ("Genta"), a publicly-traded biotechnology company. 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 1979, serving as
Vice President, Associate General 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.
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, and of Genta.
---------------------
Dale Ritter joined the Company in October 1994 as Corporate Controller and
in December 1996 was named Vice President and Chief Accounting Officer. In July
1998, Mr. Ritter was named Senior Vice President of Finance and as of August 18,
1998 was appointed Acting Chief Financial Officer and Treasurer. Prior to
joining the Company, Mr. Ritter was Director of Finance at Parexel International
Corporation from 1990 to September 1994.
The Company is actively seeking a permanent Chief Financial Officer.
40
<PAGE> 41
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and on representations that no other reports
were required, there were no reports required under Section 16(a) of the
Securities Exchange Act of 1934 which were not timely filed during fiscal 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
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.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal Year Ended September 30, 1997:
October 1 through December 31, 1996 $ 29 3/4 $ 18 1/2
January 1 through March 31, 1997 32 5/8 15 7/8
April 1 through June 30, 1997 21 5/8 12 3/4
July 1 through September 30, 1997 22 10 7/8
Fiscal Year Ended September 30, 1998:
October 1 through December 31, 1997 $ 13 3/4 $ 9 1/8
January 1 through March 31, 1998 10 15/16 7 11/16
April 1 through June 30, 1998 15 1/2 3 1/8
July 1 through September 30, 1998 5 1/16 2 1/2
</TABLE>
Approximate Number of Equity Security Holders
The number of record holders of the Company's Common Stock as of December
21, 1998 was approximately 790.
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.
Recent Sales of Unregistered Securities
In May 1998, in connection with the repricing of certain options and
warrants that had exercise prices of $10 or more, the Company issued warrants
to purchase an aggregate of 105,000 shares of Common Stock at an exercise price
of $6.19 per share, in exchange for the cancellation of warrants to purchase
the same number of shares of Common Stock at exercise prices ranging from
$18.25 to $23.25 per share. In August
41
<PAGE> 42
1998, in connection with the repricing of options that were not subject to the
May 1998 exchange offer, the Company issued options outside the Company's stock
option plans to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price of $4.16 per share, in exchange for the cancellation of options
to purchase the same number of shares of Common Stock at an exercise price of
$7.00 per share. The remaining options issued pursuant to the May 1998 and
August 1998 exchange offers were registered on registration statements on Form
S-8. The issuance of the non-registered options and warrants to an aggregate of
five directors of and consultants to the Company was exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) thereof.
42
<PAGE> 43
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 consolidated financial statements of the Company and the notes thereto
which have been audited by PricewaterhouseCoopers LLP, 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".
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
(Amounts in thousands except per share data)
1994 1995 1996 1997 1998
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product revenue ........................................ $ -- $ -- $ 13,779 $ 55,945 $ --
Contract and license fee revenue ....................... 101 3,463 8,335 11,039 6,488
Total revenues ......................................... 101 3,463 22,114 66,984 6,488
Cost of product revenue ................................ -- -- 11,454 41,144 --
Research and development ............................... 17,737 15,070 17,344 50,180 39,762
Selling, general and administrative .................... 8,341 7,142 13,991 19,581 21,975
Product withdrawal ..................................... -- -- -- 7,528 --
Purchase of in-process research and development ........ 1,852 -- 6,434 3,044 500
Net loss from operations ............................... (27,829) (18,749) (27,109) (54,493) (55,749)
Investment income, net ................................. 444 894 4,135 8,944 5,465
Equity in net loss of unconsolidated subsidiary ........ -- -- -- (9,028) (4,040)
Net loss from continuing operations .................... (27,385) (17,292) (22,400) (49,670) (50,485)
Discontinued operations ................................ -- (689) (5,586) (5,586) (19,477)
Net loss ............................................... $(27,385) $(17,981) $(27,986) $(55,256) $(69,962)
Net loss per common share from continuing operations ... $ (.98) $ (.57) $ (.61) $ (1.21) $ (1.22)
Net loss per common share from discontinued operations . $ -- $ (.02) $ (.15) $ (.14) $ (.47)
Net loss per common share - basic and diluted .......... $ -- $ (.59) $ (.76) $ (1.35) $ (1.69)
Weighted average common shares outstanding ............. 27,873 30,604 37,004 41,064 41,468
<CAPTION> September 30,
(Amounts in thousands)
1994 1995 1996 1997 1998
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 8,577 $ 25,755 $ 155,246 $ 82,229 $ 41,417
Total assets 18,278 37,516 186,438 152,930 78,197
Long-term portion of notes payable
and capital lease obligations
Total liabilities 8,501 10,486 22,303 43,962 30,842
Accumulated deficit (60,811) (78,792) (106,778) (162,034) (231,996)
Stockholders' equity 9,777 21,392 144,762 96,009 39,856
</TABLE>
43
<PAGE> 44
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. See "Note Regarding Forward Looking Statements".
General
Redux
Proposed Settlement of Product Liability Litigation
Subsequent to the September 15, 1997 market withdrawal of the weight loss
medication Redux, Interneuron has been named, together with other
pharmaceutical companies, as a defendant in approximately 779 legal actions,
many of which purport to be class actions, in federal and state courts
involving the use of Redux and other weight loss drugs. On December 10, 1997,
the federal Judicial Panel on Multidistrict Litigation issued an Order
allowing for the transfer or potential transfer of the federal actions to the
Eastern District of Pennsylvania for coordinated pretrial proceedings.
On September 25, 1998, the U.S. District Court for the Eastern District
of Pennsylvania (the "Court") preliminarily approved an Agreement of
Compromise and Settlement (the "Settlement Agreement") between the Company and
the Plaintiffs' Management Committee ("PMC") relating to the proposed
settlement of all product liability litigation and claims against the Company
relating to Redux. As part of the Settlement Agreement, the Company and the
PMC entered into a royalty agreement (the "Royalty Agreement") relating to a
portion of the payments proposed to be made to the settlement fund.
On November 3, 1998, the Court issued a stay halting all Redux product
liability litigation against the Company, pending and future, in state courts,
following the issuance of a similar stay halting Redux product liability
litigation against the Company in federal courts on September 3, 1998. These
stays will remain effective until a fairness hearing scheduled for February
25, 1999 and may be extended pending the outcome of this hearing.
Summary of Proposed Settlement: The limited fund class action established
by the Settlement Agreement includes all persons in the United States who used
Redux, and certain other persons such as their family members, who would be
bound by the terms of the settlement. Membership in the class is mandatory for
all persons included within the class definition. Class members asserting
claims against Interneuron will be required to seek compensation only from the
settlement fund, and their lawsuits against Interneuron will be dismissed. By
agreeing to the proposed settlement, Interneuron does not admit liability to
any plaintiffs or claimants.
The Settlement Agreement requires Interneuron to deposit a total of
approximately $15,000,000 in three installments into a settlement fund. The
first installment of $2,000,000 was deposited into the settlement fund in
September 1998. A second installment of $3,000,000 is to be made after the
Settlement Agreement is approved by the Court, which approval, if obtained,
would follow the fairness hearing. These installments, less certain expenses,
will be returned to Interneuron if the settlement does not become final. A
third installment of $10,000,000, plus interest, is to be made after the
settlement becomes final.
The Settlement Agreement provides for Interneuron to cause all remaining
and available insurance proceeds related to Redux to be deposited into the
settlement fund. Interneuron also agreed to make royalty payments to the
settlement fund in the total amount of $55,000,000, based upon revenues
related to
44
<PAGE> 45
Interneuron products, over a seven year period commencing when the settlement
becomes final. Royalties will be paid at the rate of 7% of gross sales of
Interneuron products sold by Interneuron, 15% of cash dividends received by
Interneuron from its subsidiaries related to product sales, and 15% of license
revenues (including license fees, royalties or milestone payments) received by
Interneuron from a sublicensee related to product sales. All Interneuron
products will be subject to this royalty during the applicable term. If, at
the end of that seven year period, the amount of royalty payments made by
Interneuron is less than $55,000,000, the settlement fund will receive shares
of Interneuron stock in an amount equal to the unpaid balance divided by $7.49
per share, subject to adjustment under certain circumstances such as stock
dividends or distributions.
Conditions to Final Settlement: The settlement will not become final
until approved by the Court and the time for appeal of the Court's judgment
approving the Settlement Agreement has elapsed without any appeals being filed
or all appeals from the Court's judgment approving the Settlement Agreement
have been exhausted and no further appeal may be taken. In this case, in order
to approve the settlement, the Court must make a determination that the
proposed settlement is fair and reasonable and meets each of the prerequisites
for a class action generally, and for a "limited fund" class action in
particular, all as required by the Federal Rules of Civil Procedure. Pursuant
to these rules, notice of the proposed settlement was provided to potential
class members in November, 1998, and the Court has scheduled a fairness
hearing for February 25, 1999 (the "Fairness Hearing"). At the Fairness
Hearing, proponents and opponents of the proposed settlement will be given an
opportunity to present written and oral arguments in favor of or against the
settlement. Following the Fairness Hearing, the Court must determine if the
case is properly is certified as a limited fund class action, and if so,
whether the terms of the Settlement Agreement are fair and reasonable.
The Company may withdraw from the Settlement Agreement, or the Settlement
Agreement may otherwise terminate, under any of the following conditions: (i)
final approval of the Settlement Agreement is not entered by the Court; (ii)
class certification and/or approval of the Settlement Agreement is overturned
on appeal for any reason; (iii) pending and future litigation against the
Company or any other party released by the Settlement Agreement ("Released
Parties") is not permanently enjoined on the final approval date; (iv) the
class action and all pending multi-district lawsuits against the Released
Parties are not dismissed with prejudice on the final approval date; (v) an
order is not entered by the Court permanently barring contribution and
indemnity claims by other defendants in the diet drug litigation; or (vi)
Interneuron is unable to compel tender of its insurance proceeds.
On November 20, 1998, one of the insurers filed an action against Servier
and the Company in the Court, pursuant to the federal interpleader statute.
The insurer alleges that both Servier and the Company have asserted claims
against a commercial excess insurance policy issued by the insurer to
Interneuron with limits of $5,000,000 in excess of $20,000,000. The insurer
has deposited the limits of the policy into the registry of the Court.
There can be no assurance that after the Fairness Hearing the Court will
approve the settlement. Even if the settlement is approved by the Court,
opponents of the settlement may appeal the Court's opinion to the United
States Court of Appeals for the Third Circuit. In addition, there is a case
pending before the United States Supreme Court (Ortiz v. Fibreboard
Corporation et al) ("Ortiz"), that may influence the Court's decision or the
outcome of any appeal that might be taken. Oral argument in the Ortiz case was
heard on December 8, 1998 and the Supreme Court is likely to render its
opinion between January and June 1999. Although factually distinguishable in
many respects from the Company's proposed settlement, Ortiz involves an appeal
from a mandatory, putative "limited fund" class action settlement. There can
be no assurance that the Supreme Court's rulings in Ortiz will not
significantly influence the approval process for, or potentially result in the
overturning of, the Settlement Agreement.
45
<PAGE> 46
Future Charges to Operations: The Company will record initial charges to
operations for the estimated fair value of the Company's obligations under the
Settlement Agreement, exclusive of insurance proceeds, at such time as the
Company can determine that it is probable that the conditions to final
settlement have been or will be met. This is expected to be subsequent to the
Fairness Hearing and the Supreme Court ruling in Ortiz. The amount of the
liability to be recognized in connection with these charges is likely to be
significant and to materially adversely affect the Company's net worth.
Additionally, if the Company records such charges prior to the final
settlement date, then on the date the Settlement Agreement becomes final, the
Company will determine if there was any increase in the fair value of the
equity conversion feature of the Royalty Agreement and record any such
increase as an additional charge to operations. From the date the Company
records the initial charge and related liability for the settlement and
through the term of the Royalty Agreement, the Company may record additional
charges to accrete the liability attributable to the royalty feature of the
Royalty Agreement up to the amount of royalties the Company expects to pay
pursuant to the Royalty Agreement over the time the Company expects to make
such royalty payments. Payments to be made by the Company pursuant to the
Settlement Agreement could have a material adverse effect on the operations
and financial condition of the Company. See Note H of Notes to Consolidated
Financial Statements.
If the Settlement Agreement is overturned or not made final, the ongoing
Redux-related litigation would then proceed against the Company. In this
event, the existence of such litigation, including the time and expenses
associated with the litigation, may materially adversely affect the Company's
business, including its ability to obtain additional financing to fund
operations. Although the Company is unable to predict the outcome of any such
litigation, such outcome may materially adversely affect the Company's future
business, financial condition and results of operations.
Securities Litigation
The Company has also been named as a defendant in several lawsuits filed
by alleged purchasers of the Company's Common Stock, purporting to be class
actions, claiming violation of the federal securities laws. It is not possible
for the Company to determine its costs related to its defense in these or
potential future legal actions, monetary or other damages which may result
from such legal actions, or the effect on the future operations of the
Company.
General
Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and similar actions
vigorously, the Company has been required and may continue to devote
significant management time and resources to these legal actions and, in the
event of successful uninsured or insufficiently insured claims, or in the
event a successful indemnification claim were made against the Company, the
Company's business, financial condition and results of operations could be
materially adversely affected. In addition, the uncertainties and costs
associated with these legal actions have had, and may continue to have, an
adverse effect on the market price of the Company's Common Stock and on the
Company's ability to obtain additional financing to satisfy cash requirements,
to retain and attract qualified personnel, to develop and commercialize
products on a timely and adequate basis, to acquire or obtain rights to
additional products, or to obtain product liability insurance for other
products at costs acceptable to the Company, or at all, any or all of which
may adversely affect the Company's business and financial condition. See
"Legal Proceedings" and "Risk Factors - Risks Relating to Redux Litigation".
Product Withdrawal
46
<PAGE> 47
The Company withdrew Redux from the market in September 1997 based on new
preliminary information provided by the Food and Drug Administration ("FDA")
to the Company and Wyeth-Ayerst and manufacturers and marketers of phentermine
concerning potential abnormal echocardiogram findings in patients using these
drugs. These patients had been treated with Pondimin or Redux for up to 24
months, most often in combination with phentermine. Redux was launched in June
1996.
These observations presented by the FDA (which have since been updated
and revised by the FDA) reflected a preliminary analysis of pooled information
rather than results of a formal clinical investigation, and are difficult to
evaluate because of the absence of matched controls and pretreatment baseline
data for these patients. Nevertheless, the Company believes it was prudent, in
light of this information, to have withdrawn Redux from the market.
On November 13, 1997, the U.S. Department of Health and Human Services
("HHS") issued preliminary recommendations for the medical management of
people who took Pondimin or Redux. HHS recommended, until more complete
information is available, that patients who took either drug should see their
physician to determine whether there are signs or symptoms of heart or lung
disease and, if such person has signs or symptoms of heart or lung disease,
such as a new heart murmur or shortness of breath, have an echocardiogram
performed; and that physicians strongly consider performing an echocardiogram
before a patient who has taken either drug has any invasive procedure for
which antibiotic prophylactic treatment is recommended to prevent the
development of bacterial endocarditis.
Additional adverse event reports of abnormal heart valve findings in
patients using Redux or fenfluramine alone or in combination with other weight
loss agents continue to be received by Interneuron, Wyeth-Ayerst, and the FDA.
These reports have included symptoms such as shortness of breath, chest pain,
fainting, swelling of the ankles or a new heart murmur.
Subsequent to the withdrawal of Redux, a number of studies have been
conducted by third parties, including Wyeth-Ayerst, and one study was
conducted by Interneuron, to assess the differences in cardiovascular clinical
outcomes between patients who had taken Redux or a combination of fenfluramine
and phentermine ("fen-phen"), compared to an untreated group. In general,
these studies have been and are being conducted and analyzed by independent
panels of cardiologists to compare the incidence of significant heart valve
abnormalities in treated compared to non-treated groups. Patients are selected
and assigned to these groups randomly. Readings of patient echocardiograms are
made on a blinded basis by cardiologists who do not know from which group
individual echocardiograms were taken. Findings of these studies have been
presented or reported by their respective third party sponsors or researchers.
Based on the results of studies announced to date, the incidence of cardiac
valve abnormalities has been shown to be less than that suggested by the
original FDA preliminary analyses. In general, these studies have shown either
no or relatively small differences, although in some cases statistically
significant, between the incidence of cardiac valve abnormalities, as defined
by the FDA, among patients who took Redux and placebo-treated patients and
that the incidence of such abnormalities among Redux patients was far less
than previously reported estimates. Findings from these studies differ with
regard to the strength and clinical significance of the association.
Differences in trial design preclude precise comparison.
Company Sponsored Redux Study
Results of a blinded, matched-control group, multi-center clinical study
sponsored by the Company and presented on November 10, 1998 at the Scientific
Sessions of the American Heart Association showed a low overall incidence of
FDA-defined cardiac valve abnormalities among patients who took Redux for
three months or longer when compared to individuals who had not taken Redux.
No severe and very few moderate cardiac valve abnormalities were found in
either Redux patients or non-Redux subjects.
47
<PAGE> 48
The incidence of cardiac valve abnormalities among Redux patients
reported in this study, although statistically significant, was far less than
some previously reported estimates. In addition, findings from the study
suggest that elevated blood pressure at the time that echocardiograms were
taken among these patients, as well as the concomitant use of drugs with
monoamine oxidase inhibitory properties, which were contraindicated with the
use of Redux, increased the incidence of cardiac valve abnormalities.
Additional findings suggest that the greater the time off Redux, the less
likely patients were to show valvular abnormalities. These findings are being
further evaluated.
The average duration of Redux use among all Redux patients in this study
was seven months. The study, funded by the Company, was designed to evaluate
the impact of long-term use of Redux alone upon the incidence of cardiac valve
disease as defined by the FDA. However, market research indicates that
approximately 86 percent of patients took Redux for 90 days or less and
approximately 6.5 percent took Redux for six months or more.
Analyses were conducted based on echocardiographic data from the total
patient population entered into the study (412) and also from the core group
(350), which included only the matched pairs. There were totals of 220
patients and 192 control group, or matched patients, in the study. Cardiac
valve disease was defined as mild or greater aortic valve regurgitation and/or
moderate or greater mitral valve regurgitation. Previous reports had estimated
rates of cardiac valve insufficiencies among anorexigen-treated patients of up
to 30 percent.
Among all study participants, 1.4 percent of Redux patients and 0.5
percent of non-treated patients (p=.63) met the FDA's definition of mitral
valve regurgitation. Among the core group of matched pairs, 1.7 percent of
Redux patients and 0.6 percent of non-treated controls (p=.32) met this
definition.
With respect to aortic valve regurgitation, in all patients, 5.9 percent
of Redux patients and 2.1 percent of non-treated patients (p=.08) met the
FDA's definition. Among the core group of matched pairs, 6.3 percent of Redux
patients and 2.3 percent of non-treated controls (p=.07) met this definition.
For all patients with either aortic or mitral valve regurgitation meeting
FDA criteria only, the incidence was 2.6 percent for controls and 7.3 percent
for the Redux patients (p=.04). When analyzed for valvular insufficiency of
any degree including trace, there was an increased incidence in the Redux
group when compared to the untreated control group for the aortic valve
(p=.04) but not the mitral valve (p=.28).
When potentially confounding factors were considered, such as use of
concomitant monoamine oxidase inhibitors (such as estrogens and thyroid
hormone replacements), and the patients' blood pressures at the time of their
echocardiograms, the difference in the incidence of valvular insufficiency
between Redux and non-Redux treated patients became non-significant. For
example, when patients were exposed to concomitant drugs possessing monamine
oxidase inhibitory properties were excluded from the analysis, 3 percent of
control group patients met FDA-criteria for aortic and mitral valve
regurgitation as compared with 4 percent in the Redux group (p=not
significant).
Background; Regulatory Approval, Labeling and Safety Issues: Redux
(dexfenfluramine) is chemically related to Pondimin (fenfluramine).
Fenfluramine is a drug made up of two mirror-image halves - a "right-handed"
half (d-isomer) and "left-handed" half (l-isomer) - and dexfenfluramine is the
right-handed isomer of fenfluramine (the left-handed half is
"levofenfluramine"). Dexfenfluramine alone is a separate drug from the
combined dexfenfluramine/levofenfluramine molecule that is fenfluramine.
Redux received clearance in April 1996 by the FDA for marketing as a
twice-daily prescription therapy to treat obesity. Until its voluntary
withdrawal, Redux was marketed in the U.S. by Wyeth-Ayerst and
48
<PAGE> 49
copromoted by the Company. Included in the FDA-approved labeling for Redux
were references to certain risks that may be associated with dexfenfluramine
and which were highlighted during the FDA's review of the drug. One issue
related 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 disclosed 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.
In connection with the approval of Redux, the Company and Wyeth-Ayerst agreed
with the FDA to conduct a Phase 4, or post marketing, study with patients
taking Redux. Following the withdrawal of Redux, this study was terminated.
In July 1997, the Mayo Clinic reported observations of heart valve
abnormalities in 24 patients taking the combination of Pondimin and
phentermine. The Mayo Clinic cases were subsequently reported in an article
appearing in the August 28, 1997 issue of The New England Journal of Medicine.
This article was accompanied by a letter to the editor from the FDA reporting
additional cases of heart valve disease in 28 patients taking the combination
of phentermine and fenfluramine, two patients taking fenfluramine alone, four
patients taking Redux alone and two patients taking Redux and phentermine.
Redux Revenues: A significant portion of Interneuron's revenues through
fiscal 1997 had been derived from Redux sales and, accordingly, did not recur
after fiscal 1997 as a result of the product's withdrawal. The Company's
revenues relating to Redux were derived primarily 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. The Company did not
recognize any revenue related to Redux in fiscal 1998 and does not expect to
realize any future revenues related to Redux.
Under the Company's license agreement with AHP the Company received (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, a
French pharmaceutical company from which the Company obtained U.S. rights to
Redux to treat abnormal carbohydrate craving and obesity ("Servier"), and (ii)
"additional" royalties (ranging from 5% to 10% of net sales in fiscal 1997)
based on net sales of Redux by AHP.
Under a three-year copromotion agreement entered into in June 1996 with
Wyeth-Ayerst, and to supplement AHP's marketing efforts, the Company had
developed an approximately 30- person sales force that promoted Redux to
selected diabetologists, endocrinologists, bariatricians, nutritionists and
weight management specialists, subject to certain restrictions, in return for
a percentage of resulting revenues less
49
<PAGE> 50
certain expenses. Although a portion of the Company's copromotion costs
related to the sales force was funded by AHP, the Company incurred substantial
additional costs relating to its sales force and in connection with the
promotion of Redux.
Under a manufacturing agreement with Boehringer Ingelheim
Pharmaceuticals, Inc. ("Boehringer"), Boehringer had manufactured finished
dosage formulation of Redux capsules on behalf of the Company for sale to AHP.
The Company recognized revenue from the sale of these capsules upon acceptance
by AHP, typically 45 days after shipment.
Charges to Operations: In connection with the market withdrawal of Redux,
the Company recorded as of September 30, 1997 certain charges aggregating
approximately $10,800,000. Of this amount, approximately (i) $3,300,000
(included in cost of revenues) related to reserves for inventories of
dexfenfluramine drug substance and finished Redux capsules which were deemed
to have no net realizable value and (ii) $7,500,000 related to costs or
commitments associated with product development, the cessation of production
of Redux capsules and other costs. Total expenses relating to the market
withdrawal of Redux may exceed these amounts which were current estimates and
do not include provisions for liability, if any, arising out of Redux-related
litigation or other related costs. In addition, the Company will record
charges to operations pursuant to the proposed Settlement Agreement if certain
conditions are met and may incur future charges to operations if the
Settlement Agreement does not become final or depending on the outcome of this
or other litigation. See "Proposed Settlement of Product Liability
Litigation."
Citicoline
In April 1998, the Company announced that based upon a preliminary
analysis, a 100-patient Phase 3 trial with citicoline (cytidine-5'-diphosphate
choline, sodium), the Company's product under development to treat ischemic
stroke, failed to meet its primary and the principal secondary endpoints. As a
result of the preliminary analysis and considering statutory requirements that
would have mandated an FDA action by June 1998, the Company withdrew its NDA
for citicoline in April 1998. The Company had submitted the NDA to the FDA for
citicoline in December 1997.
With respect to the primary endpoint in this trial, no statistically
significant difference was detected in the reduction of infarct size among
patients with ischemic stroke who received 500 milligrams per day of
citicoline as compared with patients who received placebo. With respect to the
principal secondary endpoint, the trial did not show an improvement in
neurological function among drug-treated patients as compared with patients
who received placebo. The Company believes that a placebo response rate
unexpectedly higher than that previously reported in the literature may have
accounted for the inability to detect a difference in infarct size reduction
and neurological function among drug-treated patients, as compared with
patients who received placebo.
The citicoline NDA had been accepted for filing and assigned priority and
fast-track review status. A priority review status reflects the FDA's
commitment to review the NDA within six months following submission and a
fast-track designation indicates that the FDA has determined a drug is
intended to treat a serious or life-threatening condition that currently has
an unmet medical need and that the FDA can take actions to expedite the
development and review of the drug.
The Company is proceeding with the development of citicoline and
commenced in June 1998 an approximately 900 person Phase 3 clinical trial
which will compare the neurological function at 12 weeks following ischemic
stroke of citicoline-treated patients with that of patients who received
placebo. Patients will be treated with 2000 milligrams of citicoline daily for
six weeks with a six week follow-up period. It is anticipated that this
clinical trial will be completed in late 1999. The 2000 milligram dose level
is
50
<PAGE> 51
higher than the dose used in the Company's two most recent citicoline clinical
trials but was used in the Company's first Phase 3 trial in which patients
treated with this dose achieved the primary endpoint of improved neurological
function. Depending upon the evaluation of the results from this trial, the
Company will determine whether to re-submit the NDA for citicoline to the FDA.
Even if the Company does re-submit the NDA, as to which there is no assurance,
the Company is unable to predict whether or when the FDA would grant
authorization to market citicoline in the U.S. Upon resubmission of the NDA, a
new review period would commence.
As of September 30, 1998, the remaining expenditures of all currently
planned clinical trials and related studies and NDA preparation for citicoline
are estimated, based upon current trial protocols, to aggregate approximately
$28,000,000. The Company is unable to predict the costs of any related or
additional clinical studies which will depend upon the results of the on-going
trial and upon FDA requirements. Significant additional funds will be required
for development, manufacturing, distribution, marketing and selling efforts,
the amount of which will depend upon whether the Company markets citicoline
itself or enters into a corporate collaboration.
Activase, a genetically engineered version of the naturally occurring
tissue plasminogen activator (t-PA), is marketed by Genentech, Inc. 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 clomethiazole by Astra Pharmaceuticals, a glycine
antagonist compound by Glaxo Wellcome and Fiblast by AHP. Based on existing
clinical data on CerAxon, the Company believes CerAxon may be an attractive
post-stroke therapy, particularly in patients with moderate to severe strokes,
due to its potentially broader, 24-hour post-stroke therapeutic window.
The Company licensed from Ferrer Internacional, S.A. ("Ferrer"), a
Spanish pharmaceutical company, certain patent and know-how rights in the
United States and Canada relating to the use of citicoline in exchange for a
royalty equal to 6% of the Company's net sales of citicoline. In June 1998,
the Company amended its agreement with Ferrer to extend to January 31, 2002
the date upon which Ferrer may terminate the citicoline license agreement if
FDA approval of citicoline is not obtained. The agreement provides for such
date to be extended for up to two years if the Company provides information to
Ferrer which tends to establish that the Company has carried out the steps for
obtaining such approval and if such approval has not been obtained for reasons
beyond the Company's control.
In June 1998, the Company entered into an agreement with Ferrer whereby
the Company licensed to Ferrer, worldwide except for the U.S. and Canada, the
use of Interneuron's patent rights relating to the use of citicoline in the
protection of brain tissue from cerebral infarction following ischemic stroke.
In exchange for the license to Ferrer, Interneuron will be entitled to
royalties from Ferrer on certain exports to, and sales of, the solid form of
citicoline in certain countries upon its approval in each relevant country.
As a result of the Company's withdrawal of its citicoline NDA, the
related additional time and expense for product development, and the Company's
limited cash resources, the Company is reevaluating its commercialization
strategy for citicoline. The Company requires additional funds for
manufacturing, distribution, marketing and selling efforts, the amount of
which will depend upon whether the Company markets citicoline itself or enters
into a corporate collaboration and the terms of any such collaboration. The
Company has no commitments or arrangements to obtain additional funds and
there can be no assurance such funds can be obtained on terms favorable to the
Company or at all.
The Company will be dependent upon third party suppliers of citicoline
bulk compound, finished product and packaging for manufacturing in accordance
with the Company's requirements and current U.S. Good Manufacturing Practices
("cGMP") regulations as well as third party arrangements for the distribution
of
51
<PAGE> 52
citicoline. Supplies of citicoline finished product used for clinical purposes
have been and are produced on a contract basis by third party manufacturers.
The Company does not have an agreement with a manufacturer for supply of
commercial quantities of finished product and there can be no assurance such
agreement can be obtained on terms favorable to the Company or at all, which
could adversely affect the Company's ability to commercialize citicoline on a
timely and cost-effective basis. The Company's agreement with Ferrer requires
the Company to purchase from Ferrer citicoline bulk compound for commercial
purposes at fixed prices, subject to certain conditions. Any citicoline
manufacturing facilities are subject to FDA inspection both before and after
FDA approval to determine compliance with cGMP requirements. There can be no
assurance the Company can or will establish on a timely basis, or maintain,
manufacturing capabilities of bulk compound or finished product required to
obtain regulatory approval or that any facilities used to produce citicoline
will have complied, or will be able to maintain compliance, with cGMP or that
such suppliers will be able to meet manufacturing requirements on a timely
basis or at all.
Pagoclone
The Company is developing pagoclone as a drug to treat panic/anxiety
disorders. Current pharmacological treatments for anxiety and panic disorders
include serotonin agonists such as BuSpar, and benzodiazepines, such as Valium
and Xanax, as well as selective serotonin reuptake inhibitors such as Paxil.
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 August 1998, the Company announced results of its Phase 2/3 trial
involving 277 patients showing that treatment with pagoclone statistically
significantly reduced the frequency of panic attacks among patients suffering
from panic disorder. In addition, pagoclone was well-tolerated by these
patients, with no evidence of sedation and no apparent withdrawal syndromes in
this study, which included a tapering-off period. The Company designates a
trial as Phase 2/3 if it is a well-controlled trial which the Company may
utilize, depending upon results, as either a pivotal or supporting trial in an
NDA submission. Based on the results of this trial, Interneuron believes it
has identified an optimal dose of pagoclone for Phase 3 clinical testing. The
Company estimates the total costs of currently anticipated clinical
development relating to pagoclone, including license fees to Rhone-Poulenc
Rorer Pharmaceuticals, Inc. ("RPR"), and NDA preparation to be approximately
$44,000,000, which if all of such activities are undertaken, would be incurred
over approximately the next three years. The Company licensed from RPR
exclusive worldwide rights to pagoclone, in exchange for licensing, milestone
and royalty payments to RPR.
The Company does not have sufficient funds to conduct Phase 3 clinical
testing or commercialization of pagoclone and intends to seek a corporate
collaboration or additional funds to proceed with a Phase 3 clinical study.
There can be no assurance the Company will be successful in obtaining a
corporate collaboration or additional financing sufficient to fund development
and commercialization of pagoclone, on terms favorable to the Company or at
all. In this event, the development of pagoclone would be significantly
delayed or curtailed. Even if a collaboration or other financing is obtained
the Company is unable to predict with certainty the costs of any additional
studies which may be required by the FDA for approval of pagoclone and there
can be no assurance, assuming such trials are conducted, that any such
clinical trials will be successful or result in FDA approval of the product.
52
<PAGE> 53
Results of Operations
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended
September 30, 1997
In September 1998, the Company adopted a plan to discontinue the
operations of InterNutria. As a result, the Company's financial statements
have been reclassified to reflect the results of InterNutria's operations as
"discontinued operations: loss from operations of InterNutria" for each fiscal
year reflected on the Consolidated Statement of Operations. Additionally,
during the last quarter of fiscal 1998, the Company recorded a charge to
operations of $2,326,000 in connection with the plan to discontinue
InterNutria's business operations, which includes a full reserve of
InterNutria's inventory as of September 30, 1998 and costs associated with
certain contractual commitments. InterNutria's operations, including the
one-time charges in fiscal 1998, resulted in significant losses, representing
approximately 28%, 10% and 20% of the Company's consolidated net losses during
fiscal 1998, 1997 and 1996, respectively.
Total revenues decreased substantially to $6,488,000 in fiscal 1998 from
$66,984,000 in fiscal 1997 primarily reflecting the $55,945,000 decrease in
product revenue. The Company did not recognize any Redux-related product
revenue in fiscal 1998 (see "Redux" above) compared to approximately
$55,905,000 of Redux-related product revenue recognized in fiscal 1997.
Contract and license fee revenue decreased $4,551,000, or 41%, to
$6,488,000 in fiscal 1998 from $11,039,000 in fiscal 1997. This decrease
primarily reflects revenues derived during fiscal 1997 under the copromotion
agreement with AHP, a license agreement with Lilly and from Progenitor's
license agreements. Progenitor's results were not included in the Company's
consolidated results in fiscal 1998. The decrease was offset in part by an
increase in Intercardia's contract revenues resulting from a $4,000,000
payment received in September 1998 in connection with the termination of the
Astra Merck Collaboration.
Total costs and expenses decreased $59,240,000, or 49%, to $62,237,000 in
fiscal 1998 from $121,477,000 in fiscal 1997. This substantial decrease
reflects a $41,144,000 decrease in cost of product revenue due to the absence
of any Redux-related product revenues in fiscal 1998 and the $7,528,000 fiscal
1997 charge related to the Redux product withdrawal, offset in part by an
approximately $10,000,000 non-cash compensation charge relating to the
Company's 1997 Equity Plan. The Company may incur significant charges during
fiscal 1999 relating to the settlement of the Redux product liability
litigation, if certain conditions are met. See "Proposed Settlement of Product
Liability Litigation."
Research and development expenses decreased $10,418,000, or 21%, to
$39,762,000 in fiscal 1998 from $50,180,000 in fiscal 1997. Decreases were
caused by Intercardia's accrual in fiscal 1997 of its $10,000,000 commitment
to Astra Merck, which was paid in December 1997, reductions in Redux-related
expenditures resulting from the product withdrawal, and the absence of expense
from Progenitor, whose results of operations were not consolidated with the
Company's in fiscal 1998. These decreases were offset in part by increases
resulting from an allocation to research and development of the noncash
compensation expense associated with the Company's 1997 Equity Incentive Plan,
increased expenses from Intercardia Research Laboratories (a division of
Intercardia which assumed the operations of Transcell Technologies, Inc. after
the merger of Transcell into Intercardia) due to their expanded carbohydrate
technology research and Intercardia's expansion of its other research and
development programs. Research and development expenses associated with
citicoline are expected to increase substantially during fiscal 1999
reflecting the June 1998 commencement of an approximately 900 patient Phase 3
clinical trial expected to end in late 1999.
Selling, general and administrative expenses increased $2,394,000, or
12%, to $21,975,000 in fiscal 1998 from $19,581,000 in fiscal 1997. This
increase primarily reflects an allocation to selling, general and
53
<PAGE> 54
administrative expenses of the noncash compensation expense relating to the
Company's 1997 Equity Incentive Plan and pre-marketing activities relating to
the potential launch of citcoline which have ceased since the NDA withdrawal
in April 1998. These incremental fiscal 1998 expenses were partially offset by
the absence of expense from Progenitor, whose results of operations were not
consolidated with the Company's in fiscal 1998, and reduced expense relating
to the Company's sales force which was dismissed in the third quarter of
fiscal 1998.
Purchase of in-process research and development decreased $2,544,000, or
84%, to $500,000 in fiscal 1998 from $3,044,000 in fiscal 1997. Fiscal 1998
expense relates to a cash payment made to obtain an option to acquire a
private company engaged in early stage product development. The Company did
not exercise this option. Fiscal 1997 expenses primarily reflected charges
from the Company's open-market purchases of Intercardia common stock.
Investment income, net of interest expense, decreased $3,479,000, or 39%,
to $5,465,000 in fiscal 1998 from $8,944,000 in fiscal 1997 primarily as a
result of a decrease in cash available for investment.
Equity in net loss of unconsolidated subsidiary of $4,040,000 and
$9,028,000 in fiscal 1998 and 1997, respectively, represents the Company's
share of Progenitor's net loss for the respective periods subsequent to
Progenitor's IPO in August 1997. The results of Progenitor's operations were
reflected in the Company's financial statements on a consolidated basis until
Progenitor's IPO in August 1997 after which Progenitor was included in the
Company's financial statements using the equity method of accounting. The
fiscal 1997 amount includes approximately $7,800,000 relating to the Company's
equity in Progenitor's charge for acquired in-process research and development
resulting from Progenitor's acquisition of Mercator. As of September 30, 1998,
the Company's investment in Progenitor had been reduced to zero. See
"Subsidiaries--Progenitor" and Note P of Notes to Consolidated Financial
Statements.
Minority interest reflects the Company's allocation to the Subsidiaries'
minority stockholders of the losses of Intercardia, Transcell through May 8,
1998, the date of the merger of Transcell into Intercardia, and Progenitor
through August 1997, the date of the Progenitor IPO.
Loss from the discontinued InterNutria operations increased $11,565,000,
or 207%, to $17,151,000 in fiscal 1998 from $5,586,000 in fiscal 1997. This
increase was due primarily to increased selling, marketing and promotion costs
incurred in fiscal 1998 and resulting from the national launch of PMS Escape.
The Company recorded a loss relating to the plan to discontinue InterNutria's
operations of $2,326,000 in fiscal 1998, which includes an inventory reserve
and costs associated with certain contractual liabilities.
Net loss increased $14,706,000, or 27%, to ($69,962,000) in fiscal 1998
from ($55,256,000) in fiscal 1997 for the reasons described above. Net loss
per share increased to ($1.69) in fiscal 1998 from ($1.35) in fiscal 1997.
The Company recognized approximately $10,000,000 of noncash expense in
fiscal 1998 as a result of grants of Restricted Stock Awards under the
Company's 1997 Equity Incentive Plan and expects to recognize approximately
$4,000,000 of such expense in fiscal 1999.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996
Total revenues increased $44,870,000, or 203%, to $66,984,000 in fiscal
1997 from $22,114,000 in fiscal 1996 reflecting product revenue of
$55,945,000, primarily from a full year of Redux sales, and $11,039,000 of
contract and license fee revenue.
54
<PAGE> 55
Product revenue increased $42,166,000, or 306%, to $55,945,000 in fiscal
1997 from $13,779,000 in fiscal 1996. This increase includes a $29,485,000
increase in Redux royalty revenue to $34,968,000 in fiscal 1997 from
$5,483,000 in fiscal 1996 and a $12,387,000 increase in sales of Redux
capsules and dexfenfluramine drug substance to $20,697,000 in fiscal 1997 from
$8,310,000 in fiscal 1996 reflecting a full year of Redux sales compared to
approximately one fiscal quarter of Redux sales in fiscal 1996. See Note H of
Notes to Consolidated Financial Statements.
Contract and license fee revenue increased $2,704,000, or 32%, to
$11,039,000 in fiscal 1997 from $8,335,000 in fiscal 1996. This increase
primarily reflects initial payments received pursuant to the Merck Agreement,
a full year of revenues derived under the copromotion agreement with AHP
compared to approximately one fiscal quarter of such revenues in fiscal 1996,
and the initial license fee received from Lilly, partially offset by reduced
revenue from Intercardia's bucindolol-related license agreements.
Total costs and expenses increased $72,083,000, or 146%, to $121,477,000
in fiscal 1997 from $49,394,000 in fiscal 1996. Cost of product revenue,
primarily attributable to Redux, increased $29,690,000, or 259%, to
$41,144,000 in fiscal 1997 from $11,454,000 in fiscal 1996 and constituted 41%
of the increase in total costs and expenses. Included in cost of product
revenue is approximately $3,300,000 related to reserves for inventories which
were deemed to have no net realizable value after the withdrawal of Redux.
Research and development expenses increased substantially in fiscal 1997 from
fiscal 1996 primarily reflecting increased costs related to the development
of, and NDA preparation for, citicoline and a $10,000,000 accrual related to
Intercardia's contractual obligation to Astra Pharmaceuticals. In addition,
the Company incurred charges to operations aggregating approximately
$7,500,000 relating to the market withdrawal of Redux. See Note H of Notes to
Consolidated Financial Statements. Cost of product revenue during fiscal 1998
will reflect reduced costs associated with Redux as a result of the market
withdrawal of Redux.
Research and development expenses increased $32,836,000, or 189%, to
$50,180,000 in fiscal 1997 from $17,344,000 in fiscal 1996. Increased research
and development expenses resulted primarily from the conduct of two phase 3
clinical trials and NDA preparation for citicoline and Intercardia's accrual
in fiscal 1997 of its $10,000,000 commitment which was paid to Astra
Pharmaceuticals in December 1997. In fiscal 1997, the Company and AHP had
commenced development of a sustained release formulation of Redux and incurred
related clinical development costs and paid license fees to Servier. This
development program terminated as a result of the Redux withdrawal. Additional
expenses were incurred by Transcell pursuant to its increased carbohydrate
chemistry development activities and by the other Subsidiaries on their
technologies and products.
Selling, general and administrative expenses increased $5,419,000, or
38%, to $19,581,000 in fiscal 1997 from $14,162,000 in fiscal 1996. Increased
sales and marketing expenses were incurred by Interneuron in fiscal 1997 as a
result of maintaining an approximately 30 person sales force for the
copromotion of Redux for the full 1997 fiscal year compared to approximately
one quarter in fiscal 1996. Increased facilities expenses were incurred by
Interneuron and Transcell related to their respective moves into expanded
facilities in late fiscal 1997. Also, the Company's growth resulted in
increased numbers of employees and additional administrative, consulting,
insurance and payroll-related costs. Partially offsetting these increased
expenses is a reduction in Progenitor expenses resulting from a non-recurring
fiscal 1996 charge for expenses relating to its then-postponed IPO and the
deconsolidation of Progenitor commencing in August 1997 as a result of the
Progenitor IPO. See Note P of Notes to Consolidated Financial Statements.
Purchase of in-process research and development decreased $3,390,000, or
53%, to $3,044,000 in fiscal 1997 from $6,434,000 in fiscal 1996. Fiscal 1997
expenses primarily reflected charges from the Company's open-market purchases
of Intercardia common stock and fiscal 1996 expenses primarily reflected
charges from the Company's acquisitions of the 20% of CPEC not owned by
Intercardia. The fiscal 1996 acquisition
55
<PAGE> 56
that resulted in a charge for in-process research and development was made
primarily in exchange for Interneuron Common Stock which did not require the
use of cash.
Investment income, net of interest expense, increased $4,638,000, or
108%, to $8,944,000 in fiscal 1997 from $4,306,000 in fiscal 1996 primarily
due to significantly higher invested balances of cash, cash equivalents and
marketable securities resulting primarily from funds received from public
offerings in fiscal 1996 by Interneuron and Intercardia.
Equity in net loss of unconsolidated subsidiary of $9,028,000 reflects
the Company's equity in the net loss of Progenitor subsequent to the
Progenitor IPO in mid August 1997, and includes approximately $7,800,000
relating to the Company's equity in Progenitor's charge for acquired
in-process research and development resulting from Progenitor's acquisition of
Mercator. Results of Progenitor's operations prior to the Progenitor IPO are
included in the Company's Consolidated Statements of Operations. See Note P of
Notes to Consolidated Financial Statements.
The allocation of losses from certain consolidated subsidiaries to their
respective minority stockholders increased $4,333,000 to $4,907,000 in fiscal
1997 from $574,000 in fiscal 1996 substantially due to the increased
Intercardia loss resulting primarily from the $10,000,000 fiscal 1997 accrual
pertaining to CPEC's commitment to Astra Pharmaceuticals, which was paid in
December 1997.
Net loss increased $27,270,000, or 97%, to ($55,256,000) in fiscal 1997
from ($27,986,000) in fiscal 1996. Net loss per share increased to ($1.35) in
fiscal 1997 from ($.76) in fiscal 1996 also reflecting an increase in weighted
shares outstanding to 41,064,000 in fiscal 1997 from 37,004,000 in fiscal 1996
resulting from additional equity issuances.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
At September 30, 1998, the Company had consolidated cash, cash
equivalents and marketable securities aggregating $72,032,000 (of which
approximately $23,600,000 is held by Intercardia and is not generally
available to Interneuron) compared to $140,052,000 at September 30, 1997. This
decrease is primarily due to approximately $67,000,000 used to fund
operations, including $10,000,000 paid in December 1997 by CPEC, Inc.
("CPEC"), a majority-owned subsidiary of Intercardia, to Astra Pharmaceuticals
(all of which was accrued at September 30, 1997) and $2,000,000 paid in
September 1998 as the initial installment of the proposed settlement of the
Redux product liability litigation, offset in part by the $4,000,000 received
by CPEC in September 1998 in connection with the termination of the Astra
Merck Collaboration. A portion of the payment to Astra Pharmaceuticals was
funded by Interneuron, which owns directly approximately 20% of CPEC.
While the Company believes it has sufficient cash for currently planned
expenditures through September 1999, based on certain assumptions relating to
operations, the settlement of the Redux product liability litigation and other
factors, it will require additional funds after such time and intends to seek
additional funds prior to such time. The Company will require additional funds
for the development and commercialization of citicoline, pagoclone and its
other compounds and technologies, as well as any new products acquired in the
future. The Company has no commitments or arrangements to obtain such funds.
If such funds are not available, the Company will be required to delay product
development and regulatory efforts. As a result of the uncertainties and costs
associated with the Redux-related litigation including the risk that the
proposed settlement of the Redux product liability litigation does not become
final, market conditions and other factors generally affecting the Company's
ability to raise capital, there can be no
56
<PAGE> 57
assurance that the Company will be able to obtain additional financing to
satisfy future cash requirements or that any financing will be available on
terms favorable or acceptable to the Company, if at all. See "General -- Redux
- -- Legal Actions."
Interneuron intends to seek a corporate collaboration which provides for
future pagoclone development and marketing costs, including Phase 3 clinical
studies. Although the Company is engaged in discussions with respect to certain
corporate collaborations relating to pagoclone, there can be no assurance any
agreement will be obtained. The Company does not have sufficient capital to
complete development and commercialization of any products under development and
will be required to obtain additional funds or corporate collaborations to
pursue development and commercialization of its products.
Product Development
The Company expects to continue expending substantial amounts for the
development of citicoline as described above and for its other products. Because
Interneuron does not have sufficient capital resources to fund significant
further development of any products other than citicoline, the Company intends
to seek additional funds or a corporate collaboration to conduct a Phase 3
clinical trial on pagoclone. The failure to obtain additional funds or a
corporate collaboration would adversely affect development of pagoclone. See
"Citicoline," "Pagoclone," and "Cash, Cash Equivalents and Marketable
Securities" above.
During 1997, the Company obtained an exclusive option to license a
product for the treatment and prevention of liver diseases. The option grants
Interneuron the right to license, on specified terms, North American and Asian
marketing rights to an issued U.S. patent and U.S. and international patents
applications, following Interneuron's review of future clinical data. This
orally-administered compound is being studied in a large U.S.
government-sponsored Phase 3 clinical trial. Eight hundred patients have been
enrolled in the study, which is expected to be completed in mid-2000. The study
is designed to have periodic interim analysis which could lead to earlier
termination if a significant positive drug effect is identified.
The Company is continuing to conduct preliminary evaluations of PACAP, a
compound licensed from Tulane University in April 1998 that, among other
indications, may have potential as a treatment for stroke and of LidodexNS, a
product for the acute intra-nasal treatment of migraine headaches being
developed pursuant to a collaborative agreement with Algos Pharmaceutical
Corporation.
There can be no assurance that results of any on-going current or future
preclinical or clinical trials will be successful, that additional trials will
not be required, that any drug under development will receive FDA approval in a
timely manner or at all, or that such drug could be successfully manufactured in
accordance with cGMP or marketed in a timely manner or at all, or that the
Company will have sufficient funds to commercialize any of its products, any of
which events could materially adversely affect the Company.
Analysis of Fiscal 1998 Cash Flows
Cash used by operating activities during fiscal 1998 of $66,998,000
consisted primarily of (i) a net loss of $69,962,000 (ii) $10,000,000 paid by
CPEC in December 1997 to Astra Merck for CPEC's contractual liability pursuant
to the Astra Merck Collaboration recorded as of September 30, 1997, and (iii)
$2,000,000 paid by the Company in September 1998 as the initial cash installment
of the proposed settlement of the Redux-related product liability litigation,
partially offset by noncash compensation charges of $11,624,000, consisting
primarily of compensation expense relating to grants of restricted stock awards
under the
57
<PAGE> 58
Company's 1997 Equity Incentive Plan, and $4,040,000 of equity in the net loss
of the unconsolidated subsidiary, Progenitor.
Cash provided by investing activities of $50,169,000 during fiscal 1998
consisted primarily of net proceeds from maturities and sales of marketable
securities of $51,477,000 less purchases of property and equipment of
$1,308,000.
Other
Treasury Stock and Share Repurchases: In March 1997, the Company
announced that its Board of Directors had authorized it to repurchase from
time to time through open-market transactions up to 1,500,000 shares of the
Company's Common Stock. As of September 30, 1997, the Company had repurchased
217,500 shares, for an aggregate purchase price of approximately $3,978,000,
all of which were re-issued primarily pursuant to stock option and warrant
exercises and the employee stock purchase plan. No further repurchases were
made in fiscal 1998 and there was no treasury stock at September 30, 1998.
Open-Market Purchases of Intercardia Common Stock: In February 1997, the
Company announced that its Board of Directors had authorized it to purchase
from time to time through open-market transactions up to 200,000 shares of the
common stock of Intercardia. As of September 30, 1997, the Company had
purchased 129,400 shares of Intercardia common stock, for an aggregate
purchase price of approximately $2,951,000, of which approximately $2,234,000
was recorded as purchase of in-process research and development in fiscal
1997. These purchases represented approximately 2% of number of outstanding
shares of Intercardia at September 30, 1997.
Call Options: In May 1997, the Company purchased in private transactions
from Swiss Bank Corporation, London Branch ("SBC") capped call options, which
were modified in September 1997, on Interneuron Common Stock. As modified,
these call options gave Interneuron the right to purchase from SBC up to a
total of 1,240,000 shares of Interneuron Common Stock at a strike price of
$14.50. The call options maturing on December 31, 1997, June 9, 1998, and
September 21, 1998 expired without exercise. The remaining call option is
exercisable on January 11, 1999 with respect to 310,000 shares. The call
options which the Company purchased may be settled, if exercised, with cash or
Common Stock in an amount equal to the difference between the strike price and
the market price, determined over a specified valuation period, subject to a
cap. Under certain circumstances, the Company may delay the expiration date of
the remaining call option for the payment of additional consideration to SBC.
In exchange for the purchases of these call options, in lieu of cash
purchase prices, the Company sold to SBC call options entitling SBC to
purchase from the Company at a strike price of $36.00 per share, an aggregate
of 2,000,000 shares of Interneuron Common Stock, 1,000,000 shares on each of
December 30 and 31, 1999. Modification to the original options, which
consisted of extensions of maturity dates and reductions of the caps and
strike prices, resulted in a $500,000 cash payment to the Company reflected as
a credit to additional paid-in capital. The Company will have the right to
settle these call options with cash or stock, subject to certain conditions.
If exercised, the Company expects to settle the call options that it sold
through issuances by the Company to SBC of up to an aggregate of 2,000,000
shares of Interneuron Common Stock, subject to the effectiveness of a
registration statement covering the resale of these shares delivered. Because
the Company has the ability to settle call options through issuance or receipt
of Common Stock, the Company has accounted for the original purchases and
sales of these call options as equivalent and offsetting noncash equity
transactions. Any gains realized from purchased call options will be reflected
in additional paid-in capital.
58
<PAGE> 59
SBC has advised that it has engaged, and may engage, in transactions,
including buying and selling shares of the Company's Common Stock, to offset
its risk relating to the options. Purchases and sales could affect the market
price of the Company's Common Stock.
Year 2000 Issue
The Year 2000 issue is the result of the failure of hardware or software
components to handle properly dates which occur on or after January 1, 2000
including leap years; the failure to handle properly all manipulations of time
related information and the failure to store century information in a
non-ambiguous format (i.e., storing years with 2 digits rather than 4 digits).
These failures could result in system failure or miscalculations causing
disruptions in processing transactions or creating incorrect data used in the
operations of the business.
While each of the Company's subsidiaries uses certain similar internal
systems, each operates their systems independently from the other. The Company
does not envision a Year 2000 issue at Progenitor or InterNutria because each
company is being operated pursuant to a plan to discontinue their respective
businesses prior to the year 2000. As of September 30, 1998, the Company had
fully reserved its positions in each entity and does not foresee any future
charges to operations resulting from either entity. To the extent Intercardia
maintains certain systems that are the same or similar to Interneuron's,
Interneuron and Intercardia intend to collaborate to ascertain their Year 2000
compliance to the extent each company deems necessary. The Company does not
believe it has a risk of loss of significant revenues due to the Year 2000
issue because no pharmaceutical products will have attained FDA approval prior
to the year 2000 and because the Company currently anticipates marketing and
sales fulfillment to conducted by a licensee. A factor in the selection of
potential licensees will be their ability to demonstrate Year 2000 compliance.
Systems Assessment
Interneuron's and Intercardia's internal systems are similar and
comprised primarily of purchased or leased software. Neither company develops
or maintains any significant proprietary software or hardware systems.
Interneuron and Intercardia utilize numerous operationally-related non-IT
systems. These include telephone systems, pagers, and security alarm systems.
Intercardia, through Intercardia Research Laboratories, owns laboratory
equipment with embedded microprocessors and software.
Also, Interneuron and Intercardia subcontract a substantial portion of
their research and development activities to external vendors, including
contract research organizations, and rely on the systems of these vendors for
data and information that may be date sensitive. To the extent that the
systems of these subcontractors produce incorrect information or cause
incorrect interpretation of the information that they produce, Interneuron and
Intercardia are at risk for making invalid conclusions about the nature,
efficacy, or safety of their products or technologies which could lead to
abandoning potentially lucrative products or technologies or invalidly
continuing development and pursuing FDA approval of others.
Interneuron and Intercardia intend to ascertain Year 2000 compliance of
their primary internal software systems, operationally - related systems,
equipment with embedded microprocessors, and subcontractors through vendor
inquiry and obtaining written assertions of Year 2000 compliance from each.
Interneuron has obtained letters from its primary internal software vendors
and certain subcontractors that purport their current belief of Year 2000
compliance and generally indicate continued efforts to assess Year 2000
issues. During 1999, the Company will continue and complete its review of all
significant above-noted vendors and seek to obtain letters of Year 2000
compliance. If such letters cannot be obtained on a timely basis, Interneuron
and Intercardia will assess the potential risks in each instance and determine
the appropriate actions. Such action may include the replacement of software,
equipment, or the subcontractor. Interneuron and Intercardia will continue
during
59
<PAGE> 60
1999 to monitor vendors and subcontractors who have provided letters of Year
2000 compliance for any notices or information that contradict earlier
assertions of Year 2000 compliance.
Costs and Contingencies
To date, Interneuron and Intercardia have expended only internal costs to
assess the Year 2000 issue. Letters of Year 2000 compliance from internal
software providers tend to indicate Interneuron and Intercardia will not be
exposed to any material amounts for replacements of such systems, however
there can be no assurance of this. Also, it is not yet possible to ascertain
if any expenditure will be required to replace systems, subcontractors or the
work performed by such subcontractor. While vendor assurances and internal
testing are useful in assessing Year 2000 issues, neither can provide absolute
assurance that no Year 2000 problems will or can occur. During 1999,
Interneuron and Intercardia will continue to refine their plans in an attempt
to assure the Year 2000 issue will not materially adversely affect their
business operations or financial condition.
Recent Accounting Pronouncements
The Company will adopt SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), in the fiscal year ending September 30, 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements.
The Company will adopt SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), in the fiscal year
ending September 30, 1999. SFAS No. 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of
financial information to be disclosed. Management has not determined the
effect of adopting SFAS No. 131.
The Company will adopt SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), during the fiscal year
ending September 30, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. SFAS 133 requires companies to recognize all derivatives
as either assets or liabilities, with the instruments measured at fair value.
The accounting for changes in fair value, gains or losses, depends on the
intended use of the derivative and its resulting designation. Management has
not determined the effect of adopting SFAS 133.
Other
In July 1998, the Company received FDA authorization for marketing in the
U.S. a medical device called the AnatoMark Non-Invasive Head Reference System
("AnatoMark") designed to provide reproducible anatomical markers
non-invasively for brain imaging. The Company introduced AnatoMark in December
1998 and plans to sell the product directly and promote it through literature,
meetings, and the efforts of a contract sales representative.
In November 1998, pursuant to an agreement with Les Laboratoires Servier
to resolve a withholding tax issue on Redux-related payments to Servier, the
Company paid to the U.S. Internal Revenue Service approximately $1,700,000 for
withholding tax and interest. Servier agreed to reimburse the Company for a
portion of the withholding taxes upon Servier's receipt of a related tax
refund from the French tax authorities. The Company is unable to predict with
certainty whether or when this reimbursement will be obtained.
Subsidiaries
60
<PAGE> 61
Interneuron had funded the operations of InterNutria through September
30, 1998, at which time the Company adopted a plan to discontinue the
operations of InterNutria. Loss from the discontinued operations of
InterNutria represented 28% and 10% of the Company's consolidated net loss in
fiscal 1998 and 1997, respectively. See "InterNutria". Interneuron had also
funded Transcell until May 8, 1998, when the merger of Transcell into
Intercardia was completed. See "Intercardia". Since the Transcell Acquisition,
the operations previously conducted by Transcell have been conducted as a
division of Intercardia known as Intercardia Research Laboratories.
Accordingly, such operations continue to be reflected in the Company's
consolidated financial statements. Expenses of Intercardia, including
Intercardia Research Laboratories, continue to constitute a significant part
of the Company's consolidated expenses and, in fiscal 1998 and 1997,
represented approximately 33% and 35%, respectively, of the consolidated
research and development and selling, general, and administrative expenses.
Intercardia
In September 1998, Intercardia and Astra Pharmaceuticals, L.P. (formerly
Astra-Merck, Inc.) terminated the Marketing and Development Collaboration and
License Agreement (the "Astra-Merck Collaboration") relating to the U.S.
development and commercialization of the twice-daily formulation of bucindolol
for the treatment of CHF, in connection with the restructuring of Astra-Merck,
Inc. In connection with the termination of this agreement and resolution of an
earlier dispute relating to responsibility for funding, Astra Pharmaceuticals
made a $4,000,000 payment to CPEC. As a result, Intercardia has assumed
responsibility for the U.S. development and commercialization for BEXTRA.
Intercardia requires a corporate collaboration or additional funds for the
commercialization of BEXTRA and is currently exploring possible development,
commercialization and marketing collaborations.
Pursuant to the Astra Merck Collaboration, originally entered into in
December 1995, Astra Pharmaceuticals made a $5,000,000 payment to CPEC,
assumed responsibility for certain obligations of CPEC and committed an amount
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.
Intercardia and CPEC paid Astra Pharmaceuticals an aggregate of $10,000,000 in
December 1997 (of which a portion was paid by Interneuron, reflecting its
percentage ownership interest in CPEC, as a loan to CPEC).
Through September 30, 1998, a substantial portion of the BEXTRA
development costs have been assumed or paid by the National Institutes of
Health, the Department of Veterans Affairs, Astra Merck and/or BASF
Pharma/Knoll AG ("Knoll"), Intercardia's partner for the development and
commercialization of BEXTRA in Europe. There can be no assurance of the
success of the Beta-blocker Evaluation of Survival Trial (the "BEST Study") or
that BEXTRA will be successfully commercialized.
Pursuant to the Knoll Collaboration, Intercardia is responsible for
approximately 40% of the development and marketing costs of bucindolol in the
Knoll Territory, which includes all countries other than the United States and
Japan, subject to certain maximum dollar limitations. Intercardia's portion of
development and clinical trial costs for the Knoll Territory is estimated to
be up to $10,000,000 over the next several years. Intercardia is also
responsible for approximately 40% of the once-a-day development costs which
relate to development solely for the Knoll Territory and approximately 67% of
once-a-day development costs which have a worldwide benefit.
Intercardia will require additional financing to fund its operations
after 1999 and intends to seek additional financing and corporate
collaborations during fiscal 1999. There can be no assurance such funds will
be available on terms acceptable or favorable to Intercardia, or at all. As a
result of the termination of the Astra Merck Collaboration, Intercardia has
resumed financial responsibility for the remaining estimated $15,000,000 to
$20,000,000 of BEXTRA U.S. development and NDA preparation costs. Interneuron
may
61
<PAGE> 62
fund 20% of such costs in order to maintain its approximately 20% ownership
interest in CPEC. There is no assurance that Intercardia will have sufficient
resources to complete the U.S. development of BEXTRA. Intercardia's other
funding requirements include payments to its other collaborative partners,
including 40% of development and marketing costs of bucindolol in the Knoll
Territory pursuant to the Knoll Collaboration, the operations of Intercardia
Research Laboratories previously conducted by Transcell, which merged into
Intercardia in May 1998, and new technology and product development.
In July 1998, Intercardia licensed worldwide rights (except for Japan and
South Korea) to OP2000 from Opocrin S.p.A., of Modena, Italy. Intercardia
intends to investigate the use of OP2000 as a drug for the treatment of
inflammatory bowel disease. Intercardia will be responsible for conducting
clinical trials for OP2000 and made a $1,000,000 payment to Opocrin upon
execution of the license agreement. Intercardia will make additional payments
to Opocrin upon achievement of certain milestones.
On May 8, 1998, the merger of Transcell with and into Intercardia and the
acquisition by Intercardia of certain related technology rights owned by
Interneuron was completed and, simultaneously, Interneuron contributed to
Transcell's capital all of Transcell's indebtedness and payables, aggregating
$18,698,000, to Interneuron (the "Transcell Acquisition"). Consideration
given by Intercardia consisted of (i) Intercardia common stock payable to the
former Transcell stockholders, including Interneuron, in three installments
with an aggregate market value at closing of approximately $14,200,000, of
which $3,000,000 was payable at closing as an initial payment to Interneuron
for certain of its technology rights and continued guarantees of certain
Transcell leases (the "Initial Technology/Guarantee Payment"), and (ii) the
issuance of options and warrants to purchase 259,488 shares of Intercardia
common stock to Transcell employees and consultants in exchange for their
options and warrants to purchase Transcell capital stock. Accordingly, in
connection with the first installment of the merger consideration due at the
closing of the merger, Intercardia issued an aggregate of 320,151 shares of
common stock, of which 191,383 shares were issued to Interneuron. In
addition, Intercardia issued 174,672 shares to Interneuron for the Initial
Technology/Guarantee Payment. Intercardia also agreed to pay Interneuron a
royalty on sales of certain products that may be developed under the Merck
Agreement. The second and third installments of the merger consideration will
be made in August 1999 and February 2000, respectively, and each installment
will consist of the issuance of $3,000,000 of Intercardia common stock, as
then valued. Intercardia's acquisition of the minority shareholders' interest
in Transcell resulted in Intercardia recording a charge to operations in
fiscal 1998 for the purchase of in-process research and development of
approximately $5,300,000. This charge is eliminated in consolidation and is
not reflected in the Company's results of operations because the Company did
not acquire any incremental interest in Transcell's net assets as a result of
the transaction. In connection with this transaction, the Company also
recorded a credit to additional paid-in capital of approximately $2,212,000
to reflect adjustments to minority interest resulting from the Transcell
Acquisition and the book value of the Intercardia shares received by the
Company for the Initial Technology/Guarantee Payment. Interneuron owned
approximately 61% and 62% of the outstanding capital stock of Intercardia
before and immediately after the closing of the Transcell Acquisition,
respectively.
InterNutria
InterNutria commenced a national launch of PMS Escape in September 1997
and a line of sports drinks in spring 1998. InterNutria's operations resulted
in significant losses and, in September 1998, the Company adopted a plan to
discontinue the operations of InterNutria. The Company incurred additional
charges of approximately $2,326,000 in connection with the termination of
InterNutria's operations including a full reserve against inventory. The
Company is seeking to sell InterNutria or its assets. However, there can be no
assurance it will be successful in this regard or that it will generate any
significant proceeds from any sale.
62
<PAGE> 63
Progenitor
Progenitor completed its initial public offering and acquisition of
Mercator Genetics, Inc. in August 1997, which resulted in Interneuron's
ownership in Progenitor's outstanding capital stock decreasing to
approximately 37% (and subsequently to approximately 36% at September 30,
1998). Consequently, the Company ceased consolidating the financial statements
of Progenitor. The Company's financial statements include Progenitor on a
consolidated basis through August 1997 and on an equity method basis
thereafter. See "Results of Operations".
In December 1998, Progenitor announced its intention to implement an
immediate cessation of operations. Progenitor did not have sufficient funds to
meet its obligations and was unable to raise additional funds. Progenitor's
market valuation had been substantially reduced and the Company could not
viably sell any of its holdings of Progenitor securities. As a result, as of
September 30, 1998, the Company's investment in Progenitor was reduced to
zero. See Note P of Notes to Consolidated Financial Statements.
General
The Company's business strategy includes evaluation of various
technologies, product or company acquisitions, licensing and/or financing
opportunities (including private placements and initial and follow-on equity
offerings), and Interneuron and Intercardia engage from time to time in
discussions relating to such opportunities. In particular, each of Interneuron
and Intercardia require additional cash to fund operations after 1999 and
intend to seek additional financings and corporate collaborations during
fiscal 1999. There can be no assurance either company will obtain sufficient
cash to fund future operations. See "Liquidity and Capital Resources" and
"Subsidiaries - Intercardia." Any such initiatives may involve the issuance of
securities of Interneuron or Intercardia 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. The Company's in-licensing agreements generally require the
Company to undertake general or specific development efforts or risk the loss
of the license and/or incur penalties.
Although Interneuron may acquire additional equity in Intercardia through
participation in financings, purchases from third parties, including open
market purchases and conversion of intercompany debt, equity financings by
Intercardia will likely reduce Interneuron's percentage ownership of
Intercardia and funds held by Intercardia are not generally available to
Interneuron.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8. Financial Statements 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 in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
63
<PAGE> 64
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
The following factors should be reviewed carefully, in conjunction with the
other information in this Report and the Company's consolidated financial
statements. These factors, among others, could cause actual results to differ
materially from those currently anticipated and contained in forward-looking
statements made in this Report and presented elsewhere by Company management
from time to time. See "Note Regarding Forward-Looking Statements."
Risks Relating to Redux Litigation
After the Redux withdrawal in September 1997, we have been named, together
with other pharmaceutical companies, as a defendant in approximately 779 product
liability legal actions in federal and state courts involving the use of Redux
and other weight loss drugs. Many of these actions purport to be class actions.
On September 25, 1998, the U.S. District Court for the Eastern District of
Pennsylvania (the "Court") preliminarily approved a settlement agreement
relating to the proposed settlement of all product liability litigation against
us related to Redux.
Risks Associated with Proposed Settlement of Product Liability Litigation:
If the settlement agreement becomes final, payments we make could materially
adversely affect our operations and financial condition. The amount of the
liability and related charges we recognize are likely to be significant and to
materially adversely affect our net worth. If the proposed settlement does not
become final, the ongoing Redux-related product liability litigation would then
proceed against us. In this event, this litigation may continue to materially
adversely affect our business, including our ability to obtain sufficient
financing to fund operations. In addition, although we cannot predict the
outcome of this litigation, such outcome may materially adversely affect our
future business, financial condition and results of operations. In addition, the
costs and uncertainties associated with the legal actions related to Redux have
had, and may continue to have, an adverse effect on:
- the market price of our common stock;
- our ability to obtain corporate collaborations or additional
financing to satisfy cash requirements;
- our ability to retain and attract qualified personnel;
- our ability to develop and commercialize products on a timely
and adequate basis;
- our ability to acquire rights to additional products; and
- our ability to obtain product liability insurance for other
products and officers and directors' liability insurance at acceptable
costs, or at all.
Any or all of these factors may materially adversely affect our business,
financial condition and results of operations. See Note H of Notes to
Consolidated Financial Statements.
Conditions to Final Settlement: The settlement will not become final
until:
- approved by the Court and - the time for filing appeals has passed or all
appeals have been exhausted.
64
<PAGE> 65
In this case, in order to approve the settlement, the Court must make a
determination that the proposed settlement:
- is fair and reasonable;
- meets each of the prerequisites for a class action generally; and
- meets the prerequisites for a "limited fund" class action in particular,
all as required by the Federal Rules of Civil Procedure.
Pursuant to these rules, notice of the proposed settlement was provided to
potential class members in November 1998. The Court has scheduled a fairness
hearing for February 25, 1999. At the fairness hearing, proponents and opponents
of the proposed settlement will be given an opportunity to present written and
oral arguments in favor of or against the settlement. Following the fairness
hearing, the Court must determine if the case is properly certified as a limited
fund class action, and if so, whether the terms of the settlement agreement are
fair and reasonable.
We may withdraw from the settlement agreement, or the settlement agreement
may otherwise terminate, under any of the following conditions:
- final approval of the settlement agreement is not entered by the Court; "
class certification and/or approval of the settlement agreement is
overturned on appeal for any reason;
- pending and future litigation against us or any other party released by
the settlement agreement is not permanently enjoined on the final
approval date;
- the class action and all pending multi-district lawsuits against the
released parties are not dismissed with prejudice on the final approval
date;
- an order is not entered by the Court permanently barring contribution and
indemnity claims by other defendants in the diet drug litigation; or
- we are unable to compel tender of our insurance proceeds.
There is a risk that after the fairness hearing the Court may not approve
the settlement. Even if the Court approves the settlement, opponents of the
settlement may appeal the Court's opinion to the United States Court of Appeals
for the Third Circuit. There is a case pending before the United States Supreme
Court (Ortiz v. Fibreboard Corporation et al.) ("Ortiz"), that may influence the
Court's decision or the outcome of any appeal that might be taken. Oral argument
in the Ortiz case was heard on December 8, 1998 and the Supreme Court is likely
to render its opinion between January and June 1999. Although factually
distinguishable in many respects from our proposed settlement, Ortiz involves an
appeal from a mandatory, putative "limited fund" class action settlement. The
Supreme Court's rulings in Ortiz may significantly influence, or potentially
result in the overturning of, the settlement agreement.
Summary of Payments Required by Proposed Settlement: The settlement
agreement requires us to deposit approximately $15,000,000 in three installments
into a settlement fund as follows:
- $2,000,000, which was deposited in September 1998;
- $3,000,000, payable after the Settlement Agreement is approved by the
Court; and
- $10,000,000, plus interest, after the settlement becomes final.
The first two installments, less certain expenses, will be returned to us
if the settlement does not become final.
In addition, we agreed:
65
<PAGE> 66
- to cause all remaining and available product liability insurance proceeds
related to Redux to be deposited into the settlement fund;
- to pay royalties based on our product revenues to the settlement fund, in
the total amount of $55,000,000, over a seven year period commencing
after the settlement becomes final;
- if, at the end of that seven year period, we pay less than $55,000,000 of
royalties, to issue to the settlement fund shares of our stock in
an amount equal to the unpaid balance divided by $7.49 per share.
In November 1998, one of the insurers filed an action against us and
Servier pursuant to the federal interpleader statute. The insurer alleges that
both we and Servier have asserted claims against an insurance policy issued by
the insurer to us with limits of $5,000,000 in excess of $20,000,000. The
insurer has deposited the limits of the policy into the registry of the Court.
Future Charges to Operations: As a result of the settlement, we will
record charges to operations, which may be substantial, expected to be as
follows:
- We will record initial charges for the estimated fair value of our
obligations under the settlement agreement, exclusive of insurance
proceeds. We will record this charge when we can determine that it is
probable that the conditions to final settlement have been or will be
met. We expect this to be subsequent to the fairness hearing and the
Supreme Court ruling in Ortiz.
- If we record charges prior to the final settlement date, then on the
date the settlement agreement becomes final, we will determine if there
was any increase in the fair value of the equity conversion feature of
the royalty agreement and record any such increase as an additional
charge to operations.
- From the date we record the initial charge and related liability for the
settlement and through the initial term of the royalty agreement, we may
record additional charges to accrete the liability attributable to the
royalty feature of the royalty agreement up to the amount of royalties we
expect to pay over the time we expect to make such royalty payments.
Redux Safety Issues: The FDA-approved labeling for Redux included
references to certain risks that may be associated with dexfenfluramine and that
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").
PPH is 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. This study 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
disclosed this revised estimate.
The FDA-approved labeling for Redux also included 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.
In July 1997, the Mayo Clinic reported observations of heart valve
abnormalities in 24 patients taking the combination of Pondimin and phentermine.
The Mayo Clinic cases were subsequently reported in an article
66
<PAGE> 67
appearing in the August 28, 1997 issue of The New England Journal of Medicine.
This article was accompanied by a letter to the editor from the FDA reporting
additional cases of heart valve disease in 28 patients taking the combination of
phentermine and fenfluramine, two patients taking fenfluramine alone, four
patients taking Redux alone and two patients taking Redux and phentermine.
The September 1997 withdrawal of Redux was based on a preliminary analysis
by the FDA of potential abnormal echocardiogram findings associated with certain
patients taking Redux or the combination of fenfluramine with phentermine
(commonly referred to as the "fen-phen" combination). The FDA presented these
observations, indicating an incidence of approximately 30%, to us in September
1997. Subsequent to the withdrawal, we have been named as a defendant in
numerous legal actions relating to Redux, as summarized above.
Interneuron, Wyeth-Ayerst and the FDA continue to receive additional
adverse event reports of abnormal heart valve findings in patients using Redux
or fenfluramine alone or in combination with other weight loss agents. These
reports have included symptoms such as shortness of breath, chest pain,
fainting, swelling of the ankles or a new heart murmur.
On November 13, 1997, the U.S. Department of Health and Human Services
("HHS") issued preliminary recommendations for the medical management of people
who took Pondimin or Redux. HHS recommended, until more complete information is
available, that:
- patients who took either drug should see their physician to determine
whether there are signs or symptoms of heart or lung disease;
- if such person has signs or symptoms of heart or lung disease, such as a
new heart murmur or shortness of breath, have an echocardiogram
performed;
- physicians strongly consider performing an echocardiogram before a
patient who has taken either drug has any invasive procedure for which
antibiotic prophylactic treatment is recommended to prevent the
development of bacterial endocarditis.
See "Business--Redux" and "Legal Proceedings".
Uncertainties Relating to Citicoline
Risk that Ongoing Phase 3 Study Does Not Demonstrate Efficacy or that FDA
Does Not Approve Citicoline: We are substantially dependent on FDA approval of
citicoline and on the successful commercialization of citicoline. In the event
the ongoing Phase 3 clinical study fails to demonstrate the efficacy of
citicoline or the FDA does not grant authorization to market the drug, we would
be materially adversely affected. In April 1998, we withdrew our NDA for
citicoline after receipt of negative results in a 100 patient Phase 3 clinical
trial. We are now devoting a substantial portion of our cash resources to a 900
patient Phase 3 clinical study with citicoline which commenced in June 1998.
However, the results of the ongoing Phase 3 clinical study may not demonstrate
the efficacy of citicoline. Notwithstanding the results of this study, the FDA
may not grant authorization to commercialize citicoline. Our agreement with
Ferrer relating to a license of certain patent rights relating to citicoline
provides that Ferrer may terminate the agreement if FDA approval of citicoline
is not obtained by January 2002, subject to certain extensions.
Additional Funds or Corporate Collaboration Required to Market Citicoline:
We require additional funds for manufacturing, distribution, marketing and
selling efforts, assuming FDA approval of citicoline. The amount of funds
required depends upon whether we market citicoline ourselves or enter into a
corporate collaboration and the terms of any such collaboration. We have no
commitments or arrangements to obtain additional funds or a corporate
collaboration. We may not be able to obtain such funds or a corporate
collaboration on favorable terms or at all. If we market citicoline directly, we
will be required to obtain substantial additional funds and to establish,
maintain and manage sufficient sales and marketing capabilities.
67
<PAGE> 68
We have no experience in marketing any pharmaceutical products directly. We may
not be able to recruit and retain required marketing, sales, medical and
administrative support personnel or otherwise successfully market citicoline.
Assuming FDA approval, revenues we generate from citicoline will depend to a
significant extent on the FDA-approved label as well as the availability of
third-party reimbursement for the drug.
If additional funds are not available, we will be required to delay product
launch, reduce launch and marketing efforts, or enter into a corporate
collaboration for citicoline on terms which may not be favorable to us. Any of
these alternatives may cause us to generate less revenue and, eventually,
reduced profitability from citicoline than if we were able to launch the product
on a timely basis and conduct sole marketing. See "Risks Relating to Redux
Litigation" and "Need for Additional Funds".
Dependence on Third Parties for Manufacturing Citicoline: We will be
dependent upon third party suppliers of citicoline bulk compound, finished
product and packaging for manufacturing in accordance with our requirements and
current U.S. Good Manufacturing Practices ("cGMP") regulations. We will also be
dependent on third party arrangements for the distribution of citicoline. We do
not have an agreement with a manufacturer for supply of commercial quantities of
citicoline finished product and we may not be able to obtain such an agreement
on favorable terms or at all. Our inability to obtain a supply agreement for
finished product could adversely affect our ability to commercialize citicoline
on a timely and cost-effective basis. Our agreement with Ferrer requires us to
purchase from Ferrer citicoline bulk compound for commercial purposes at fixed
prices, subject to certain conditions. We may be unable to establish on a timely
basis, or maintain, manufacturing capabilities of bulk compound and finished
product. In addition, suppliers may not be able to meet manufacturing
requirements on a timely basis or at all.
Any citicoline manufacturing facilities are subject to FDA inspection both
before and after NDA approval to determine compliance with cGMP requirements.
Any facilities used to produce citicoline may not have complied, or may not be
able to maintain compliance, with cGMP. The cGMP regulations are complex and
failure to be in compliance could lead to non-approval or delayed approval of
the NDA. This would delay product launch or, if approval is obtained, may result
in remedial action, penalties and delays in production of material acceptable to
the FDA.
Need for Additional Funds
Although we believe we have sufficient cash to meet our requirements
through fiscal 1999, we will require additional funds after such time. We
continue to expend substantial funds for product development activities,
primarily clinical testing of citicoline. We intend to seek additional funds
during fiscal 1999 through corporate collaborations or equity or debt
financings. We do not have any commitments or arrangements for additional
financing. As a result of the uncertainties and costs associated with the
Redux-related litigation, market conditions, and other factors generally
affecting the ability to raise additional funds, we may not be able to obtain
sufficient additional funds to satisfy cash requirements or may be required to
obtain financing on terms that are not favorable to the Company. If we are
unable to enter into a corporate collaboration or obtain additional funds, we
will not have sufficient cash to support our operations beyond 1999. In such
event we would be required to reduce, defer or discontinue our product
development programs. We may be required to obtain funds on terms which are not
favorable to us and our stockholders.
Our financing requirements are based on certain assumptions primarily
relating to operations and the proposed settlement of the Redux product
liability litigation. The amount of additional funds we require depends on many
factors including:
- the timing, costs and outcome of the Redux-related litigation, including
whether and when the proposed settlement of the product liability
litigation becomes final and related payments become due;
68
<PAGE> 69
- the results of the ongoing Phase 3 clinical trial with citicoline; " the
timing and outcome of the FDA review process for citicoline;
- if citicoline receives FDA authorization for marketing, the timing
and extent of citicoline launch and marketing activities we conduct;
- our ability to enter into a corporate collaboration for citicoline or
pagoclone and the terms of any such collaborations;
- the nature and extent of clinical trials conducted by us on other
products;
- whether we acquire and seek to develop new products; and
- the extent to which we use cash or securities as consideration for any of
the foregoing. To the extent that we issue securities, dilution to
existing stockholders will result.
See "Risks Relating to Redux Litigation" and "Uncertainties Related to
Citicoline".
In addition, although Intercardia believes it has sufficient cash resources
through fiscal 1999, it will also require additional funds after such time and
intends to seek additional financing or corporate collaborations during fiscal
1999. If adequate funds are not available to Intercardia on acceptable terms,
Intercardia may be required to delay, scale back or eliminate some or all of its
research and product development programs. Although we may acquire additional
equity in Intercardia, equity financings by Intercardia will likely reduce our
percentage ownership of Intercardia. Funds held by Intercardia are not generally
available to us.
History of Losses; Accumulated Deficit and Expectation of Future Losses;
Charges to Operations; Uncertainty of Future Profitability
Through September 30, 1998, we had accumulated net losses since inception
of approximately $232,000,000. We continue to have losses and to use cash in
operating activities. We will be required to conduct significant development and
clinical testing activities and establish marketing, sales, regulatory and
administrative capabilities for many of the products we are developing. These
activities are expected to result in continued operating losses for the
foreseeable future. We cannot predict the extent of future losses or the time
required to achieve profitability. In addition, payments to be made by us
pursuant to the proposed settlement of the Redux product liability litigation
could materially adversely affect our operations and financial condition.
We will record charges to operations in connection with the settlement
agreement, commencing when we can determine it is probable that the conditions
to final settlement have been or will be met. The amount of the related
liability to be recognized by us is likely to be significant and to materially
adversely affect our net worth. See "--Risks Relating to Redux Litigation" and
"Legal Proceedings".
We incurred a $2,326,000 charge during fiscal 1998 relating to our plan to
discontinue InterNutria's operations. InterNutria's operations resulted in
substantial losses, including $17,151,000 in fiscal 1998, prior to this charge.
We have also incurred and will continue to incur noncash compensation expense
over the vesting periods of 1,226,334 shares subject to awards granted under
the Company's 1997 Equity Incentive Plan. These charges are expected to
aggregate approximately $14,000,000, of which we incurred approximately
$10,000,000 in fiscal 1998 and we expect to incur the remainder through fiscal
2000. In connection with Intercardia's acquisition of CPEC, we will incur
charges to operations when and if Intercardia makes two milestone payments to
the former CPEC stockholders. These milestone payments are payable with our
Common Stock. Each additional payment will have a minimum value of $750,000 and
a maximum value of $1,875,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We may never achieve or sustain profitability. Substantially all of our
revenues had been derived from Redux, which was withdrawn from the market in
September 1997. We have experienced, and may continue
69
<PAGE> 70
to experience, fluctuations in revenues as a result of the Redux withdrawal,
regulatory approvals, product launches, the timing of license fees, royalties,
product shipments, and milestone payments.
Uncertainties Generally Related to Clinical Trials
Before obtaining regulatory approval for the commercial sale of any of the
pharmaceutical products we are developing, we must demonstrate that the product
is safe and efficacious for use in each target indication. If clinical trials do
not demonstrate the safety and efficacy of certain products under development,
we will be materially adversely affected. The results of preclinical studies and
early clinical trials may not predict results that will be obtained in
large-scale testing or use. Clinical trials of products we are developing may
not demonstrate the safety and efficacy of such products. Regardless of clinical
trial results, the FDA may not approve marketing of the product. A number of
companies in the pharmaceutical industry, including the Company, have suffered
significant setbacks in advanced clinical trials or have not received FDA
approval, even after promising results in earlier trials. We withdrew our NDA
for citicoline after receipt of negative results in a small Phase 3 clinical
study and commenced a third pivotal Phase 3 clinical study. BEXTRA is currently
in a Phase 3 clinical study for which enrollment is scheduled to end December
31, 1998. Because this study is sponsored by the National Institutes of Health
and the VA, Intercardia does not control the timing, operation or analysis of
the study.
Product Liability Exposure and Insurance Uncertainties
In addition to the claims and risks summarized under "Risks Relating to
Redux Litigation", the use of other products in clinical trials and the
marketing of any products may expose us to substantial product liability claims
and adverse publicity. Certain of our agreements require us to obtain specified
levels of insurance coverage, naming the other party thereto as an additional
insured. We may not be able to maintain or obtain such insurance coverage, or to
obtain such insurance in amounts sufficient to protect us or other named parties
against such liability, at a reasonable cost, or at all. In addition, any
insurance obtained may not cover any particular liability claim. We are unable
to predict the extent to which the Redux-related litigation may affect our
ability to obtain sufficient product liability insurance for other products at
costs acceptable to us. We have indemnified certain licensors and licensees and
may be required to indemnify additional licensors or licensees against product
liability claims incurred by them as a result of products we develop or market.
In the event of uninsured or insufficiently insured product liability claims, or
in the event a successful indemnification claim was made against us, our
business and financial condition could be materially adversely affected.
Dependence on Others for Clinical Development, Regulatory Approvals,
Manufacturing and Marketing
We depend upon collaborative partners for the development, manufacturing
and marketing of certain of our products. In particular, we do not have
sufficient funds to conduct and do not intend to commence a Phase 3 clinical
study on pagoclone unless we enter into a collaborative arrangement providing
for development, manufacturing and marketing. We may not be successful in
establishing any collaborative arrangements. In addition, any such collaborative
partners may not be successful in commercializing our products or may terminate
their collaborative agreements with us. If we obtain any collaborative
arrangements, we will depend on the efforts of these collaborative partners and
we may have limited control over the manufacture and commercialization of the
products subject to the collaboration. In the event certain of our collaborative
partners terminate the related agreements or fail to manufacture or
commercialize products, we would be materially adversely affected. Because we
will generally retain a royalty interest in sales of products licensed to third
parties, our revenues may be less than if we marketed products directly.
Risk of Termination of Contractual Arrangements
70
<PAGE> 71
Our agreements with licensors and licensees generally provide the other
party with rights to terminate the agreement, in whole or in part, under certain
circumstances. Many of our agreements require us to diligently pursue
development of the underlying product or risk loss of the license or incur
penalties. Termination of certain agreements could substantially reduce the
likelihood of successful commercialization of a particular product. Depending
upon the importance to us of the product that is subject to any such agreement,
this could materially adversely affect our business. Ferrer has the right to
terminate the Ferrer Agreement in the event FDA approval of citicoline is not
obtained by January 2002, subject to certain extensions, or in the event an
unaffiliated party acquires 50% of our Common Stock. In September 1998, an
agreement among Intercardia, CPEC and Astra Pharmaceuticals relating to the
development and commercialization of BEXTRA in the U.S. terminated. As a result,
Intercardia is now responsible for substantially all remaining U.S. development
and marketing costs associated with BEXTRA. See "Agreements" and "--Need for
Additional Funds".
Uncertainty of Government Regulation
Our research, development and pre-clinical and clinical trial activities
and the manufacturing and marketing of our 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 required regulatory approvals for
drugs, including conducting preclinical and clinical testing, is lengthy,
expensive and uncertain. Even after such time and expenditures, we may not
obtain necessary regulatory approvals for clinical testing or for the
manufacturing or marketing of any products. Regulatory approval may entail
limitations on the indicated usage of a drug, which may reduce the drug's market
potential. 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. We will depend upon the manufacturers of our products to
comply with cGMP. We also depend on laboratories and medical institutions
conducting preclinical studies and clinical trials to maintain both good
laboratory and good clinical practices. We may not be able to obtain on a timely
basis, or at all, cGMP manufacturers capable of producing product to meet our
requirements, which would materially adversely affect our ability to
commercialize these products. See "Uncertainties Relating to Citicoline."
In addition, we and our 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 local, state, federal and foreign
regulation. We cannot predict the impact of such regulation on us, although it
could be material and adverse.
Limited Patent Protection; Failure to Obtain or Retain Patents and
Proprietary Rights
Our future success will depend to a significant extent on our ability to:
- obtain and enforce patent protection on our products and technologies;
- maintain trade secrets; and
- operate and commercialize products without infringing on the patents
or proprietary rights of others.
Our patents may not afford any competitive advantages and may be challenged
or circumvented by third parties. Further, patents may not issue on pending
patent applications. 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,
reducing any advantage of the patent.
The U.S. composition of matter patent on bucindolol expired in November
1997. As a result, assuming FDA approval can be obtained, competitors,
including generic drug manufacturers, may market bucindolol,
71
<PAGE> 72
if market exclusivity is not obtained under the Waxman-Hatch Act and after such
exclusivity expires. Intercardia must pay a royalty on net sales of bucindolol,
which lessens its ability to compete with generic drug manufacturers of
bucindolol. Our 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, subject to potential extension
under the Waxman-Hatch Act. 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
neuromuscular disorders, and post-stroke rehabilitation. Although the claim of
the licensed patent is broadly directed to the treatment of inadequate release
of brain acetylcholine, this patent may not afford protection against
competitors of citicoline to treat ischemic stroke.
Our business may be materially adversely affected if we fail to obtain and
retain needed patents, licenses or proprietary information. Others may
independently develop similar technologies or duplicate any technology we
develop. Furthermore, litigation may be necessary to:
- enforce any of our patents;
- determine the scope and validity of the patent rights of others; or
- in response to legal action against us claiming damages for infringement
of patent rights or other proprietary rights or seeking to enjoin
commercial activities relating to the affected product or process.
The outcome of any such litigation is highly uncertain. Such litigation may
also result in significant use of management and financial resources.
To the extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to our
proposed products, disputes may arise as to the proprietary rights to such
information which may not be resolved in our favor. Most of our consultants are
employed by or have consulting agreements with third parties and any inventions
discovered by such individuals generally will not become our property. There is
a risk that other parties may breach confidentiality agreements or that our
trade secrets become known or independently discovered by competitors, which
could adversely affect us.
Uncertainty Regarding Waxman-Hatch Act
Assuming regulatory approvals are obtained, our ability to commercialize
successfully certain drugs, including citicoline and BEXTRA, may depend on the
availability of market exclusivity or patent extension under the Waxman-Hatch
Act. The composition of matter patent for bucindolol expired in November 1997
and the Company's licensed patent relating to citicoline expires in 2003. The
marketing of these products could be materially adversely affected if marketing
exclusivity or patent extension provisions are not available to us.
The Waxman-Hatch Act establishes a period of time from the date of FDA
approval of certain NDAs 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. The Waxman-Hatch Act also 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. We are unable to predict whether we will obtain market exclusivity
for CerAxon or BEXTRA or patent term extension for citicoline under the
Waxman-Hatch Act or similar foreign laws.
72
<PAGE> 73
Competition
Competition from other pharmaceutical companies is intense and expected to
increase. We are aware of products under development by our competitors that
address diseases we are targeting and competitors have developed or are
developing products or technologies that are, or may be, the basis for
competitive products.
- With respect to citicoline, Genentech, Inc. markets Activase, a
thrombolytic agent, as a treatment for stroke. We are aware that other
companies are conducting clinical trials on a number of other products
for stroke which could also compete with citicoline.
- BEXTRA would compete with Coreg (carvedilol), which is marketed in
the U.S. for the treatment of congestive heart failure and possibly with
two other beta-blockers which were the subject of separate Phase 3
clinical trials that each recently terminated early due to positive
results. As a result, bucindolol would be the third or fourth
beta-blocker to be introduced in the U.S. market to treat CHF. Although
the patent on bucindolol has expired, Intercardia is required to pay
royalties on net sales.
- Pagoclone would also compete with a number of drugs available and under
development to treat anxiety or panic disorders, including serotonergic
drugs such as BuSpar, Paxil, Zoloft and Prozac and benzodiazepines such
as Valium and Xanax.
Many of the other companies who market or are expected to market
competitive drugs are large, multinational pharmaceutical companies who have
substantially greater marketing and financial resources and experience than us.
We may not be able to develop products that are more effective or achieve
greater market acceptance than competitive products. In addition, our
competitors may develop products that are safer or more effective or less
expensive than those we are developing or that would render our products less
competitive or obsolete. As a result, our products may not be able to compete
successfully.
If the proposed settlement of the Redux product liability litigation
becomes final, we will be required to pay the settlement fund royalties on
product sales, in addition to royalties payable to licensors. These obligations
may adversely affect our ability to compete with certain lower priced
competitive drugs.
Many companies in the pharmaceutical industry also 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, we may compete with other
companies in acquiring rights to products or technologies.
Uncertainty Regarding Pharmaceutical Pricing and Reimbursement
Efforts of governmental and third-party payors to contain or reduce the
cost of health care will affect our business. Successful commercialization of
many of our products 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.
Third-party payors are increasingly challenging the price of medical products
and services. Such reimbursement may not be available for any of our products at
all or for the duration of the recommended treatment with the drug, which could
materially adversely affect our ability to commercialize such drug. The
increasing emphasis on managed care in the U.S. continues to increase the
pressure on pharmaceutical pricing. There have been, and we anticipate 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 adversely affect us. Furthermore, our ability to commercialize
our products may be adversely affected to the extent that such proposals
materially adversely
73
<PAGE> 74
affect the business, financial condition and profitability of companies that are
prospective collaborative partners.
Risks Relating to Managing Growth
Assuming required additional funds and regulatory approvals are obtained
and additional product launches occur, we may experience a period of rapid
growth. This would place significant demands on our management, operational,
financial and accounting resources. If we market certain products directly, such
as citicoline, we will further strain these resources. In particular, we will be
required to establish and maintain a marketing organization, including a sales
force and related management systems. Our future success will depend in part on
whether we can expand our operational, financial and accounting systems and
expand, train and manage our employee base. Our inability to manage growth
effectively could have a material adverse effect on our business, financial
condition and results of operations.
Early Stage of Products Under Development
We are investigating for therapeutic potential a variety of pharmaceutical
compounds, technologies and other products at various stages of development.
Intercardia Research Laboratories is conducting very early stage research and
its technology requires significant further research and development, testing
and regulatory clearances, and is subject to the risks of failure inherent in
the development of products or therapeutic procedures based on innovative
technologies. The products we are developing are subject to the risk that any or
all of them are found to be ineffective or unsafe, or otherwise fail to receive
necessary regulatory clearances. We are unable to predict whether any of our
products will receive regulatory clearances or 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 Upon Key Personnel and Consultants
We are dependent on certain executive officers and scientific personnel and
our business would be adversely affected by the loss of certain of these
individuals. We have 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, we rely 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 highly skilled employees, could adversely affect
our business and prospects. The uncertainties associated with the ongoing
Redux-related litigation adversely affects our ability to recruit qualified
personnel. We are actively seeking to hire a permanent chief financial officer
and, if regulatory approvals and additional funds are obtained, will be required
to hire significant numbers of marketing and sales personnel, as well as medical
and administrative support personnel, in connection with a launch of citicoline.
We may not be able to attract additional qualified employees or retain our
existing personnel.
Control by Present Stockholders; Anti-Takeover Provisions
Our executive officers, directors and principal stockholders (including
individuals or entities related to such stockholders) beneficially own
approximately 44% of our outstanding Common Stock. Accordingly, these officers,
74
<PAGE> 75
directors and stockholders may have the ability to exert significant influence
over the election of our Board of Directors and to determine corporate actions
requiring stockholder approval.
The Board of Directors has the authority, without further approval of our
stockholders, to fix the rights and preferences of and to issue shares of
preferred stock. The preferred stock held by AHP provides that AHP's consent is
required prior to a merger of the Company, the sale of substantially all of our
assets or certain other transactions. In addition, Ferrer may terminate its
license agreement with us relating to citicoline in the event an unaffiliated
third party acquires 50% of our Common Stock. In addition, vesting of shares of
our Common Stock subject to stock awards under the Company's 1997 Equity
Incentive Plan accelerates and outstanding options under the Company's stock
option plans become immediately exercisable upon certain changes in control of
the Company, except under certain conditions. 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 our Common Stock.
No Dividends
We have not paid any cash dividends on our Common Stock since inception and
do 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 we may issue.
Potential Volatility of Stock Price
The market prices for our securities and for securities of emerging
growth companies have historically been highly volatile. Future announcements
concerning us or Intercardia or our competitors may have a significant impact
on the market price of our Common Stock. Factors which may affect our market
price include:
- litigation developments;
- results of clinical studies and regulatory reviews;
- market conditions in the pharmaceutical and biotechnology industries;
- competitive products;
- financings or corporate collaborations;
- sales or the possibility of sales of our stock;
- our results of operations and financial condition;
- proprietary rights;
- public concern as to the safety or commercial value of our products; or
- general economic conditions.
The uncertainties associated with the Redux-related litigation have
adversely affected and may continue to adversely affect the market price of our
Common Stock. Furthermore, the stock market has experienced significant price
and volume fluctuation unrelated to the operating performance of particular
companies. These market fluctuations may also adversely affect the market price
of our Common Stock. See "Risks Relating to Redux Litigation" and "Shares
Eligible For Future Sale; Registration Rights."
Shares Eligible for Future Sale; Registration Rights
As of December 22, 1998, we had 41,817,017 shares of Common Stock
outstanding. Substantially all of these shares are eligible for sale without
restriction or 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, is entitled to sell within any three-month period a
number of restricted shares beneficially owned for at least one year that does
not exceed the greater of:
75
<PAGE> 76
(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 two years is entitled to sell such shares without
regard to the volume or other requirements.
AHP has registration rights relating to 622,222 shares of Common Stock
issuable upon conversion of preferred stock. Swiss Bank Corporation, London
Branch ("SBC"), has registration rights relating to 2,000,000 shares of Common
Stock subject to options held by SBC to purchase such shares in December 1999.
See Note I of Notes to Consolidated Financial Statements.
We have outstanding registration statements on Form S-3 relating to the
resale of our shares of Common Stock and on Form S-8 relating to shares issuable
under our 1989 Stock Option Plan, 1994 Long-Term Incentive Plan, 1995 Stock
Purchase Plan, 1997 Equity Incentive Plan and 1998 Employee Stock Option Plan.
The recipients of shares of our Common Stock under the 1997 Equity
Incentive Plan can sell these shares immediately when the shares vest. Of the
1,226,334 shares of Common Stock issued or issuable under the 1997 Equity
Incentive Plan pursuant to stock awards, 501,188 shares vested and were issued
during fiscal 1998, and the remaining 725,146 shares vest from December 1998
through May 2000. The vesting dates are subject to extension if it occurs during
a "Black Out Period." Black Out Periods generally are periods in which the
recipient is unable to sell the shares subject to the award at the applicable
vesting date due to legal or contractual restrictions. The vesting dates are
also subject to acceleration under certain circumstances, including certain
changes in control of the Company, except under certain conditions. Sales of the
shares of Common Stock subject to restricted stock awards or the possibility of
sales of such shares may adversely affect the market price of our Common Stock.
Shares Subject to Options, Warrants, Stock Awards and Royalty Agreement
As of December 22, 1998, we had reserved the following shares of Common
Stock for issuance:
- 7,203,000 shares issuable upon exercise of outstanding options and
warrants, subject to anti-dilution provisions. As a result of such
provisions, additional shares of Common Stock may be issued upon exercise
of certain warrants.
- 725,146 shares issuable, at nominal consideration, upon vesting of stock
awards under the Company's 1997 Equity Incentive Plan;
- 7,343,124 shares for potential issuance under the royalty agreement, if
the proposed settlement of the Redux product liability litigation becomes
final, based on the total amount of royalties payable ($55,000,000)
divided by the conversion price ($7.49 per share); and
- an additional 3,322,000 shares reserved for issuance under the Company's
stock option plans, stock purchase plan and equity incentive plan.
We may grant additional options, warrants or stock awards. In addition, we
are required to issue additional shares of Common Stock in connection with
technology acquisitions and may issue additional shares if certain call options
to purchase 2,000,000 shares are exercised. To the extent such shares are
issued, the interest of holders of Common Stock will be diluted.
76
<PAGE> 77
Risk Associated with Year 2000 Compliance
If we fail to implement our Year 2000 compliance plan successfully or in a
timely manner, or if we fail to identify significant two-digit dependencies in
our systems or with key business vendors, we could be materially adversely
affected. We cannot assess the likelihood of third parties' Year 2000 compliance
or the impact any noncompliance may have on our operations at this time. If
there are significant delays or unanticipated Year 2000 issues with key business
vendors, the Year 2000 issue could have a material adverse effect on our product
development and our future results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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.
(b) Reports on Form 8-K
During the three month period ended September 30, 1998, the Registrant filed
reports on Form 8-K reporting information under "Item 5 - Other Information" on
August 18, 1998 and September 9, 1998. The Company also filed a report on Form
8-K reporting information under "Item 5 - Other Information" on October 2, 1998.
(c) Exhibits
<TABLE>
<S> <C> <C>
3.4 - Restated Certificate of Incorporation of Registrant, as amended(41)
3.5 - By-Laws of Registrant(1)
4.4 - Certificate of Designation establishing Series C Preferred Stock(17)
4.8 - 1997 Equity Incentive Plan and Form of Restricted Stock Award Agreement thereunder(44)
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)
10.11 - 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)
</TABLE>
77
<PAGE> 78
<TABLE>
<S> <C> <C>
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) 10.16 - 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)
10.22(b) - Addendum and Second Amendment to License Agreement between the
Registrant and Ferrer Internacional S.A., dated June 1, 1998 (47)
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)
10.37 - License Agreement dated as of February 15, 1992 between the Registrant and
Massachusetts Institute of Technology(9)
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)
10.4 - 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)
10.51 - 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)
10.55 - Patent License Agreement between Registrant and Massachusetts Institute of
Technology dated March 1, 1994(20)
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)
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)
10.65(a) - 1994 Long-Term Incentive Plan, as amended(42)
</TABLE>
78
<PAGE> 79
<TABLE>
<S> <C> <C>
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)
10.71 - Securities Purchase Agreement dated June 2, 1995 between the Registrant and Reliance
Insurance Company, including Warrant and exhibits(29)
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)
10.78 - 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)
10.82 - 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(39)
10.87 - Lease dated February 5, 1997 between Registrant and Ledgemont Realty Trust(40)
10.89 - Form of ISDA Master Agreement by and between the Registrant and Swiss Bank Corporation,
London Branch, together with Schedules thereto(42)
10.90(a) - Form of Confirmation for Contract A entered into pursuant to ISDA
Master Agreement by and between the Registrant and Swiss Bank Corporation,
London Branch, together with appendix thereto(42)
10.90(b) - Form of Confirmation for Contract B entered into pursuant to ISDA
Master Agreement by and between the Registrant and Swiss Bank Corporation,
London Branch, together with appendix thereto(42)
10.90(c) - Letter Amendment dated September 18, 1997 to Confirmations filed as
Exhibits 10.90(a) and 10.90(b)(45)
10.91 - Form of Agreement regarding Registration Rights and Related
Obligations to be entered into by and between Registrant and Swiss
Bank Corporation, London Branch(42)
10.92 - Research and Collaboration and License Agreement effective as of
June 30, 1997 by and among Merck & Co., Inc., Transcell
Technologies, Inc. and the Registrant (assigned to Intercardia as
of May 8, 1998)(3)(43)
10.93 - Form of Indemnification Agreement between Registrant and each
director, executive officer and certain officers of the Registrant
entered into as of October 6, 1997(45)
10.94 - 1998 Employee Stock Option Plan(46)
10.95 - Agreement and Plan of Merger dated March 2, 1998 by and among
Registrant, Intercardia, Inc. and Transcell Technologies, Inc.(47)
10.95(a) - Waiver and Consent Agreement dated May 8, 1998 by and among
Registrant, Intercardia and Transcell(47)
</TABLE>
79
<PAGE> 80
<TABLE>
<S> <C> <C>
10.96 - Assignment and Assumption and Royalty Agreement between
Intercardia and Registrant dated May 8, 1998(48)
10.97 - License Agreement between Registrant and the Administrators of the
Tulane Educational Fund dated April 29, 1998(48)
10.98 - Letter of Understanding between the Registrant and the Plaintiffs'
Management Committee dated September 3, 1998(49)
10.99 - Agreement of Compromise and Settlement, including Appendices,
dated September 21, 1998, between the Registrant and the Plaintiffs'
Management Committee(50)
10.100 - Royalty Agreement between the Registrant and the Plaintiffs' Management
Committee effective as of September 21, 1998(51)
10.101 - Fiscal 1999 Senior Executive Bonus Plan, as adopted by the Board September 9, 1998
21 - List of Subsidiaries
23 - Consent of PricewaterhouseCoopers LLP
27 - Financial Data Schedule
</TABLE>
- ----------------------------
(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.
(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.
(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).
(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 Form 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.
80
<PAGE> 81
(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.
(39) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996
(40) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the three months ended December 31, 1996
(41) Incorporated by reference to Exhibit 3.5 of Registrant's Quarterly Report
on Form 10-Q for the three months ended March 31, 1997
(42) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the three months ended March 31, 1997
(43) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the three months ended June 30, 1997
(44) Incorporated by reference to Registrant's Form S-8 (File No. 333-40315)
filed November 14, 1997.
(45) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997.
(46) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the three months ended December 31, 1997
(47) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the three months ended March 31, 1998
(48) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the three months ended June 30, 1998
(49) Incorporated by reference as Exhibit 99.1 of Registrant's Form 8-K dated
September 3, 1998
(50) Incorporated by reference as Exhibit 99.2 of Registrant's Form 8-K dated
September 28, 1998
(51) Incorporated by reference as Exhibit 99.3 of Registrant's Form 8-K dated
September 28, 1998
81
<PAGE> 82
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 28, 1998 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>
Name Title Date
<S> <C> <C>
/s/ Glenn L. Cooper President and Chief Executive December 28, 1998
- ----------------------------- Officer and Director (Principal
Glenn L. Cooper, M.D. Executive Officer)
/s/ Lindsay Rosenwald
- ----------------------------- Chairman of the December 28, 1998
Lindsay Rosenwald, M.D. Board of Directors
Director December , 1998
- -----------------------------
Harry Gray
/s/ Alexander M. Haig Director December 28, 1998
- -----------------------------
Alexander M. Haig, Jr.
/s/ Peter Barton Hutt Director December 28, 1998
- -----------------------------
Peter Barton Hutt
/s/ Malcolm Morville Director December 28, 1998
- -----------------------------
Malcolm Morville
/s/ Robert K. Mueller Director December 28, 1998
- -----------------------------
Robert K. Mueller
/s/ Lee J. Schroeder Director December 28, 1998
- -----------------------------
Lee J. Schroeder
/s/ David B. Sharrock Director December 28, 1998
- -----------------------------
David B. Sharrock
/s/ Richard Wurtman Director December 28, 1998
- -----------------------------
Richard Wurtman, M.D.
/s/ Dale Ritter Senior Vice President, Finance, December 28, 1998
- ----------------------------- Acting Chief Financial Officer
Dale Ritter and Treasurer (Principal
Financial and Accounting Officer)
</TABLE>
82
<PAGE> 83
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements Page
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets -- September 30, 1998 and 1997................ F-3
Consolidated Statements of Operations -- For the years ended
September 30, 1998, 1997 and 1996......................................... F-4
Consolidated Statements of Stockholders' Equity -- For the years ended
September 30, 1998, 1997 and 1996......................................... F-5
Consolidated Statements of Cash Flows -- For the years ended
September 30, 1998, 1997 and 1996......................................... F-7
Notes to Consolidated Financial Statements................................ F-8
F-1
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Interneuron Pharmaceuticals, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Interneuron
Pharmaceuticals, Inc. and its subsidiaries at September 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 8, 1998
F-2
<PAGE> 85
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------ -----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 39,330 $ 55,820
Marketable securities 28,877 64,549
Accounts receivable 1,273 1,297
Inventories - 735
Prepaids and other current assets 1,116 2,056
---------- ---------
70,596 124,457
Marketable securities 3,825 19,683
Investment in unconsolidated subsidiary - 4,040
Property and equipment, net 3,691 4,669
Other assets 85 81
---------- ---------
$ 78,197 $ 152,930
========== =========
LIABILITIES
Current liabilities:
Accounts payable $ 1,334 $ 1,615
Accrued expenses 27,008 39,153
Deferred revenue - 750
Current portion of notes payable and capital lease obligations 837 710
---------- ---------
Total current liabilities 29,179 42,228
Long-term portion of notes payable and capital lease obligations 1,663 1,734
Minority interest 7,499 12,959
Commitments and contingencies (see Notes)
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value, 5,000,000 shares authorized;
Series B, 239,425 shares issued and outstanding at September 30, 1998
and 1997, respectively (liquidation preference at September 30, 1998 $3,026) 3,000 3,000
Series C, 5,000 shares issued and outstanding at September 30, 1998 and
1997, respectively (liquidation preference at September 30, 1998 $502) 500 500
Common stock; $.001 par value, 80,000,000 shares authorized; 41,817,017 shares
issued and outstanding and 41,226,293 shares issued at September 30, 1998
and 1997, respectively 42 41
Additional paid-in capital 268,278 255,693
Accumulated deficit (231,996) (162,034)
Unrealized net gain on marketable securities 32 85
Treasury stock, at cost, no shares and 70,483 shares at September 30, 1998
and 1997, respectively - (1,276)
---------- ---------
Total stockholders' equity 39,856 96,009
========= ---------
$ 78,197 $ 152,930
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE> 86
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the years ended September 30,
---------------------------------
1998 1997 1996
---- ---- ----
Revenues:
<S> <C> <C> <C>
Product revenue $ - $ 55,945 $ 13,779
Contract and license fee revenue 6,488 11,039 8,335
---------- ---------- ----------
Total revenues 6,488 66,984 22,114
Costs and expenses:
Cost of product revenue - 41,144 11,454
Research and development 39,762 50,180 17,344
Selling, general and administrative 21,975 19,581 14,162
Product withdrawal - 7,528 -
Purchase of in-process research and development 500 3,044 6,434
---------- ---------- ----------
Total costs and expenses 62,237 121,477 49,394
Net loss from operations (55,749) (54,493) (27,280)
Investment income, net 5,465 8,944 4,306
Equity in net loss of unconsolidated subsidiary (4,040) (9,028) -
Minority interest 3,839 4,907 574
---------- ---------- ----------
Net loss from continuing operations (50,485) (49,670) (22,400)
Discontinued operations (see Note M):
Loss from operations of InterNutria (17,151) (5,586) (5,586)
Loss from discontinuation of InterNutria (2,326) - -
---------- ---------- ----------
Net loss $ (69,962) $ (55,256) $ (27,986)
========== ========== ==========
Net loss per common share - basic and diluted:
Net loss from continuing operations $ (1.22) $ (1.21) $ (0.61)
Net loss from operations of InterNutria (0.41) (0.14) (0.15)
Net loss from discontinuation of InterNutria (0.06) - -
---------- ---------- ----------
Net loss per common share - basic and diluted $ (1.69) $ (1.35) $ (0.76)
========== ========== ==========
Weighted average common shares outstanding 41,468 41,064 37,004
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE> 87
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------- ------------------
Additional
Number of Par Value Number of Paid-in
Shares Amount Shares Amount Capital
--------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 33,284,006 $ 33 244,425 $3,500 $ 96,651
Proceeds from exercise of Class B Warrants and other warrants 3,524,897 4 13,124
Proceeds from exercise of stock options 740,022 1 3,141
Public offering of common stock, net of issuance costs of $850 3,000,000 3 109,127
Proceeds from offering of Employee Stock Purchase Plan 16,672 146
Dividends on preferred stock (35)
Shares issued in payment of dividends 9,935 105
Issuance of common stock for technology rights 342,792 8,827
Shares and payments pursuant to private placement agreements 97,645 (35)
Gain on sale of stock by subsidiary 16,348
Stock-based compensation 600
Net loss
---------- --- ------- ------ --------
Balance at September 30, 1996 41,015,969 41 244,425 3,500 247,999
Repurchases of common stock
Proceeds from exercise of stock options and warrants 154,902 (163)
Proceeds from offering of Employee Stock Purchase Plan (109)
Dividends on preferred stock (35)
Proceeds from modification of call options 500
Issuance of common stock for technology rights 55,422 108
Gain on sale of stock by subsidiary 7,291
Stock-based compensation and other 102
Unrealized net gain on marketable securities
Net loss
---------- --- ------- ------ --------
Balance at September 30, 1997 41,226,293 41 244,425 3,500 255,693
Proceeds from exercise of stock options and warrants 17,500 (125)
Proceeds from offering of Employee Stock Purchase Plan 14,726 85
Dividends on preferred stock (35)
Issuance of common stock for technology rights 57,310 (787)
Gain on issuance of stock by subsidiary 2,212
Stock-based compensation and other 501,188 1 11,235
Unrealized net loss on marketable securities
Net loss
---------- --- ------- ------ --------
Balance at September 30, 1998 41,817,017 $42 244,425 $3,500 $268,278
========== === ======= ====== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 88
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT.)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Treasury Stock
---------------------
Unrealized Total
Accumulated Net Gain on Number Stockholders'
Deficit Securities of Shares Amount Equity
---------- ----------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 ($78,792) $ 21,392
Proceeds from exercise of Class B and other warrants 13,128
Proceeds from exercise of stock options 3,142
Public offering of common stock, net of issuance costs of $850 109,130
Proceeds from offering of Employee Stock Purchase Plan 146
Dividends on preferred stock (35)
Shares issued in payment of dividends 105
Issuance of common stock for technology rights 8,827
Shares and payments pursuant to private placement agreements (35)
Gain on sale of stock by subsidiary 16,348
Stock-based compensation 600
Net loss (27,986) (27,986)
---------- --------
Balance at September 30, 1996 (106,778) 144,762
Repurchases of common stock 217,500 ($3,978) (3,978)
Proceeds from exercise of stock options and warrants (120,150) 2,224 2,061
Proceeds from offering of Employee Stock Purchase Plan (16,152) 291 182
Dividends on preferred stock (35)
Proceeds from modification of call options 500
Issuance of common stock for technology rights 108
Gain on sale of stock by subsidiary 7,291
Stock-based compensation and other (10,715) 187 289
Unrealized net gain on marketable securities $ 85 85
Net loss (55,256) (55,256)
---------- -------- ---------- ------------ --------
Balance at September 30, 1997 (162,034) 85 70,483 (1,276) 96,009
Proceeds from exercise of stock options and warrants (15,000) 281 156
Proceeds from offering of Employee Stock Purchase Plan 85
Dividends on preferred stock (35)
Issuance of common stock for technology rights (55,483) 995 208
Gain on issuance of stock by subsidiary 2,212
Stock-based compensation and other 11,236
Unrealized net loss on marketable securities (53) (53)
Net loss (69,962) (69,962)
---------- -------- ---------- ------------ --------
Balance at September 30, 1998 ($231,996) $ 32 -- $ -- $ 39,856
========== ======== ========== ============ ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 89
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
For the years ended September 30,
--------------------------------------
1998 1997 1996
------ ------ -------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ($69,962) ($55,256) ($27,986)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,409 1,484 927
Minority interest in net loss of consolidated subsidiaries (3,839) (4,907) (574)
Purchase of in-process research and development - 2,234 8,098
Noncash compensation 11,624 434 1,422
InterNutria discontinuation 1,106 - -
Equity in net loss of unconsolidated subsidiary 4,040 9,028 -
Change in assets and liabilities, net of effects from deconsolidation:
Accounts receivable (139) 2,787 (4,101)
Prepaid and other current assets 814 (8,348) (1,135)
Inventories and other assets (50) 7,605 (8,049)
Accounts payable (281) 114 1,414
Deferred revenue (750) (6,171) 6,921
Accrued expenses and other liabilities (11,970) 31,099 3,633
========= ========== =========
Net cash (used) by operating activities: (66,998) (19,897) (19,430)
========= ========== =========
Cash flows from investing activities:
Capital expenditures (1,308) (3,273) (1,850)
Purchases of marketable securities (28,992) (85,971) (56,641)
Proceeds from maturities and sales of marketable securities 80,469 25,531 51,141
Purchases of Intercardia stock - (2,951) -
Purchases of Progenitor units and stock - (3,605) -
Other - (12) 63
========= ========== =========
Net cash provided (used) by investing activities 50,169 (70,281) (7,287)
========= ========== =========
Cash flows from financing activities:
Net proceeds from issuance of common and treasury stock and other
financing activities 242 2,819 125,510
Net proceeds from issuance of stock by subsidiaries 201 333 30,569
Purchases of treasury stock - (3,978) -
Proceeds from sale/leaseback transactions - 1,636 313
Proceeds from notes payable 460 156 16
Principal payments of notes payable (122) (35) -
Principal payments of capital lease obligations (442) (834) (571)
========= ========== =========
Net cash provided by financing activities 339 97 155,837
========= ========== =========
Net change in cash and cash equivalents (16,490) (90,081) 129,120
Cash and cash equivalents at beginning of period 55,820 145,901 16,781
========= ========== =========
Cash and cash equivalents at end of period $ 39,330 $ 55,820 $ 145,901
========= ========== =========
Supplemental disclosure of financing and investing activities:
Cash payments for interest $ 268 $ 311 $ 330
========= ========== =========
Property and equipment obtained through financing arrangements $ 159 $ 1,211 $ 157
========= ========== =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-7
<PAGE> 90
INTERNEURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Nature of the Business:
Interneuron Pharmaceuticals, Inc. ("Interneuron" or 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. The Company also develops products
and technologies, through two consolidated subsidiaries and one unconsolidated
subsidiary (the "Subsidiaries"): Intercardia, Inc. ("Intercardia") a public
company and a consolidated subsidiary, focuses on cardiovascular disease and
carbohydrate-based drug discovery; InterNutria, Inc. ("InterNutria"), a
consolidated subsidiary, focuses on dietary supplement products; and Progenitor,
Inc. ("Progenitor") a public company and an unconsolidated subsidiary, focuses
on functional genomics using developmental biology. As of September 30, 1998,
InterNutria has been classified as a discontinued operation (see Note M) and the
Company's investment in Progenitor has been fully reserved pursuant to
Progenitor's December 1998 determination to discontinue operations (see Note P).
On September 15, 1997, the Company and Wyeth-Ayerst Laboratories
("Wyeth-Ayerst"), a division of American Home Products Corp. ("AHP") announced a
withdrawal of the weight loss medication Redux (TM) (dexfenfluramine
hydrochloride capsules) C-IV. This action was taken based on new, preliminary
and summary information regarding potential abnormal echocardiogram findings in
patients using these medications. The market withdrawal of Redux resulted in the
recognition of certain charges to operations in fiscal 1997. In addition, the
Company has been named in certain legal actions. (See Note H.)
B. Summary of Significant Accounting Policies:
Basis of Presentation: The consolidated financial statements include the
accounts of the Company and its majority-owned Subsidiaries. Transcell
Technologies, Inc. ("Transcell") was a majority-owned Subsidiary through May 8,
1998 at which time it was merged into Intercardia (see Note P). All significant
intercompany accounts and transactions have been eliminated. Investments in
Subsidiary companies which are less than majority but greater than 20% owned are
reflected using the equity method of accounting.
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 primarily 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 noncurrent 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, 1998 and 1997, all
F-8
<PAGE> 91
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:
Office equipment....................................................2 to 5 years
Laboratory equipment.....................................................5 years
Leasehold improvements............Shorter of lease term or estimated useful life
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. For products requiring regulatory approval or compliance
prior to marketing, inventory costs are capitalized commencing from the time the
Company determines it is probable the pertinent product will be approved by or
comply with requirements of the relevant regulatory authorities including the
U.S. Food and Drug Administration ("FDA").
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 accurate and appropriate form and in accordance
with the related license agreements. Contract and license fee revenue consists
of technology license-related payments, 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. Cash received in advance of revenue
recognition is recorded as deferred revenue.
Research and Development: Research and development costs are expensed in the
period incurred.
Advertising Costs: Advertising 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 J.)
Accounting for Stock-Based Compensation: The Company adopted the disclosure -
only alternative permitted under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which changes
measurement, recognition and disclosure standards for stock-based compensation.
The Company measures stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25 ("APB Opinion No. 25") and related interpreta-
tions. The Company has disclosed proforma net loss and proforma net loss per
share for fiscal 1998, 1997 and 1996 in Note I using the fair value method. As
such, the adoption of SFAS No. 123 did not impact the financial position or the
results from operations of the Company.
F-9
<PAGE> 92
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 uncertain. 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.
Earnings per Share: During the fiscal year ended September 30, 1998, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS No. 128"). SFAS No. 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. All earnings
per share amounts for all periods have been presented to conform to SFAS No. 128
requirements. There was no effect on the earnings per share disclosures as a
result of adoption of SFAS No. 128 due to the antidilutive effect of the
Company's outstanding options, warrants and convertible securities. (See Note
K.)
Uncertainties: The Company is subject to a number of risks including those
common to companies in the pharmaceutical and biotechnology industries, such as
litigation, product liability, need for additional funds, competition,
dependence on third parties for manufacturing and marketing, 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 1998 classifications.
Recent Accounting Pronouncements: The Company will adopt SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), in the fiscal year ending
September 30, 1999. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements.
The Company will adopt SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), in the fiscal year ending
September 30, 1999. SFAS No. 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed. Management has not determined the effect of adopting SFAS No. 131.
The Company will adopt SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), in the fiscal year ending September 30, 2000.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS 133 requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. Management has not determined the
effect of adopting SFAS 133.
F-10
<PAGE> 93
C. Marketable Securities:
<TABLE>
<CAPTION>
Investments in marketable securities consisted of the following at September 30, 1998 and 1997:
1998 1997
-------------------------------- ---------------------------------
Market Market
Cost Value Cost Value
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
U.S. government treasury and agency obligations $14,246,000 $14,275,000 $12,768,000 $12,789,000
Foreign government and corporate obligations -- -- 13,904,000 13,903,000
U.S. corporate notes 18,424,000 18,427,000 57,475,000 57,540,000
============== ============== ============== ==========
$32,670,000 $32,702,000 $84,147,000 $84,232,000
============== ============== ============== ===========
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998, gross unrealized gains and losses were $34,000 and $2,000, respectively. At September 30, 1997,
gross unrealized gains and losses were $89,000 and $4,000 respectively. The maturities of these marketable securities
as of September 30, 1998 and 1997 were as follows:
1998 1997
------------- -------------
<S> <C> <C>
Within one year $28,877,000 $64,549,000
After one year through three years 3,825,000 19,683,000
============= =============
Total maturities $32,702,000 $84,232,000
============= =============
</TABLE>
D. Inventories:
<TABLE>
<CAPTION>
At September 30, 1997, inventories consisted of the following:
1997
=============
<S> <C>
Raw materials $ 221,000
Finished goods 514,000
=============
$ 735,000
=============
</TABLE>
At September 30, 1998, the Company has fully reserved all inventory related to
PMS Escape in connection with the Company's decision to discontinue the
operations of InterNutria (see Note M). At September 30, 1997, inventories
related primarily to PMS Escape as all Redux-related inventories were fully
reserved in connection with the market withdrawal of Redux (see Note H).
F-11
<PAGE> 94
E. Property and Equipment:
<TABLE>
<CAPTION>
At September 30, 1998 and 1997, property and equipment consisted of the
following:
1998 1997
====== =====
<S> <C> <C>
Office equipment $1,725,000 $2,131,000
Laboratory equipment 1,258,000 2,093,000
Leasehold improvements 2,321,000 2,362,000
----------- -----------
5,304,000 6,586,000
Less: accumulated depreciation and amortization (1,613,000) (1,917,000)
----------- -------------
$3,691,000 $4,669,000
=========== =============
</TABLE>
Included in the above amounts is property and equipment under capital lease and
note obligations of $1,207,000 and $2,713,000 at September 30, 1998 and 1997,
respectively, and related accumulated depreciation of $401,000 and $1,149,000 at
September 30, 1998 and 1997, respectively. Assets financed through capital lease
and note payable arrangements consist primarily of office and laboratory
equipment. The Company paid $173,000 and $165,000 in interest expense during the
years ended September 30, 1998 and 1997, respectively, related to these capital
lease and note payable obligations.
F. Accrued Expenses:
<TABLE>
<CAPTION>
At September 30, 1998 and 1997, accrued expenses consisted of the following:
1998 1997
====== -----
<S> <C> <C>
Clinical and sponsored research $ 12,378,000 $ 21,077,000
Redux withdrawal 7,982,000 11,620,000
Compensation related 3,150,000 3,949,000
InterNutria discontinuation 1,719,000 -
Other 1,779,000 2,507,000
------------- ---------
$ 27,008,000 $ 39,153,000
============ ============
</TABLE>
G. Commitments and Obligations:
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 $2,290,000, $1,931,000 and $1,195,000 for the years ended
September 30, 1998, 1997 and 1996, respectively. The Company also leases certain
property and equipment under capital leases.
F-12
<PAGE> 95
<TABLE>
<CAPTION>
At September 30, 1998, the Company's future minimum payments under
non-cancelable lease arrangements are as follows:
Operating Capital
Fiscal Year Leases Leases
------------ -------------
<C> <C> <C>
1999 $ 1,964,000 $ 742,000
2000 1,841,000 622,000
2001 1,740,000 268,000
2002 1,288,000 27,000
2003 957,000 20,000
Thereafter 4,479,000 --
------------ -------------
Total lease payments $ 12,269,000 1,679,000
============
Less: amount representing interest (151,000)
-------------
Present value of net minimum lease
payments $1,528,000
==========
</TABLE>
At September 30, 1998 and 1997, the Company's note obligations consisted of
approximately $972,000 and $633,000 in note payable agreements (the "Notes")
respectively. The Notes require monthly, semi-annual or single payments, accrue
interest at rates ranging from approximately 5.8% to approximately 13.4% and
expire at various dates through June 2007. At September 30, 1998 and 1997,
$194,000 and $73,000, respectively, of the Notes have been classified as
current.
H. Withdrawal of Redux, Legal Proceedings, and Related Contingencies:
On September 15, 1997, the Company and Wyeth-Ayerst announced a market
withdrawal of the weight loss medication Redux, which was launched in June 1996.
In connection with the market withdrawal of Redux, the Company recorded as of
September 30, 1997 certain charges aggregating approximately $10,800,000. Of
this amount, approximately (i) $3,300,000 (included in cost of revenues) related
to reserves for inventories of dexfenfluramine drug substance and finished Redux
capsules which were deemed to have no net realizable value and (ii) $7,500,000
related to costs or commitments associated with product development, the
cessation of production of Redux capsules and other costs. Total expenses
relating to the market withdrawal of Redux may exceed these amounts which are
current estimates and do not include provisions for liability, if any, arising
out of Redux-related litigation or other related costs.
Interneuron is named, together with other pharmaceutical companies, as a
defendant in approximately 779 product liability legal actions, many of which
purport to be class actions, in federal and state courts involving the use of
Redux and other weight loss drugs. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation issued an Order allowing for the transfer or
potential transfer of the federal actions to the Eastern District of
Pennsylvania for coordinated pretrial proceedings.
On September 25, 1998, the U.S. District Court for the Eastern District of
Pennsylvania (the "Court") preliminarily approved an Agreement of Compromise and
Settlement (the "Settlement Agreement") between the Company and the Plaintiffs'
Management Committee ("PMC") relating to the proposed settlement of all product
liability litigation and claims against the Company relating to Redux. As part
of the Settlement Agreement, the Company and the PMC entered into a royalty
agreement relating to a portion of the payments proposed to be made to the
settlement fund.
On November 3, 1998, the Court issued a stay halting all Redux product liability
litigation against the Company,
F-13
<PAGE> 96
pending and future, in state courts, following the issuance of a similar stay
halting Redux product liability litigation against the Company with federal
courts on September 3, 1998. These stays will remain effective until a fairness
hearing scheduled for February 25, 1999 and may be extended pending the outcome
of this hearing.
The limited fund class action established by the Settlement Agreement includes
all persons in the United States who used Redux, and certain other persons such
as their family members, who would be bound by the terms of the settlement.
Membership in the class is mandatory for all persons included within the class
definition. Class members asserting claims against Interneuron will be required
to seek compensation only from the settlement fund, and their lawsuits against
Interneuron will be dismissed. By agreeing to the proposed settlement,
Interneuron does not admit liability to any plaintiffs or claimants.
The Settlement Agreement requires Interneuron to deposit a total of
approximately $15,000,000 in three installments into a settlement fund. The
first installment of $2,000,000 was deposited into the settlement fund in
September 1998. A second installment of $3,000,000 is to be made after the
Settlement Agreement is approved by the Court, which approval, if obtained,
would follow the fairness hearing. These installments, less certain expenses,
will be returned to Interneuron if the settlement does not become final. A third
installment of $10,000,000, plus interest, is to be made after the settlement
becomes final.
In addition, the Settlement Agreement provides for Interneuron to cause all
remaining and available insurance proceeds related to Redux to be deposited into
the settlement fund. Interneuron also agreed to make certain royalty payments to
the settlement fund pursuant to a Royalty Agreement (the "Royalty Agreement")
which is part of the Settlement Agreement, in the total amount of $55,000,000,
based upon revenues related to Interneuron products, over a seven year period
commencing when the settlement becomes final. Royalties will be paid at the rate
of 7% of gross sales of Interneuron products sold by Interneuron, 15% of cash
dividends received by Interneuron from its subsidiaries related to product
sales, and 15% of license revenues (including license fees, royalties or
milestone payments) received by Interneuron from a sublicensee related to
product sales. All Interneuron products will be subject to this royalty during
the applicable term. If, at the end of that seven year period, the amount of
royalty payments made by Interneuron is less than $55,000,000, the settlement
fund will receive shares of Interneuron stock in an amount equal to the unpaid
balance divided by $ 7.49 per share, subject to adjustment under certain
circumstances such as stock dividends or distributions. The Company could be
required to issue up to 7,343,124 shares of Common Stock if it is makes no
royalty payments.
The Settlement Agreement will not become final until approved by the Court and
the time for filing appeals of the Court's judgement approving the Settlement
Agreement has elapsed without any appeals being filed or all appeals from the
Court's judgement approving the Settlement Agreement have been exhausted and no
further appeal may be taken. In this case, in order to approve the settlement,
the Court must make a determination that the proposed settlement is fair and
reasonable and meets each of the prerequisites for a class action generally, and
for a "limited fund" class action in particular, all as required by the Federal
Rules of Civil Procedure. Pursuant to these rules, notice of the proposed
settlement was provided to potential class members in November 1998, and the
Court has scheduled a Fairness Hearing for February 25, 1999 (the "Fairness
Hearing"). At the Fairness Hearing, proponents and opponents of the proposed
settlement will be given an opportunity to present written and oral arguments in
favor of or against the settlement. Following the Fairness Hearing, the Court
must determine if the case is properly certified as a limited fund class action,
and if so, whether the terms of the Settlement Agreement are fair and
reasonable.
The Company may withdraw from the Settlement Agreement, or the Settlement
Agreement may otherwise terminate, under any of the following conditions: (i)
final approval of the Settlement Agreement is not entered by the Court; (ii)
class certification and/or approval of the Settlement Agreement is overturned on
appeal for
F-14
<PAGE> 97
any reason; (iii) pending and future litigation against the Company or any other
party released by the Settlement Agreement ("Released Parties") is not
permanently enjoined on the final approval date; (iv) the class action and all
pending multi-district lawsuits against the Released Parties are not dismissed
with prejudice on the final approval date; (v) an order is not entered by the
Court permanently barring contribution and indemnity claims by other defendants
in the diet drug litigation; or (vi) Interneuron is unable to compel tender of
its insurance proceeds.
There can be no assurance that after the Fairness Hearing, the Court will
approve the settlement. Even if the settlement is approved by the Court,
opponents of the settlement may appeal the Court's opinion to the United States
Court of Appeals for the Third Circuit. In addition, there is a case pending
before the United States Supreme Court (Ortiz v. Fibreboard Corporation et al)
("Ortiz"), that may influence the Court's decision or the outcome of any appeal
that might be taken. Oral argument in the Ortiz case was heard on December 8,
1998 and the Supreme Court is likely to render its opinion between January and
June 1999. Although factually distinguishable in many respects from the
Company's proposed settlement, Ortiz involves an appeal from a mandatory,
putative "limited fund" class action settlement. There can be no assurance that
the Supreme Court's rulings in Ortiz will not significantly influence the
approval process for, or potentially result in the overturning of, the
Settlement Agreement.
The Company will record initial charges to operations for the estimated fair
value of the Company's obligations under the Settlement Agreement, exclusive of
insurance proceeds, at such time as the Company can determine that it is
probable that the conditions to final settlement have been or will be met. This
is expected to be subsequent to the Fairness Hearing and the Supreme Court
ruling in Ortiz. The amount of the liability to be recognized in connection with
these charges is likely to be significant and to materially adversely affect the
Company's net worth. Additionally, if the Company records such charges prior to
the final settlement date, then on the date the Settlement Agreement becomes
final, the Company will determine if there was any increase in the fair value of
the equity conversion feature of the Royalty Agreement and record any such
increase as an additional charge to operations. From the date the Company
records the initial charge and related liability for the settlement and through
the term of the Royalty Agreement, the Company may record additional charges to
accrete the liability attributable to the royalty feature of the Royalty
Agreement up to the amount of royalties the Company expects to pay pursuant to
the Royalty Agreement over the time the Company expects to make such royalty
payments. Payments to be made by the Company pursuant to the Settlement
Agreement could have a material adverse effect on the operations and financial
condition of the Company.
If the Settlement Agreement is overturned or not made final, the ongoing
Redux-related litigation would then proceed against the Company. In this event,
existence of such litigation, including the time and expenses associated with
the litigation, may materially adversely affect the Company's business,
including its ability to obtain sufficient financing to fund operations.
Although the Company is unable to predict the outcome of any such litigation,
such outcome may materially adversely affect the Company's future business,
financial condition and results of operations.
The Company has also been named as a defendant in several lawsuits filed by
alleged purchasers of the Company's Common Stock, purporting to be class
actions, claiming violation of the federal securities laws. It is not possible
for the Company to determine its costs related to its defense in these or
potential future legal actions, monetary or other damages which may result from
such legal actions, or the effect on the future operations of the Company.
F-15
<PAGE> 98
I. 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 AHP. (See
Note N.)
Common Stock and Warrants: Class B Warrants, which were issued in connection
with the Company's initial public offering in 1990, 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 1996, approximately 2,402,000 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.
In connection with private placements of 3,009,045 shares of the Company's
Common Stock in fiscal 1995, the Company issued warrants to purchase 653,500
shares of its Common Stock. At September 30, 1998, 632,500 of these warrants
were outstanding at prices ranging from $5.00 to $13.08 per share and expire
from August 16, 2000 to February 3, 2005.
In January 1996, the Company issued 342,792 shares of Common Stock for the pur-
chase of the 20% of outstanding capital stock of CPEC, Inc. ("CPEC") not owned
by Intercardia. (See Note O.)
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.
In March 1997, the Company's stockholders approved an increase to the number of
authorized shares of Common Stock from 60,000,000 to 80,000,000.
During fiscal 1995, certain Subsidiaries issued convertible preferred stock
through private placements (the "Subsidiaries' Private Placements"). In
connection with certain of the Subsidiaries' Private Placements, the Company
issued 239,938 warrants to purchase shares of the Company's Common Stock
exercisable at $4.63 per share until June 30, 1998, all of which were exercised
or expired. Additionally, investors in the private placements had certain rights
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").
As a result of Intercardia's IPO, Progenitor's IPO and the Transcell
Acquisition, the Company's potential obligations under the Put Protection Rights
expired.
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, and under the Company's 1994 Long-Term Incentive
Plan (the "1994 Plan"), incentive or non-qualified options to purchase 6,000,000
shares of the Company's Common Stock, may be granted to employees and directors
and consultants may be granted non-qualified options. Under the 1989 and 1994
Plans the term of each grant cannot exceed ten years.
In January 1998, the Company's Board of Directors adopted, and in March 1998 the
Company's stockholders approved, the 1998 Employee Stock Option Plan (the "1998
Plan") (along with the 1989 and 1994 Plans, the
F-16
<PAGE> 99
"Plans"). Under the 1998 Plan, options to purchase up to 1,500,000 shares of the
Company's Common Stock, may be granted to employees, directors and consultants
except persons who were executive officers or directors of the Company as of the
date of adoption of the 1998 Plan. The duration of the 1998 Plan is ten years
and the term of options granted thereunder cannot exceed seven 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, 1998, 100,000
Non-Plan Options were outstanding.
In May 1998, the Company's Board of Directors authorized the Company to offer
(the " May 1998 Exchange Offer") holders of outstanding options, issued
primarily pursuant to Interneuron's stock option plans, and certain warrants to
purchase the Company's Common Stock which had exercise prices of $10.00 per
share or greater, the right to exchange such options and warrants for new
options and warrants (the "May 1998 New Options and Warrants") to purchase the
same number of shares represented by the outstanding original options and
warrants at an exercise price of $6.19 per share, the fair market value of the
Company's Common Stock determined as of May 5, 1998 (the "May 1998 Exchange
Date"). The May 1998 New Options and Warrants generally vest in six equal
installments every six months commencing November 1998. The term of each May
1998 New Option or Warrant is the same as the remaining term of the respective
original option or warrant. Pursuant to the May 1998 Exchange Offer, 3,992,040
options and 105,000 warrants have been exchanged.
In August 1998, the Company's Board of Directors authorized the Company to offer
(the "August 1998 Exchange Offer") holders of outstanding options, issued
primarily pursuant to Interneuron's stock option plans and which were not
subject to the terms of the May 1998 Exchange Offer, the right to exchange such
options for new options (the "August 1998 New Options") to purchase the same
number of shares represented by the outstanding original options at an exercise
price of $4.16 per share, the fair market value of the Company's Common Stock
determined as of August 17, 1998 (the "August 1998 Exchange Date"). The August
1998 New Options generally vest in four installments: 30% in six months from the
August 1998 Exchange Date, 30% in twelve months from the August 1998 Exchange
Date, 20% in eighteen months from the August 1998 Exchange Date, and 20% in
twenty four months from the August 1998 Exchange Date. The term of each August
1998 New Option is the same as the remaining term of the respective original
option. Pursuant to the August 1998 Exchange Offer, 2,144,401 options have been
exchanged.
Presented below under the caption "Stock Options" is all Plan and Non-Plan
option activity and under the caption "Warrants" is all warrant activity,
exclusive of Class B warrant activity, certain of which may also be
disclosed in this and other Notes to the Consolidated Financial Statements:
F-17
<PAGE> 100
<TABLE>
<CAPTION>
Stock Options Warrants
--------------------------- ------------------------------
Weighted
Average
Shares Exercise Price Shares Warrant Price
---------- -------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Outstanding at September 30, 1995 4,081,441 $7.25 2,038,438 $4.00 - $14.00
Granted 848,300 $23.56 75,000 $23.25
Exercised (740,021) $4.24 (1,309,125) $4.00- $14.00
Canceled (298,000) $27.22 -
--------- --------
Outstanding at September 30, 1996 3,891,720 $9.85 804,313 $4.63 - $23.25
Granted 1,477,000 $21.71 50,000 $18.25 - $20.25
Exercised (271,896) $7.53 (3,156) $4.63
Canceled (14,750) $19.19 (20,000) $23.25
--------- --------
Outstanding at September 30, 1997 5,082,074 $13.39 831,157 $4.63 - $23.25
Granted 8,555,641 $6.97 155,000 $6.19 - $7.13
Exercised (5,000) $5.88 (27,500) $4.63
Canceled (7,242,392) $12.72 (146,157) $4.63 - $23.25
--------- -------
Outstanding at September 30, 1998 6,390,323 $5.57 812,500 $5.00 - $12.77
========= =======
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998, stock options were outstanding and exercisable as
follows:
Outstanding Exercisable
---------------------------------------------------------- ---------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Exercise Exercise
Price Number Contractual Life Price Number Price
------------- --------- ---------------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.83-$ 5.00 2,581,801 4.9 years $ 4.22 356,150 $ 4.72
$ 6.00-$10.00 3,753,747 6.2 years $ 6.33 351,847 $ 7.73
$10.50-$28.13 54,775 7.5 years $17.04 49,775 $ 16.15
--------- -------
$ 0.83-$28.13 6,390,323 5.7 years $ 5.57 757,772 $ 6.87
========= =======
</TABLE>
All outstanding options vest at various rates over periods up to four years and
expire at various dates from February 18, 1999 to March 3, 2008. At September
30, 1997, 2,698,907 options were exercisable at a weighted average exercise
price of $9.02. At September 30, 1996, 2,210,998 options were exercisable at a
weighted average exercise price of $7.95.
At September 30, 1998, warrants were outstanding and exercisable as follows:
F-18
<PAGE> 101
<TABLE>
<CAPTION>
Range of
Exercise Number Number
Prices Outstanding Exercisable
-------- ----------- -----------
<S> <C> <C>
$ 5.00-$7.88 250,000 145,000
$10.00 500,000 500,000
$12.77 62,500 62,500
------- -------
812,500 707,500
======= =======
</TABLE>
At September 30, 1998, all outstanding warrants expire at various dates from
August 16, 2000 to September 16, 2006 and have a weighted average exercise price
of $9.14 per share.
Restricted Stock Awards: As an integral component of a management and employee
retention program designed to motivate, retain and provide incentive to the
Company's management and other employees, the Company's Board of Directors
adopted the 1997 Equity Incentive Plan in October 1997 (the "1997 Plan"). The
1997 Plan provides for the grant of restricted stock awards which entitle the
plan participants to receive up to an aggregate of 1,750,000 shares of the
Company's Common Stock upon satisfaction of specified vesting periods. As of
September 30, 1998, restricted stock awards to acquire an aggregate of 1,226,334
shares had been granted, net of forfeitures, to all employees of the Company in
consideration of services rendered by the employee to the Company and payment of
the par value of the shares. The shares subject to the awards have been
registered under the Securities Act of 1933 on a registration statement on Form
S-8 and, accordingly, may be sold by the plan participants immediately upon
vesting of the shares. In accordance with the provisions of the 1997 Plan for
automatic extension of vesting during Black-Out Periods, as defined in the 1997
Plan, vesting of the shares commenced in April 1998 and through September 30,
1998, 501,188 shares have vested and been issued by the Company under the 1997
Plan. Vesting continues through May 2000 on the remaining 725,146 shares subject
to awards at September 30, 1998.
The Company has incurred and will continue to incur compensation expense from
the date of grant of awards through the vesting period of shares subject to
restricted stock awards. The charges relating to the restricted stock awards to
acquire 1,226,334 shares are expected to aggregate approximately $14,000,000,
the fair market value of the shares at the time of grant, of which approximately
$10,000,000 was incurred in fiscal 1998 and the remainder will be incurred
through the final vesting periods in fiscal 2000. Such expense has been and is
being allocated to research and development and selling, general and
administrative expense.
Employee Stock Purchase Plan: The Company's 1995 Employee Stock Purchase Plan
(the "1995 Plan") covers 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"). Stock is 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. At September 30, 1998, 43,295 shares remain to be
purchased under the 1995 Plan.
F-19
<PAGE> 102
Pro Forma Net Loss Information: Pro forma information regarding net loss shown
below was determined as if the Company and its consolidated Subsidiaries had
accounted for employee stock options and shares purchased under stock purchase
plans under the fair value method of SFAS No. 123. The fair value of each option
grant is estimated on the date of the grant using a Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 70%-90% 60%-70%
Risk-free interest rate 5.3%-5.6% 6.0%-6.9%
Expected option life 2-3 years 5 years
Weighted average grant date fair value:
Interneuron $3.87 $12.81
Intercardia $9.57 $11.46
Transcell - $ .17
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's and its consolidated Subsidiaries'
employee stock options have characteristics significantly different from those
of traded options such as vesting restrictions and extremely limited
transferability. In addition, the assumptions used in option valuation models
are highly subjective, particularly the assumption of expected stock price
volatility of the underlying stock. Changes in these subjective assumptions can
materially affect the fair value estimate.
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The below pro forma net
loss and net loss per share amounts only include option grants within the last
two years. The pro forma effect on net loss for the fiscal years ended September
30, 1998 and 1997 may not be representative of the pro forma effect on net
income or loss in future years. The Company's pro forma information is as
follows for the fiscal years ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $69,962,000 $83,043,000 $55,256,000 $62,773,000
Net loss per share $1.69 $2.00 $1.35 $1.53
</TABLE>
Treasury Stock and Stock Repurchases: In March 1997, the Company announced that
its Board of Directors had authorized it to repurchase from time to time through
open-market transactions up to 1,500,000 shares of the Company's Common Stock.
As of September 30, 1998, the Company had repurchased 217,500 shares, all in
fiscal 1997, for an aggregate purchase price of approximately $3,978,000, all of
which shares were re-issued primarily pursuant to stock option and warrant
exercises and the 1995 Plan.
Call Options: In May 1997, the Company purchased in private transactions from
Swiss Bank Corporation, London Branch ("SBC") capped call options, which were
subsequently modified, on Interneuron Common Stock. As modified, these call
options gave Interneuron the right to purchase from SBC up to a total of
1,240,000 shares of Interneuron Common Stock at a strike price of $14.50. The
call options maturing on December 31, 1997, June 9, 1998, and September 21, 1998
expired without exercise. The remaining call option is exercisable on January
11, 1999, with respect to 310,000 shares, and is subject to a cap of $34.50. The
call options which the Company purchased may be settled, if exercised, with cash
or Common Stock in an amount equal to the difference between the strike price
and the market price, determined over a specified valuation period, subject to
the cap. Under certain circumstances, the Company may delay the expiration date
of the remaining call option for the payment of additional consideration to SBC.
F-20
<PAGE> 103
In exchange for the purchases of these call options, in lieu of cash purchase
prices, the Company sold to SBC call options entitling SBC to purchase from the
Company at a strike price of $36.00 per share, an aggregate of 2,000,000 shares
of Interneuron Common Stock, 1,000,000 shares on each of December 30 and 31,
1999. Modification to the original options, which consisted of extensions of
maturity dates and reductions of the caps and strike prices, resulted in a
$500,000 cash payment to the Company. The Company will have the right to settle
these call options with cash or stock, subject to certain conditions. If
exercised, the Company expects to settle the call options that it sold through
issuances by the Company to SBC of up to an aggregate of 2,000,000 shares of
Common Stock, subject to the effectiveness of a registration statement covering
the resale of these shares delivered. Because the Company has the ability to
settle call options through issuance or receipt of Common Stock, the Company has
accounted for the original purchases and sales of these call options as
equivalent and offsetting noncash equity transactions. Any gains realized from
purchased call options will be reflected in additional paid-in capital. The
additional $500,000 received in cash for the subsequent modification to the
original options is reflected as a credit to additional paid-in capital in
fiscal 1997.
Other: In addition to the 41,817,000 shares of Common Stock outstanding at
September 30, 1998, there were approximately 18,778,000 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) 622,000 shares of Common Stock issuable upon conversion of
issued and outstanding Preferred Stock; (iii) 1,249,000 shares reserved for
issuance under the 1997 Plan (iv) 9,088,000 shares reserved for issuance under
the Plans and the 1995 Plan, (of which approximately 6,290,000 stock options
were outstanding not all of which were vested); (v) an estimated 150,000 shares
issuable in connection with certain acquisitions; (vi) approximately 913,000
shares reserved for issuance from exercise of outstanding warrants and Non-Plan
Options; and (vii) 2,000,000 shares reserved for issuance pursuant to call
options potentially exercisable by SBC. In addition, the Company had reserved
7,343,124 shares for issuance pursuant to the Royalty Agreement, subject to
final approval of the Settlement Agreement (see Note H).
F-21
<PAGE> 104
J. Income Taxes:
<TABLE>
<CAPTION>
At September 30, 1998 and 1997, the significant components of the Company's
deferred tax asset consisted of the following:
1998 1997
----------- -----------
<S> <C> <C>
Federal and state net operating loss
carryforwards $60,876,000 $36,728,000
Federal and state tax credit carryforwards 5,154,000 3,922,000
Accrued expenses 15,263,000 16,076,000
Investment in unconsolidated subsidiary 11,880,000 10,000,000
----------- -----------
Total deferred tax asset before
valuation allowance 93,173,000 66,726,000
Valuation allowance against total
deferred tax asset (93,173,000) (66,726,000)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
At September 30, 1998, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $165,000,000 which
expire at various dates from 2004 to 2018. In addition, the Company had
approximately $5,200,000 of tax credit carryforwards for federal income tax
purposes expiring at various dates through 2013. 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. Approximately $12,500,000
of the net operating loss carryforwards available for federal income tax
purposes relate to exercises of non-qualified stock options and disqualifying
dispositions of incentive stock options, the tax benefit from which, if
realized, will be credited to additional paid-in capital.
Due to the uncertainty surrounding the realization of favorable tax attributes
in future tax returns, all of the deferred tax assets have been fully offset by
a valuation allowance.
K. Earnings Per Share:
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted earnings per
share for the years ended September 30, 1998 and 1997:
1998 1997
------------------ --------------
<S> <C> <C>
Numerator for basic and diluted:
Net loss $(69,962,000) $(55,256,000)
================= ================
Denominator for basic and diluted:
weighted average shares outstanding 41,468,000 41,064,000
================= ================
Net loss per common share - basic $ (1.69) $ (1.35)
================= ================
Net loss per common share - diluted $ (1.69) $ (1.35)
================ ================
</TABLE>
During the year ended September 30, 1998, securities not included in the
computation of diluted earnings per share, because their exercise price exceeded
the average market price during the period were as follows: (i)
F-22
<PAGE> 105
options to purchase 301,625 shares of Common Stock at prices ranging from $7.88
to $28.13 with expiration dates ranging up to May 5, 2007; (ii) warrants to
purchase 612,500 shares of Common Stock with exercise prices ranging from $7.88
to $12.77 and with expiration dates ranging up to June 1, 2002; and (iii) call
options sold by the Company for 2,000,000 shares of Common Stock with an
exercise price of $36.00 and expiration dates ranging up to December 31, 1999.
Additionally, during the year ended September 30, 1998, securities not included
in the computation of diluted earnings per share, because they would have an
antidilutive effect due to the net loss for the period, were as follows: (i)
options to purchase 6,088,698 shares of Common Stock at prices ranging from
$0.83 to $7.25 with expiration dates ranging up to March 3, 2008; (ii) warrants
to purchase 200,000 shares of Common Stock with exercise prices ranging from
$5.00 to $7.13 and with expiration dates ranging up to July 17, 2006; (iii)
Series B and C preferred stock convertible into 622,222 shares of Common Stock;
and (iv) unvested Restricted Stock Awards to acquire 725,146 shares of Common
Stock granted pursuant to the Company's 1997 Equity Incentive Plan.
During the year ended September 30, 1997, securities not included in the
computation of diluted earnings per share, because their exercise price exceeded
the average market price during the period were as follows: (i) options to
purchase 581,550 shares of Common Stock at prices ranging from $21.50 to $32.00
with expiration dates ranging up to July 23, 2007; (ii) warrants to purchase
55,000 shares of Common Stock with exercise prices of $23.25 and with expiration
dates ranging up to July 17, 2006; and (iii) call options sold by the Company
for 2,000,000 shares of Common Stock with an exercise price of $36.00 and
expiration dates ranging up to December 31, 1999. Additionally, during the year
ended September 30, 1997, securities not included in the computation of diluted
earnings per share, because they would have an antidilutive effect due to the
net loss for the period, were as follows: (i) options to purchase 4,500,524
shares of Common Stock at prices ranging from $0.83 to $20.25 with expiration
dates ranging up to September 23, 2007; (ii) warrants to purchase 826,157 shares
of Common Stock with exercise prices ranging from $4.63 to $20.13 and with
expiration dates ranging up to July 6, 2004; and (iii) Series B and C preferred
stock convertible into 622,222 shares of Common Stock.
L. Related Party Transactions:
The Company and certain of its subsidiaries have agreements with certain
directors of the Company and parties related to directors to provide technical
and other consulting services. The total of such payments were approximately
$414,000, $417,000 and $357,000 in fiscal 1998, 1997 and 1996, respectively.
Included in the fiscal 1996 payments was approximately $103,000 of payments
to a director regarding certain patent matters and the April 1996 FDA approval
of Redux. In addition to the above, (i) one related party was a principal
investigator in clinical trials and received approximately $34,000, $296,000
and $45,000 in fiscal 1998, 1997 and 1996, respectively, for services performed
in that capacity and (ii) one director is the Chairman and Chief Executive
Officer of an entity that provides product distribution services for certain
InterNutria products to which InterNutria paid approximately $58,000, $117,000
and $47,000 in fiscal 1998, 1997 and 1996, respectively.
In fiscal 1996, InterNutria acquired certain technology from AVAX Technologies,
Inc. (formerly Walden Laboratories, Inc.) ("AVAX") of which certain of the
Company's directors are or were stockholders (see Note O).
The Company made contributions of $147,000, $147,000, and $182,000, in the years
ended September 30, 1998, 1997, and 1996, respectively, to The Center for Brain
Science and Metabolism Charitable Trust of which one of the Company's directors
is the scientific director.
F-23
<PAGE> 106
M. Discontinued Operations
In September 1998, the Company adopted a plan to discontinue the operations of
InterNutria. Accordingly, the net losses from InterNutria's operations have been
segregated from continuing operations and condensed and reported on a separate
line on the statement of operations. Additionally, the fiscal 1998 results
include a separate charge of $2,326,000 for the discontinuation of InterNutria's
operations. At September 30, 1998 the assets of InterNutria were $571,000 and
the liabilities were $35,543,000, including indebtedness to Interneuron of
$33,019,000, which is eliminated in the consolidated financial statements. All
inventories have been fully reserved at September 30, 1998. At September 30,
1997, the assets of InterNutria were $1,771,000 and the liabilities were
$14,884,000, including indebtedness to Interneuron of $13,754,000. The Company
is seeking to sell InterNutria or all or part of its assets, which include
primarily a line of sports drink products and PMS Escape. There can be no
assurance it will be successful and the Company does not expect to generate
significant proceeds.
The Company has reclassified its prior year financial statements to reflect the
operating results of InterNutria as a discontinued operation. Operating results
of InterNutria, exclusive of charges relating to the discontinuation of
operations and interest on intercompany debt, for the fiscal years ended
September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
===== ====== =====
<S> <C> <C> <C>
Revenues $ 2,567,000 $ 879,000 $ 383,000
Operating Expenses 19,701,000 6,345,000 5,799,000
---------- --------- ----------
Net loss from operations 17,134,000 5,466,000 5,416,000
Interest (expense) income, net (17,000) (120,000) (170,000)
------------- ---------- ----------
Net loss $17,151,000 $ 5,586,000 $ 5,586,000
============ ============ ===========
</TABLE>
N. Agreements:
Servier: In February 1990, as amended, the Company entered into a series of
agreements with Les Laboratoires Servier ("Licensor") under which the Company
licensed U.S. marketing rights to Redux, in exchange for royalty payments based
upon net product sales, as defined. Additionally, the agreements required the
Company to purchase the bulk compound from an affiliate of the Licensor and pay
to the Licensor 11.5% of net sales of the products by AHP.
American Home Products: In November 1992, the Company entered into an agreement
with American Cyanamid Company (which subsequently was acquired by AHP) for the
development and marketing in the U.S. of Redux. In connection with this
agreement, AHP made certain milestone payments to the Company and purchased from
the Company the Series B and C stock which is outstanding at September 30, 1998.
Holders of Series B and C Preferred Stock are entitled to receive mandatory
dividends of $.13 and $1.00 per share, respectively, 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 and C Preferred Stock are also entitled to a liquidation preference of
$12.53 and $100.00 per share, respectively, plus accumulated and unpaid
dividends. Holders of Series B and C Preferred Stock are entitled to convert
such shares into an aggregate of 622,222 shares of Common Stock (a conversion
price of $5.63 per share) subject to anti-dilution adjustments in the event of
future dilution. Additionally, the agreement with AHP provides for
F-24
<PAGE> 107
royalty payments to the Company based upon net sales of Redux and for AHP to
share equally with the Company certain research and development expenses.
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. AHP
has the right to terminate its sublicense upon twelve months notice to the
Company.
On April 29, 1996, Redux received FDA clearance for marketing. The Company's
License Agreement with AHP provides for AHP to pay 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 10% of
AHP's annual net sales over $150,000,000, providing Redux is supplied to AHP by
the Company. The Company manufactured Redux through an arrangement with
Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer") and was the exclusive
supplier of Redux to AHP. On September 15, 1997, the Company and AHP announced a
market withdrawal of Redux. (See Note H.)
Boehringer: 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 from Boehringer, all of the Company's
requirements for Redux capsules. The contract contained certain minimum
purchase, insurance and indemnification commitments by the Company and required
conformance by Boehringer to the FDA's Good Manufacturing Practices regulations.
(See Note H.)
Ferrer: The Company has licensed from Ferrer Internacional, S.A. ("Ferrer")
exclusive rights in the U.S., Puerto Rico and Canada to certain uses of
citicoline, a drug under development for potential treatment for ischemic
stroke, for commercialization. In June 1998, the Company amended its agreement
with Ferrer to extend to January 31, 2002 the date upon which Ferrer may
terminate the citicoline license agreement if FDA approval of citicoline is not
obtained. The agreement provides for such date to be extended for up to two
years if the Company provides information to Ferrer which tends to establish
that the Company has carried out the steps for obtaining such approval and if
such approval has not been obtained for reasons beyond the Company's control. A
license fee and future royalties on net sales of citicoline were consideration
provided to Ferrer.
In June 1998, the Company also entered into an agreement with Ferrer whereby the
Company licensed to Ferrer, worldwide except for the U.S. and Canada, the use of
Interneuron's patent rights relating to the use of citicoline in the protection
of brain tissue from cerebral infarction following ischemic stroke. In exchange
for the license to Ferrer, Interneuron will be entitled to royalties from Ferrer
on certain exports to, and sales of, the solid form of citicoline in certain
countries upon its approval in each relevant country.
Rhone-Poulenc Rorer: In February 1994, the Company entered into a license
agreement with Rhone-Poulenc Rorer S.A. ("RPR"), granting the Company worldwide
exclusive rights to an anti-panic and anxiety compound (pagoclone). License
fees, milestone payments and future royalties on net sales were consideration
provided to RPR.
Eli Lilly: In June 1997, the Company entered into an agreement with Eli Lilly
and Co. and Eli Lilly S.A. ("Lilly") relating to the licensing by Lilly from the
Company of a use patent for Lilly's antidepressant Prozac(R) (fluoxetine
hydrochloride) to treat disturbances of appetite and mood associated with
premenstrual syndrome. Lilly paid the Company an up-front license fee of
$1,000,000, which was recorded as license fee revenue in fiscal 1997, and is
required to make additional payments based upon achievement of development and
regulatory related milestones and pay royalties based upon net sales.
F-25
<PAGE> 108
PACAP: In April 1998, the Company licensed from Tulane University the exclusive,
worldwide rights to a U.S. patent and U.S. and foreign patent applications owned
by Tulane relating to a novel neuropeptide, known as PACAP (pituitary adenylate
cyclase activating polypepide). Preclinical data suggests the potential of PACAP
as a treatment for stroke and other neurodegenerative diseases. Under terms of
the license, Interneuron paid Tulane an upfront licensing fee and will fund
research over a two-year period. Interneuron will make additional payments based
on the achievement of clinical and regulatory review milestones. Tulane will
receive royalties on net sales of any product developed from this program.
Bristol-Myers Squibb: CPEC (see Note O) 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.
Merck: In July 1997, Transcell (subsequently merged into Intercardia; see Note
P) and Interneuron entered into a Research Collaboration and Licensing
Agreement with Merck & Co., Inc. ("Merck") (the "Merck Collaboration") to
discover and commercialize certain novel antibacterial agents. Interneuron
assigned its rights and obligations under the Merck Collaboration to Intercardia
in connection with the Transcell Acquisition (see Note P). Merck made initial
payments totaling $2,500,000 of which $1,500,000 was recognized as license fee
revenue in fiscal 1997 and $1,000,000 was recognized as license fee revenue
ratably over the twelve month option period commencing in July 1997.
Additionally, Merck will provide research support for the first two years of
the agreement and make payments based upon achievement of certain defined
clinical development and regulatory milestones and pay royalties based upon
net sales of products resulting from the Merck Collaboration. Certain of the
rights licensed to Merck are based on exclusive licenses or rights held by
Intercardia from Princeton University, which will be entitled to varying
percentages of certain payments and royalties received from Merck. A portion
of any royalties from Merck will also be payable to Interneuron.
Astra Merck: In December 1995, Intercardia executed a Development and Marketing
Collaboration and License Agreement (the "Astra Merck Collaboration") with Astra
Pharmaceuticals LP, formerly Astra Merck, Inc. ("Astra Pharmaceuticals") 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. This agreement was terminated in September 1998. 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.
Intercardia paid Astra Pharmaceuticals $10,000,000 in December 1997, which
had been accrued as a liability at September 30, 1997. During the fiscal
years ended September 30, 1998, 1997, and 1996, the Company recognized contract
revenue of approximately $4,833,000 (including a $4,000,000 termination fee),
$553,000, and $5,000,000, respectively, from payments made by Astra
Pharmaceuticals to Intercardia. During the fiscal years ended September 30,
1998, 1997 and 1996, Astra Merck assumed additional liabilities of
approximately $6,065,000, $5,505,000 and $4,301,000, respectively, on
Intercardia's behalf. These additional amounts did not impact the Company's
Consolidated Statements of Operations, as they were offset against related
expenses. As of September 30, 1998, the Company's Consolidated Balance Sheet
included approximately $944,000 of accounts receivable due from Astra
Pharmaceuticals and approximately $941,000 of accrued expenses related to
obligations assumed by Astra Pharmaceuticals.
In connection with the termination of this agreement and resolution of an
earlier dispute relating to responsibility for funding certain costs, Astra
Pharmaceuticals made a $4,000,000 payment to CPEC. As a result, Intercardia has
assumed responsibility for the U.S. development and commercialization for
BEXTRA. Intercardia requires a corporate collaboration or additional funds for
the commercialization of BEXTRA and is currently exploring possible development,
commercialization and marketing collaborations.
F-26
<PAGE> 109
Knoll: In December 1996, Intercardia entered into an agreement with BASF
Pharma/Knoll AG ("Knoll") ("the Knoll Collaboration") to provide for the
development, manufacture and marketing of bucindolol in all countries with the
exception of the United States and Japan (the "Territory"). The Knoll
Collaboration relates to both the twice-daily bucindolol formulation and the
once-a-day bucindolol formulation currently under development. Under the terms
of the Knoll Collaboration, Knoll made up-front payments to CPEC (see Note O)
totaling $3,143,000 which were recognized as contract and license fee revenue in
fiscal 1997. Knoll will make future payments to CPEC contingent upon the
achievement of product approval and sales milestones.
Knoll and Intercardia agreed to share the development and marketing costs of
bucindolol in the Territory. In general, Knoll agreed to pay approximately 60%
of certain development and marketing costs prior to product launch and
Intercardia agreed to pay approximately 40% of such costs, subject to certain
maximum dollar limitations. CPEC will be entitled to a royalty equal to 40% of
net profits, as defined in the Knoll Collaboration, and would be responsible
for 40% of any net loss, as defined. Knoll also agreed to pay approximately 60%
of once-a-day formulation development costs that relate solely to the Territory
and approximately one-third that have worldwide benefit.
O. Acquisitions:
In September 1994, Intercardia acquired 80% of the outstanding common stock of
CPEC which has an exclusive worldwide license 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 was obligated
to, and did, pay an additional $2,000,000, through September 30, 1998, and
is obligated to fund other costs of the study including drug supply and
clinical monitoring.
The purchase price of CPEC included 170,000 shares of Common Stock of the
Company, payments to stockholders of CPEC, assumed liabilities, other related
expenses and additional future issuances of Interneuron's Common Stock upon
achieving bucindolol-related 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. Future issuances of Common Stock of the Company will
result in additional charges.
In January 1996, the Company acquired the 20% 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 and 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 AVAX, the technology and know-how to
produce a specially-formulated dietary supplement for women's use during their
pre-menstrual period, later named PMS Escape, in exchange for $2,400,000 payable
in two installments of Interneuron Common Stock. The first payment consisted of
55,422 shares and was made in fiscal 1997 and the second payment consisted of
112,793 shares and was made in fiscal 1998. Certain affiliates of the Company
are or were stockholders of AVAX but did 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 depended upon the
successful completion of certain clinical trials.
F-27
<PAGE> 110
P. Subsidiaries:
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's 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, 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.
In February 1997, the Company announced that its Board of Directors had
authorized it to purchase from time to time through open-market transactions up
to 200,000 shares of the common stock of Intercardia. As of September 30, 1998,
the Company had purchased 129,400 shares of Intercardia common stock, all in
fiscal 1997, for an aggregate purchase price of approximately $2,951,000, of
which approximately $2,234,000 was recorded as purchase of in-process research
and development in fiscal 1997.
On May 8, 1998, the merger of Transcell with and into Intercardia and the
acquisition by Intercardia of certain related technology rights owned by
Interneuron was completed and, simultaneously, Interneuron contributed to
Transcell's capital all of Transcell's indebtedness and payables, aggregating
$18,698,000, to Interneuron (the "Transcell Acquisition"). Consideration given
by Intercardia consisted of (i) Intercardia common stock issuable to the former
Transcell stockholders, including Interneuron, in three installments with an
aggregate market value at closing of approximately $14,200,000, of which
$3,000,000 was payable at closing as an initial payment to Interneuron for
certain of its technology rights and continued guarantees of certain Transcell
leases (the "Initial Technology/Guarantee Payment"), and (ii) the issuance of
options and warrants to purchase 259,488 shares of Intercardia common stock to
Transcell employees and consultants in exchange for their options and warrants
to purchase Transcell capital stock. Accordingly, in connection with the first
installment of the merger consideration due at the closing of the merger,
Intercardia issued an aggregate of 320,151 shares of common stock, of which
191,383 shares were issued to Interneuron. In addition, Intercardia
issued 174,672 shares to Interneuron for the Initial Technology/Guarantee
Payment. Intercardia also agreed to pay Interneuron a royalty on sales of
certain products that may be developed under the Merck Agreement. The
second and third installments of the merger consideration will be made in
August 1999 and February 2000, respectively, and each installment will
consist of the issuance of $3,000,000 of Intercardia common stock, as
then valued. Intercardia's acquisition of the minority shareholders'
interest in Transcell resulted in Intercardia recording a charge to operations
in fiscal 1998 for the purchase of in-process research and development of
approximately $5,300,000. This charge is eliminated in consolidation and is not
reflected in the Company's results of operations because the Company did not
acquire any incremental interest in Transcell's net assets as a result of the
transaction. In connection with this transaction, the Company also recorded a
credit to additional paid-in capital of approximately $2,212,000 to reflect
adjustments to minority interest resulting from the Transcell Acquisition and
the book value of the Intercardia shares received by the Company for the
Initial Technology/Guarantee Payment. Interneuron owned approximately 61%
of the outstanding capital stock of Intercardia before the closing of the
Transcell Acquisition and approximately 62% immediately after the Transcell
Acquisition and at September 30, 1998.
F-28
<PAGE> 111
Progenitor:
In August 1997, Progenitor completed an initial public offering (the "Progenitor
IPO") of 2,875,000 units, at $7.00 per unit, each unit consisting of one share
of Progenitor common stock and one five-year warrant to purchase one share of
Progenitor common stock at $10.50 per share. The Progenitor IPO resulted in
proceeds to Progenitor, net of offering-related costs, of approximately
$17,200,000. Interneuron purchased 500,000 units of the Progenitor IPO for a
total of $3,500,000. Concurrent with the Progenitor IPO, Progenitor sold
1,023,256 shares of Progenitor common stock to Amgen pursuant to a stock
purchase agreement for a purchase price of $4,500,000 in cash and a $1,000,000
promissory note. Concurrent with the closing of the Progenitor IPO, Progenitor
acquired Mercator Genetics, Inc. ("Mercator") (the "Mercator Acquisition") for
an aggregate purchase price of approximately $24,000,000, including related
transaction costs, paid with the issuance of approximately 3,443,000 shares of
Progenitor common stock, plus the assumption of Mercator liabilities,
forgiveness of debt relating to advances made by Progenitor to Mercator and the
issuance of stock options and warrants. Interneuron's ownership in Progenitor's
outstanding capital stock decreased from approximately 76% at September 30, 1996
to approximately 37% at September 30, 1997 principally due to the Progenitor IPO
and the Mercator Acquisition. As a result of the Company's decreased percentage
of ownership in Progenitor, as of the date of the Progenitor IPO and Mercator
acquisition, the Company ceased consolidating the financial statements of
Progenitor and commenced including Progenitor in the Company's financial
statements using the equity method of accounting. At September 30, 1998,
Interneuron's ownership in Progenitors's outstanding capital stock was
approximately 36%.
In connection with the Mercator Acquisition, Progenitor incurred non-recurring
charges to operations in fiscal 1997 related to the purchase of in-process
research and development. Interneuron included approximately $7,800,000 of these
charges in equity in net loss of unconsolidated subsidiary based on the
Company's ownership interest in Progenitor. As a result of the Progenitor IPO,
Interneuron recognized a gain on its investment in Progenitor of approximately
$7,291,000 which has been recorded as an increase in the Company's additional
paid-in capital. In fiscal 1997 the Company purchased 20,000 shares of
Progenitor common stock for approximately $105,000. At September 30, 1997 the
Company's investment in Progenitor is reflected in investment in unconsolidated
subsidiary at $4,040,000. Such securities are subject to regulatory and
contractual restrictions on resale and on the liquidity of the market for
Progenitor's securities and, accordingly, the market value of such securities as
of a given date is not necessarily indicative of their ultimate value to
Interneuron. In fiscal 1997, the Company reported equity in Progenitor's
net losses of approximately $9,028,000 for the period from the Progenitor IPO to
September 30, 1997.
In July 1997, the Company relinquished certain conversion price adjustment
rights relating to Progenitor Series A Preferred Stock held by the Company in
exchange for an option to acquire an exclusive, worldwide license to
manufacture, use and sell certain aspects of Del-1, a novel cell surface protein
encoded by the del-1 gene which was discovered by Progenitor.
In December 1998, Progenitor announced its intention to implement an
immediate cessation of operations. Progenitor did not have sufficient funds to
meet its obligations and was unable to raise additional funds. Progenitor's
market valuation had been substantially reduced and the Company could not viably
sell any of its holdings of Progenitor securities. As a result, the Company's
investment in Progenitor was reduced to zero as of September 30, 1998. During
the year ended September 30, 1998, the Company reported equity in Progenitor's
net losses of approximately $4,040,000. Following are condensed statements of
operations and balance sheet data of Progenitor for which fiscal 1998
information is unaudited:
F-29
<PAGE> 112
<TABLE>
<CAPTION>
Fiscal Year ended September 30,
----------------------------------------------
1998 1997 1996
=========== =========== ==============
Statement of Operations:
<S> <C> <C> <C>
Revenues $ 485,000 $ 1,142,000 $ 1,332,000
Charge for acquired in-process
research and development -- 21,092,000 --
Net loss (13,916,000) (30,283,000) (5,484,000)
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
============ ============
Balance Sheet:
<S> <C> <C>
Current assets $ 7,239,000 $ 20,224,000
Noncurrent assets 3,062,000 3,361,000
Current liabilities 4,513,000 6,703,000
Noncurrent liabilities 2,849,000 942,000
</TABLE>
Transcell:
Until May 8, 1998, the date of the Transcell Acquisition (see "Intercardia"
above), the Company consolidated the financial statements of Transcell. After
May 8, 1998, Transcell was merged into Intercardia and operated as an
Intercardia division called Intercardia Research Labs. Therefore, the
results of Transcell continue to be included in the Company's Consolidated
Results of Operations. The Company's ownership of Transcell was approximately
79% at September 30, 1997 and immediately prior to the Transcell Acquisition.
InterNutria:
In January 1998, Interneuron sold, subject to repurchase rights expiring in
April 1999, an aggregate of 10% of its InterNutria common stock to the executive
officers of Interneuron for the par value of the InterNutria shares ($.0001 per
share) which approximated fair market value of these shares at the time of the
transaction. At September 30, 1998, the Company owned approximately 76% of
InterNutria's outstanding stock. (Also, see Note M.)
F-30
<PAGE> 1
FISCAL YEAR 1999 SENIOR EXECUTIVE BONUS PLAN
(1). PARTICIPANTS
Glenn Cooper (President), Mark Butler (Executive Vice President), Bobby
Sandage (Executive Vice President), and new CFO (pro-rated)
(2). MAXIMUM AVAILABLE
Base Bonus Pool: Up to 60% of Glenn Cooper's base salary; up to 50% of
the base salaries of the Executive Vice Presidents (Messrs. Butler,
Sandage and CFO)
(Base Salary is defined as the Base Salary at the time bonuses are
paid.)
(3). BONUS POOL
The amount of Base Bonus Pool received will be calculated based on the
following five Performance Areas: (a) Corporate partnering; (b) R&D
Clinical Development Goals; (c) Acquisition/Licensing of Significant
Assets; (d) Common Stock Performance; and (e) Corporate Finance Goals.
Each of the five areas will contribute equally to the Base Bonus Pool.
The allocation of the pool will be made by the President to the other
participants based on participant's performance particularly as it
relates to his objectives for the year as jointly established with the
President. The President may allocate any amount to any Executive Vice
President, including none, but he may not exceed the pool for each
individual.
The allocation of the President's pool will be made at the discretion
of the Board of Directors. One of the criteria that will be used in
determining the President's allocation is the quality of the
methodology used by the President in allocating bonuses to the
Executive Vice Presidents.
(4). COMPUTATION OF PERFORMANCE AREAS
(a). Corporate Partnering - Meeting objective has a value of 100%
of goal.
(i). Out-licensing Pacoclone or CerAxon to a corporate
development/marketing partner on terms approved by
Board of Directors.
(b). R&D Clinical Development Goals - Meeting each of the following
objectives by the end of the fiscal year has a value of 33%:
(i). Be on target to complete analysis of citicoline Study
018 by December 31, 1999;
(ii). Be on target for partner to initiate Pagoclone Phase
3 trial during fiscal year;
(iii.) Filing of one new IND;
page 1
<PAGE> 2
(c). Acquisition of Significant Assets - Meeting the following
objective has a value of 100% of this Performance Area.
(i). The acquisition or purchase of a significant new
asset (significance to be determined by the
Compensation Committee).
(d). Common Stock Performance - All or a portion of this
Performance Area will be earned based on the higher of the
formulas derived from either the (a) relative stock
performance of Interneuron's Common Stock during the fiscal
year or (b) the actual percentage increase in Interneuron's
Common Stock during the fiscal year. Since achievement of a
large increase in Interneuron's Common Stock either over an
Index or over its price at the beginning of the fiscal year is
beneficial to the Company's shareholders, the calculation is
made based on the higher one.
<TABLE>
<CAPTION>
IPIC % PTS. INCREASE OVER INITIAL IPIC PRICE
% OF PERFORMANCE AREA IPIC % PTS. ABOVE INDEX
--------------------- ------------------------
<S> <C>
25% 10%
50% 20%
75% 30%
100% 40%
</TABLE>
The Index is calculated based on the publicly available AMEX
Biotechnology Index (or close equivalent if unavailable).
In order to capture the return to shareholders during the
fiscal year, the calculation of the percentage points increase
above Index and the percentage points increase over IPIC stock
during the year will be made from the average of two
calculations: (1) from 10/1/98 to 3/30/99 (six months) and (2)
from 10/1/98 to 9/30/99 (12 months). Due to the potential for
short term news driven fluctuations in stock price, the
average of the closing common stock price for the five trading
days prior to 10/1/98, 3/30/99 and 9/30/99 will be used
instead of the closing common stock price on that day.
(e). Corporate Finance Goal - Performance Area will be earned based
on the amount of debt, equity or cash raised by Interneuron or
InterNutria, on terms acceptable to the Board of Directors
according to the following chart:
<TABLE>
<CAPTION>
% OF PERFORMANCE AREA AMOUNT EQUITY, DEBT OR CASH RAISED
--------------------- ----------------------------------
<S> <C>
25% $ 1 - 9.9MM
50% 10 - 50MM
100% >$50MM
</TABLE>
page 2
<PAGE> 3
(5). ADDITIONAL GOAL - REDUX LITIGATION
This additional goal would be over and above any bonuses earned
pursuant to Sections 2-4. Enter into an agreement (corporate, judicial
or with any parties to the Redux litigation, etc.) which substantially
mitigates the Company's exposure to Redux litigation. Equal to 20-40%
of base salary at the discretion of the Compensation Committee, to be
evaluated September 1999, based on an evaluation of the status and
finality of any such agreement.
(6). CALCULATION AND PAYMENT.
A recommended calculation of the bonus will be made by management and
will be reviewed and approved by the Compensation Committee. Bonuses
may be paid in up to three tranches and will be paid by October 31,
1999, but earlier (including during the fiscal year) if possible
subject to review and approval by the Compensation Committee. Payment
will be made only to recipients who are still employees of the Company
at the time of payment of the bonuses or October 31, 1999, whichever is
earlier.
page 3
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
Intercardia, Inc. Delaware
CPEC, Inc. Nevada
Aeolus Pharmaceuticals, Inc. Delaware
Renaissance Cell Technologies, Inc. Delaware
InterNutria, Inc. Delaware
IPL Management Corp. Massachusetts
<PAGE> 1
ACCOUNTANT'S CONSENT
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
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, 33-94736, 333- 40315 and 333-48911) and on Form S-3
(33-75826, 333-1273 and 333-18001) of our report dated December 8, 1998 on our
audits of the consolidated financial statements of Interneuron Pharmaceuticals,
Inc. as of September 30, 1998 and 1997 and for each of the three years in the
period ended September 30, 1998, which report is included in the Annual Report
on Form 10-K of Interneuron Pharmaceuticals, Inc. for the fiscal year ended
September 30, 1998. We also consent to the reference to us under the heading
"Selected Financial Data" in such Form 10-K. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data".
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 29, 1998
<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-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 39,330,000
<SECURITIES> 28,877,000
<RECEIVABLES> 1,273,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,596,000
<PP&E> 5,304,000
<DEPRECIATION> (1,613,000)
<TOTAL-ASSETS> 78,197,000
<CURRENT-LIABILITIES> 29,179,000
<BONDS> 1,663,000
0
3,500,000
<COMMON> 42,000
<OTHER-SE> 36,314,000<F1>
<TOTAL-LIABILITY-AND-EQUITY> 78,197,000
<SALES> 0
<TOTAL-REVENUES> 6,488,000
<CGS> 0
<TOTAL-COSTS> 62,237,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,000
<INCOME-PRETAX> (50,485,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (50,485,000)
<DISCONTINUED> (19,477,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,962,000)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
<FN>
<F1>Additional paid-in capital - $268,278,000
Accumulated deficit - $(231,996,000)
FAS 115 Securities Adjustment - $32,000
</FN>
</TABLE>
