<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 5, 1996
REGISTRATION NO. 33-98706
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHARMAVENE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 52-1666548
(State or other (Primary standard (I.R.S. employer
jurisdiction industrial identification
of incorporation) classification code number)
number)
</TABLE>
1550 EAST GUDE DRIVE
ROCKVILLE, MARYLAND 20850
(301) 838-2500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
JAMES D. ISBISTER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PHARMAVENE, INC.
1550 EAST GUDE DRIVE
ROCKVILLE, MARYLAND 20850
(301) 838-2500
(Name, including zip code, and telephone number, including area code, of agent
for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Sheldon E. Misher, Esq. Mark Kessel
Steven A. Fishman, Esq. Jonathan Jewett
Bachner, Tally, Polevoy & Misher LLP Shearman & Sterling
380 Madison Avenue 599 Lexington Avenue
New York, New York 10017 New York, New York 10022
(212) 687-7000 212-848-4000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C>
Shares of Common Stock, $.01 par value............... 2,530,000 $30,360,000 $10,469(3)
</TABLE>
(1) Includes 330,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) A registration fee of $9,518 has previously been paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PHARMAVENE, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM AND CAPTION LOCATION IN PROSPECTUS
- ----------------------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
Forepart of Registration Statement and Outside Front
Cover Page of Prospectus..............................
1. Outside Front Cover Page
Inside Front and Outside Back Cover Pages of
Prospectus............................................
2. Inside Front and Outside Back Cover Pages
Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.............................
3. Prospectus Summary; Risk Factors; Financial Statements
Use of Proceeds....................................... Prospectus Summary; Use of Proceeds
4.
Determination of Offering Price.......................
5. Outside Front Cover Page; Risk Factors;
Underwriting
Dilution.............................................. Risk Factors; Dilution
6.
Selling Security Holders..............................
7. Not Applicable
Plan of Distribution..................................
8. Outside Front Cover Page; Underwriting
Description of Securities to be Registered............
9. Outside Front Cover Page; Description of Capital Stock
Interests of Named Experts and Counsel................ Legal Matters; Experts
10.
Information With Respect to the Registrant............
11. Prospectus Summary; Risk Factors; Capitalization;
Selected Financial Data; Management's Discussion and
Analysis; Business; Management; Certain Transactions;
Principal Stockholders; Financial Statements
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities........................ Not Applicable
12.
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
2,200,000 SHARES
[LOGO]
PHARMAVENE, INC.
COMMON STOCK
----------------
All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently anticipated that the initial public
offering price will be between $10 and $12 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "PHVN," subject to official notice of issuance.
Athena Neurosciences, Inc., a wholly-owned subsidiary of Elan Corporation
plc, in connection with its license agreement with the Company, has been granted
the right to purchase 220,000 shares of Common Stock in this offering.
---------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts Proceeds to
Public and Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share............... $ $ $
Total (3)............... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
330,000 additional shares of Common Stock on the same terms and conditions
as set forth herein, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------
The shares of Common Stock offered by this Prospectus are being offered by
the Underwriters, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
certificates for the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York, on or about , 1996.
---------------------
LEHMAN BROTHERS VOLPE, WELTY & COMPANY
, 1996
<PAGE>
The following table lists each of the Company's 12 product candidates and
its intended therapeutic indication, method of drug delivery and current stage
of development. There can be no assurance that any of these products will be
developed successfully or approved by the FDA in a timely manner.
<TABLE>
<CAPTION>
PRODUCT CANDIDATE INDICATION DRUG DELIVERY TECHNOLOGY DEVELOPMENT STAGE
- ----------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Carbatrol Epilepsy Oral sustained-release 505(b)(2) NDA accepted for
filing by the FDA on June
1, 1996/
licensed to Athena
Neurosciences, Inc.
Selegiline SR Cocaine craving and Oral sustained-release Phase III commenced in
withdrawal November 1994
Selegiline SR Parkinson's Disease Oral sustained-release Ready to enter Phase III
BChE Injectable Cocaine overdose Injectable Preclinical safety and
efficacy studies
substantially completed/
licensed to Rhone-Poulenc
Rorer
BChE Injectable Post-surgical apnea Injectable Preclinical safety and
efficacy studies
substantially completed/
licensed to Rhone-Poulenc
Rorer
Acyclovir CD Viral infection Peptitrol/sustained-release Formulation development
DHE IR Migraine headache Transmucosal Formulation development
immediate-release/
Peptitrol
Alprazolam TD Anxiety Transdermal sustained- Formulation development
release
Lorazepam TD Anxiety Transdermal sustained- Formulation development
release
PI 181.2 TD Emesis Transdermal sustained- Formulation development
release
Nifedipine SR Cardiovascular disease Oral sustained-release Formulation development
Insulin CD Diabetes Peptitrol Formulation development
</TABLE>
The following are trademarks of the Company: Carbatrol-TM-, Peptitrol-TM-
and Peptiscreen-TM-.
All other trademarks appearing in this Prospectus are the property of their
respective holders.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SUCH
TRANSACTIONS MAY BE EFFECTED THROUGH THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE NOTED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND REFLECTS (I) THE ONE-FOR-SIX REVERSE SPLIT OF THE
COMMON STOCK EFFECTIVE IN MARCH 1996 AND (II) THE AUTOMATIC CONVERSION OF ALL
OUTSTANDING SHARES OF MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED
STOCK, $.01 PAR VALUE (THE "PREFERRED STOCK"), INTO SHARES OF COMMON STOCK AND
CERTAIN RELATED TRANSACTIONS UPON THE CLOSING OF THIS OFFERING.
THE COMPANY
Pharmavene, Inc. (the "Company") develops pharmaceutical products utilizing
advanced drug delivery systems. The Company has developed a portfolio of drug
delivery and screening technologies designed to produce optimal delivery of a
particular pharmaceutical product for a given indication. These technologies
include its proprietary Peptitrol systems for the oral delivery of
hard-to-deliver compounds, oral controlled-release and sustained-release
delivery, transmucosal delivery through tissues in the oral cavity and
transdermal delivery. Instead of emphasizing a specific drug delivery system,
the Company selects the drug delivery system that it believes is most effective
for delivery of a specific compound and that can result in such advantages as
convenient dosing, reduced side effects, improved bioavailability or easier
administration. The Company has also developed various screening technologies,
including its proprietary Peptiscreen system, to systematically and rapidly test
a large number of formulations.
The Company's strategy in selecting its current product candidates has been
to generally select pharmaceutical products for reformulation that the Company
believes have a significant commercial market, that are off-patent or for which
patent protection will no longer be available at the time the Company's product
is introduced and where enhancement of the method of delivery is expected to
have measurable clinical value as compared to the existing delivery method. The
Company generally selects products for reformulation that treat indications that
have relatively simple, clear-cut clinical end-points. Most of the Company's
product candidates are reformulations of existing compounds approved by the U.S.
Food and Drug Administration (the "FDA") and the Company's delivery systems
usually contain inactive ingredients that are generally recognized as safe
(GRAS) for food use as determined by the FDA or are inactive ingredients that
the Company believes are safe for such use. Therefore, the Company believes that
the development process for its products may be expedited and some of the
regulatory approval risks may be reduced. In addition to reformulating existing
compounds, the Company also intends to seek arrangements with other companies
developing pharmaceutical products based on new molecular entities to use the
Company's drug delivery systems to formulate these products.
The Company's initial product is expected to be Carbatrol, a
sustained-release, patented formulation of carbamazepine for the treatment of
epilepsy. In 1994, U.S. sales of carbamazepine were approximately $148 million.
A major cause of seizures in epileptic patients is patient noncompliance with
the treatment regimen, which can be caused by frequent dosing and an adverse
side effect profile. Carbatrol would provide convenient twice-a-day dosing and
could be administered orally as a capsule or sprinkled on food. On June 1, 1996,
the Company's New Drug Application ("NDA") under Section 505(b)(2) (a "505(b)(2)
NDA") of the Federal Food, Drug and Cosmetic Act, as amended, relating to
Carbatrol was accepted for filing by the FDA. If approved for marketing,
Carbatrol, which has been licensed to Athena Neurosciences, Inc. ("Athena"), a
wholly-owned subsidiary of Elan Corporation plc ("Elan"), will compete directly
with CIBA-Geigy's twice-a-day, extended-release formulation of carbamazepine.
The Company has 11 other product candidates, including oral
controlled-release formulations of Selegiline SR for treatment of cocaine
craving and for the treatment of Parkinson's Disease, Acyclovir CD for the
treatment of viral infections, Nifedipine SR (a generic version of Procardia XL)
for the treatment of cardiovascular disorders and Insulin CD for diabetes. The
Company is also developing a transmucosal formulation of dihydroergotamine (DHE)
for the treatment of migraine headache, an injectable formulation of
butyrylcholinesterase (BChE) for the treatment of cocaine overdose and for the
treatment of post-
3
<PAGE>
surgical apnea, as well as three transdermal sustained-release products,
Alprazolam TD and Lorazepam TD for the treatment of anxiety and PI 181.2 TD for
the treatment of emesis. A number of these product candidates are in the early
stages of development.
The Company has developed its proprietary Peptitrol drug delivery
technologies for the enhanced oral delivery of pharmaceutical compounds that are
hard to deliver or have poor oral bioavailability, such as peptides and other
large molecules. The Peptitrol drug delivery systems use one or more hydrophobic
or hydrophilic materials to protect the pharmaceutical compound from degradation
and to increase absorption of the compound from the gastrointestinal tract. The
Company then uses its proprietary Peptiscreen cell culture screens to rapidly
test the formulations developed using Peptitrol technologies. The Company is
currently in the process of developing Acyclovir CD, Insulin CD and DHE IR using
its Peptitrol and Peptiscreen technologies.
The Company generally intends to develop its products and commence clinical
testing in humans and then to seek collaborators to undertake further testing,
obtain regulatory approval, manufacture and market such products. In August
1994, the Company entered into its first license agreement with Rhone-Poulenc
Rorer, Inc. and its Armour Pharmaceutical Company subsidiary, which subsequently
merged with Behringwerke to form the Centeon joint venture (together,
"Rhone-Poulenc Rorer") to develop, manufacture and market its BChE Injectable
products for the treatment of cocaine overdose and reversal of post-surgical
apnea. The Company's BChE Injectable products have been designated as Orphan
Drugs by the FDA for each of these indications. As a result, the Company may be
entitled to marketing exclusivity for these indications for a seven-year period,
subject to certain limitations, if it is the first sponsor to receive FDA
approval for such indications. See "Business -- Government Regulation."
On July 1, 1996, the Company entered into an exclusive license agreement
with Athena for the worldwide marketing, sale and distribution of Carbatrol.
Carbatrol will be marketed in the United States by Athena and by its affiliates
or sublicensees in the rest of the world. Under the agreement, Athena (i) will
make a $2.0 million payment within ten days of the execution of the agreement,
(ii) will fund all future development costs associated with Carbatrol which are
approved by a steering committee, (iii) will make a milestone payment of up to
$8.0 million upon FDA approval of the Company's Carbatrol NDA, of which $5.0
million is creditable against future royalty payments which may be earned on
product sales, and (iv) will make future royalty payments to the Company based
on net sales of Carbatrol. The milestone payment is conditioned upon the absence
of any finding of exclusivity for CIBA-Geigy's Tegretol XR or any actual or
threatened proceeding seeking such a finding. Athena has been granted the right
to purchase 220,000 shares of Common Stock in this offering.
The Company was incorporated in Delaware on December 22, 1989, as Substance
Abuse Sciences, Inc. In February 1990, the Company changed its name to
Pharmavene, Inc. The Company's executive offices are located at 1550 East Gude
Drive, Rockville, Maryland 20850 and its telephone number is (301) 838-2500.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.......................... 2,200,000 shares
Common Stock to be outstanding after the
offering..................................... 8,672,332 shares (1)
Use of proceeds............................... To fund research and development activities,
including the continued development of
Carbatrol, and for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol........ "PHVN"
</TABLE>
- ------------------
(1) Includes an aggregate of 6,182,818 shares of Common Stock that will be
issued upon consummation of this offering, or that have been issued
subsequent to March 31, 1996, in connection with the conversion of
Preferred Stock and certain convertible notes and the exercise of options
under the Stock Option Plan. See "Capitalization." Excludes as of July 1,
1996: (i) 1,827,759 shares of Common Stock reserved for issuance upon
exercise of options granted, to be granted or available for grant under the
Company's 1991 Stock Option Plan (the "Stock Option Plan"); and (ii)
665,084 shares of Common Stock reserved for issuance upon exercise of
warrants that are outstanding or that the Company has agreed to issue. See
"Capitalization," "Management -- Stock Options," "Certain Transactions" and
"Description of Capital Stock."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE THREE MONTHS FEBRUARY 16,
FOR THE YEARS ENDED DECEMBER 31, 1990 (DATE OF
ENDED MARCH 31, INCEPTION) TO
--------------------------------- ---------------------- MARCH 31,
1993 1994 1995 1995 1996 1996
----------- --------- --------- --------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licensing revenue........................ $ -- $ 2,000 $ -- $ -- $ -- $ 2,000
Research and development revenue......... -- -- 111 95 19 130
Research and development grants.......... 269 194 -- -- -- 513
Interest income.......................... 19 46 35 5 10 201
----------- --------- --------- --------- ----------- -------------
Total revenues............................. 288 2,240 146 100 29 2,844
----------- --------- --------- --------- ----------- -------------
Expenses:
Research and development................. 3,932 4,936 4,987 1,230 1,266 20,397
General and administrative............... 1,413 1,317 1,392 369 478 6,777
Interest expense......................... 426 (1) 132 446 58 3,572 (1) 5,166
----------- --------- --------- --------- ----------- -------------
Total expenses............................. 5,771 6,385 6,825 1,657 5,316 32,340
----------- --------- --------- --------- ----------- -------------
Net loss................................... $ (5,483) $ (4,145) $ (6,679) $ (1,557) $ (5,287 ) $ (29,496 )
----------- --------- --------- --------- ----------- -------------
----------- --------- --------- --------- ----------- -------------
Net loss per common and common equivalent
share..................................... $ (1.59 ) $ (1.20) $ (1.91) $ (0.45) $ (1.51 ) $ (8.76 )
----------- --------- --------- --------- ----------- -------------
----------- --------- --------- --------- ----------- -------------
Weighted average common and common
equivalent shares outstanding............. 3,455 3,458 3,495 3,466 3,508 3,366
----------- --------- --------- --------- ----------- -------------
----------- --------- --------- --------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (2) AS ADJUSTED(2)(3)
--------- ------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 586 $ 2,590 $ 24,288
Working capital (deficit)........................................... (225) 1,067 22,766
Total assets........................................................ 3,802 4,901 26,600
Convertible notes................................................... 938 -- --
Capital lease obligations, less current portion..................... 784 784 784
Mandatorily Redeemable Series A Convertible Preferred Stock......... 24,697 -- --
Deficit accumulated during the development stage.................... (29,496) (32,694) (32,694)
Total stockholders' equity (deficit)................................ (24,293) 2,442 24,142
</TABLE>
- ------------------
(1) Includes non-cash charges of $292,000 during the year ended December 31,
1993, relating to the issuance of warrants to purchase Common Stock at an
exercise price below the fair market value per share of the Common Stock
and $3,325,000 during the period ended March 31, 1996 in connection with
the conversion of an aggregate of $8,000,000 principal amount of
convertible notes (the "Convertible Notes") into Preferred Stock at a
conversion price below the originally agreed upon conversion price. See
"Management's Discussion and Analysis," "Certain Transactions" and Notes 5
and 11 of Notes to Financial Statements.
(2) Gives effect to the following events subsequent to March 31, 1996: (i) the
borrowing on April 25, 1996 and June 11, 1996 of an aggregate of $2,000,000
principal amount under a credit agreement with certain stockholders entered
into in 1996 (the "1996 Credit Agreement"); (ii) the conversion of all of
the shares of Preferred Stock outstanding into an aggregate of 5,636,452
shares of Common Stock upon the consummation of this offering; (iii) the
conversion of all borrowings under the 1996 Credit Agreement into 545,455
shares of Common Stock upon consummation of this offering ($3,000,000 of
such borrowings were outstanding on July 1, 1996 and the foregoing assumes
no additional borrowings under the 1996 Credit Agreement and an initial
public offering price of $11.00 per share); and (iv) the issuance on June
17, 1996 of 911 shares of Common Stock upon the exercise of options under
the Stock Option Plan. See "Capitalization," "Certain Transactions,"
"Description of Capital Stock" and the Notes to the Financial Statements.
(3) Adjusted to give effect to the sale of 2,200,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per
share. See "Capitalization."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY. The Company
is in the development stage and the development of any products will require
significant further research, development, testing and regulatory approvals and
will be subject to the risks of failure inherent in the development of new
products based on innovative technologies. No assurance can be given that
product development expenditures will result in the generation of revenue by the
Company. Many of the products being developed by the Company are still in the
early stages of development. As the Company obtains results of particular
preclinical studies and clinical trials, the Company may abandon projects that
it might otherwise have believed to be promising, some of which may be described
in this Prospectus.
Additionally, the Company has only recently developed its Peptitrol drug
delivery systems for the oral delivery of hard-to-deliver compounds and the
Peptiscreen cell screens to test the extent to which such drugs may be
transported from the gastrointestinal tract. The Company is currently developing
reformulations of three drugs, DHE, acyclovir and insulin, using the Peptitrol
systems. The Company intends to focus an increasing portion of its efforts on
developing products using these technologies. Drugs developed using these
delivery systems have not yet been tested in humans and there can be no
assurance that they will prove to be effective in preclinical studies in animals
or in clinical studies in humans.
Additional risks include the possibility that the Company's products will
not be found to be safe and effective or will otherwise fail to receive
necessary regulatory approvals; that the products, if safe and effective, will
be difficult to manufacture on a large scale or will be uneconomical to market;
that the proprietary rights of third parties will preclude or delay the Company
from marketing products; or that third parties will market superior or
equivalent products. Accordingly, there can be no assurance that the Company's
research and development activities will result in any commercially viable
products. See "Business -- Products in Development" and "-- Manufacturing" and
"-- Marketing."
NO PRODUCT REVENUE; ACCUMULATED DEFICIT; CONTINUING LOSSES. The Company is
in the development stage. Through March 31, 1996, it had generated no revenues
from sales of any of its products and had incurred losses in each year since its
inception. As of March 31, 1996, the Company had an accumulated deficit of
$29,496,000, principally from costs incurred in research and development of the
Company's product candidates and from general and administrative costs
associated with the Company's development programs. As of March 31, 1996, the
Company had a working capital deficit of $225,000.
Although the Company has received initial license fees under its agreement
with Rhone-Poulenc Rorer during 1994, and Athena during 1996, there can be no
assurance that the Company will receive any additional milestone or royalty
payments under such agreements or will enter into any other collaborative
arrangements that will result in revenues. The Company currently does not have
any products ready to be marketed or any rights to receive royalties on any
products ready to be marketed, and there can be no assurance that it will be
able to generate any revenues from product sales, or that its operations will
become profitable, even if it is able to commercialize any products. The
Company's most advanced product candidate is Carbatrol, and the Company's
operations will be disproportionately dependent upon Carbatrol's successful
development. The Company expects to incur significant additional expenses for
research, development, testing and regulatory compliance activities, which,
together with projected general and administrative expenses, are expected to
result in significant continued operating losses for at least several years.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
believes that the net proceeds of this offering, together with the Company's
available cash (including the $2 million payment due from Athena under its
license agreement with the Company), will be sufficient to fund the Company's
operations for at least the next 24 months. However, the Company's cash
requirements may vary materially from those now planned depending upon numerous
factors, including whether and when the Company enters into other license
agreements for its product candidates and the terms of any such agreements,
whether the Company
6
<PAGE>
receives license fees or milestone payments under any collaborative
arrangements, the extent to which the Company may have working capital
requirements to carry necessary inventory and meet other manufacturing costs in
connection with the Company's product candidates, which will depend on the terms
of the license agreement entered into with respect to such potential products,
the progress of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. Expenditures will also be dependent upon the establishment of
collaborative arrangements with other companies, the availability of financing
and other factors.
The Company plans to seek collaborative arrangements for the development of
all of its product candidates at such time as significant funding is required
for clinical testing. If the Company is successful in obtaining such
collaborators, the collaborators may provide funding for such product
development. However, if the Company decides to conduct clinical trials or to
seek FDA approval of any of its product candidates in the future, or if the
Company decides to undertake the commercialization of any product candidate, it
would require substantial funds in addition to the proceeds of this offering.
There can be no assurance such collaborative arrangements will be entered into.
Accordingly, there can be no assurance that the Company will not require
additional financing or that additional financing, if required, will be
available on acceptable terms or at all. The Company may seek additional funding
through public or private financings, including equity financings. If additional
funds are raised by issuing equity securities, further dilution to stockholders
may result. If adequate funds are not available, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research and
development programs, or to license the rights to certain of its product
candidates on terms that are less favorable to the Company than might otherwise
have been available. See "Use of Proceeds" and "Management's Discussion and
Analysis."
NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION. The FDA and comparable
agencies in foreign countries impose substantial requirements upon the
introduction of therapeutic pharmaceutical products through lengthy and detailed
laboratory, animal and human clinical testing, sampling activities and other
procedures that are costly and time-consuming. Satisfaction of these
requirements typically takes several years or more and varies substantially
based upon the type, complexity and novelty of the compound. FDA regulations
also govern the manufacture and marketing of pharmaceutical products. In
addition, because the Company handles alprazolam and lorazepam, which are
controlled substances, it must be licensed and its facilities must be inspected
by the U.S. Drug Enforcement Administration (the "DEA") and the State of
Maryland. Failure to comply with applicable FDA, DEA and other regulatory
requirements can result in sanctions being imposed on the Company and any
contract manufacturers and distributors of its products. Typical sanctions can
include warning letters, fines, product recalls or seizures, injunctions,
refusals to permit products to be imported into or exported out of the United
States, refusals of the FDA to grant premarket approval of drugs or to allow the
Company to enter into government supply contracts, withdrawals of previously
approved applications and criminal prosecution.
A company seeking FDA approval of a drug for human use must file an
application with the FDA pursuant to the Federal Food, Drug and Cosmetic Act
(the "FDC Act"), as amended in 1984 by the Drug Price Competition and Patent
Term Restoration Act of 1984 (the "DPCPTRA"). The FDC Act, as amended, provides
for several types of applications, including an NDA, which may be filed under
either Section 505(b)(1) or Section 505(b)(2) of the FDC Act, and an Abbreviated
New Drug Application ("ANDA") under Section 505(j) of the FDC Act. The type of
application required to be filed depends upon a variety of factors, including
the nature of the drug and the extent and availability of scientific data
supporting the application. Biologics, such as the Company's BChE product, are
licensed pursuant to Section 351 of the Public Health Service Act and require
submission and FDA approval of both a product license application ("PLA") and an
establishment license application ("ELA") for the particular product and the
facility manufacturing the product.
The procedures that the Company and other drug sponsors must follow in
submitting these applications are sometimes uncertain and are subject to change.
The type of application that the FDA is willing or able to
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accept to review a new drug product determines the nature of the information
that must be prepared and submitted in support of the application and the time
required to obtain FDA approval. Although the statutory requirements may be
subject to interpretation, under their current administration by the FDA,
Section 505(b)(2) of the FDC Act permits drug sponsors to submit applications
for which the investigations required in Section 505(b)(1)(A) and relied upon by
the applicant for approval of the application were not conducted by or for the
applicant and for which the applicant has not obtained a right of reference or
use from the person by or for whom the investigations were conducted. In this
connection, a petition was filed with the FDA by Pfizer, Inc. ("Pfizer") in 1993
seeking to prohibit reliance by an applicant under a 505(b)(2) NDA on safety and
other data previously submitted by Pfizer in support of its NDA for nifedipine
(Procardia XL). While the FDA recently denied the petition, it did not decide
the legal merits of the issues presented. Accordingly, any future decision by
the FDA to accept these or similar legal arguments could delay the approval of
505(b)(2) NDA applications generally. See "Business -- Government Regulation."
An NDA for Carbatrol for the treatment of epilepsy was accepted for filing
by the FDA on June 1, 1996 and the clinical portion of a Phase III study of
Selegiline SR for cocaine craving and withdrawal was completed in December 1995.
Selegiline SR for the treatment of Parkinson's Disease is ready to enter Phase
III clinical testing. Five of the Company's product candidates could be ready to
enter Phase I, II or III clinical trials during the next 12 months. See
"Business -- Products in Development." The Company believes that the development
process for its products may include reduced regulatory submissions and some of
the regulatory approval risks may be reduced because the Company's drug delivery
systems usually contain inactive ingredients that are GRAS for food use as
determined by the FDA or are inactive ingredients that the Company believes are
safe for such use. However, there are a number of other factors related to the
FDA approval process, including the requirement, for certain types of
applications, that manufacturers establish bioequivalence and bioavailability or
the safety and efficacy of proposed drug products and certain factors relating
to the manufacturing processes involved with making any drug product, that may
delay or preclude approval of one or more of the Company's product candidates.
There can be no assurance that the Company will not encounter problems in
clinical trials that will cause the Company or the FDA to delay or suspend
clinical trials. In addition, there can be no assurance that any of the
Company's product candidates will obtain FDA approval for any indication.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time or to impose costly procedures upon
the Company's activities, which may give a competitive advantage to companies
with greater resources that compete with the Company. There can be no assurance
that FDA or other regulatory approval for any product candidates developed by
the Company will be granted on a timely basis, if at all. Any such delay in
obtaining, or failure to obtain, such approvals would adversely affect the
marketing of the Company's potential products and its ability to generate
revenues or royalties. Any additional regulation or changes in existing
regulations could result in limitations or restrictions on the Company's ability
to utilize one or more of its technologies or could delay regulatory approval of
the Company's potential products and could have a material adverse effect on the
Company. See "Business -- Government Regulation."
POSSIBLE DELAY IN BRINGING TO MARKET REFORMULATED DRUG PRODUCTS. The
Company could be delayed in bringing some of its potential drug product
candidates to market by marketing exclusivity rights accorded other
manufacturers under the DPCPTRA. Under the DPCPTRA, a drug sponsor may be
entitled to three years of marketing exclusivity in the United States for an
FDA-approved drug product if new clinical investigations (other than
bioavailability studies), conducted or sponsored by the drug sponsor, are
submitted to the FDA and found to be essential to the FDA's approval. Until FDA
approval of an NDA, FDA filings are not public and it is typically not known
what, if any, clinical studies are submitted by a sponsor. In this connection,
however, the Company received information pursuant to a Freedom of Information
Act ("FOIA") request that CIBA-Geigy obtained approval on March 25, 1996 for an
NDA supplement for an extended-release formulation of carbamazepine under its
brand name Tegretol. The FOIA documentation further discloses that CIBA-Geigy
requested that the FDA grant it three years marketing exclusivity commencing on
the date of approval of the Tegretol NDA supplement and that the FDA denied
CIBA-Geigy's request for such exclusivity. See "Business -- Government
Regulation."
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DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. The Company's success will
depend, in part, on its ability to obtain patent protection for its processes
for formulating drug delivery systems and products both in the United States and
in other countries, to preserve its trade secrets and to operate without
infringing upon the proprietary rights of others. The Company intends to file
applications as appropriate for patents covering its technologies, products and
processes. In 1994, a patent expiring in 2011 was issued to the Company covering
the process for obtaining BChE from plasma. The Company is aware that there may
be an approach for producing BChE using recombinant methods. As a result, other
parties may be able to manufacture BChE for any and all purposes without
infringing the Company's patent. In 1994, a patent expiring in 2011 was also
issued, covering the formulation of the Company's Carbatrol product. In 1995,
two patents were issued based on the Company's Peptitrol technologies. One of
the patents, which expires in 2014, is directed to a pharmaceutical preparation
of a drug which is poorly soluble in water, and which is incorporated into
particles comprised of hydrophobic fatty acid ester. The second patent, which
also expires in 2014, is directed to a pharmaceutical preparation of a drug
incorporated into particles formed of alternate layers of hydrophobic and
hydrophilic materials. The issued patents do not cover the microemulsion
formulations, which are a significant component of the Company's product
development efforts using its Peptitrol technologies. The Company is aware of
other pharmaceutical companies that are working with microemulsions and
hydrophobic materials for use in drug delivery. In 1996, a patent, expiring in
2015, was issued for the Company's formulation of Selegiline SR. No assurance
can be given that any additional patents will issue from any of the Company's
patent applications or that, if patents do issue, the claims allowed will be
sufficiently broad to protect the Company's technologies. Although a patent has
a statutory presumption of validity in the United States, the issuance of a
patent is not conclusive as to such validity or as to the enforceable scope of
the claims of the patent. There can be no assurance that the Company's issued
patents or any patents subsequently issued to or licensed by the Company will
not be successfully challenged in the future. The validity or enforceability of
a patent after its issuance by the patent office can be challenged in
litigation. If the outcome of the litigation is adverse to the owner of the
patent, third parties may then be able to use the invention covered by the
patent, in some cases without payment. There can be no assurance that the
Company's patents will not be infringed or successfully avoided through design
innovation.
There can be no assurance that patents or patent applications owned by or
licensed to the Company will result in patents being issued or that, if issued,
the patents will afford protection against competitors with similar technology.
For example, other companies are evaluating microemulsions, hydrophobic,
transdermal, transmucosal and sustained-release oral formulations. It is also
possible that third parties may obtain patent or other proprietary rights that
may be necessary or useful to the Company. In cases where third parties are
first to invent a particular product or technology, it is possible that those
parties will obtain patents that will be sufficiently broad so as to prevent the
Company from using certain technologies or from further developing or
commercializing certain products. If licenses from third parties are necessary
but cannot be obtained, commercialization of the related products would be
delayed or prevented. The Company is aware of patent applications and issued
patents that belong to competitors and it is uncertain whether any of these, or
any other filed patent applications of which the Company does not have any
knowledge, will require the Company to alter its potential products or
processes, pay licensing fees or cease certain activities.
The Company's principal product candidates are reformulations of existing
products. Therefore, patents, if any, issued to the Company will only cover the
Company's formulation of the product or the process for manufacturing the
product. Others may be able to develop formulations which provide similar
advantages to the Company's, but which do not infringe the Company's patent.
Additionally, patents issued or which may be issued in the future with respect
to Peptitrol or other drug delivery systems may not be sufficiently broad to
preclude others from developing products that compete with products developed by
the Company. For example, although the Company's issued patents and patent
applications relating to Peptitrol may prevent competitors from developing
products using formulations covered by the Company's patents, the patents would
not preclude other companies from formulating drugs using technologies that
could provide similar results.
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The Company's product candidates may conflict with patents that have been or
may be granted to competitors, universities or others. In addition, such other
persons could bring legal actions against the Company claiming damages and
seeking to enjoin manufacturing and marketing of the affected products. If any
such actions are successful, in addition to any potential liability for damages,
the Company could be required to obtain a license in order to continue to
manufacture or market the affected products. There can be no assurance that the
Company would prevail in any such action or that any license required under any
such patent would be made available on acceptable terms. The Company believes
that there may be significant litigation in the industry regarding patent and
other intellectual property rights. If the Company becomes involved in such
litigation, it could consume substantial resources.
The Company is conducting research to identify and develop a formulation of
nifedipine that is bioequivalent to Procardia XL, marketed by Pfizer, without
infringing Pfizer's existing patents on Procardia XL. While the patent on the
compound nifedipine has expired, Pfizer has been issued patents with respect to
its once-a-day formulation, Procardia XL. There can be no assurance that the
Company will be successful in developing a generic reformulation that is
bioequivalent to Procardia XL and that does not infringe Pfizer's patents. If
the Company successfully develops a nifedipine reformulation, the Company
expects that it or its licensee will file an ANDA with the FDA with respect to
the reformulation. Since the filing of an ANDA or other drug application for a
product covered by a patent is an act of infringement, the Company believes
Pfizer would file a lawsuit against the Company and its licensee, if any, if it
believed that it had a claim that the Company's formulation was covered by
Pfizer's patents. The filing of a patent action could delay the approval of an
ANDA for a period of up to 30 months, or longer if so ordered by a court. If
Pfizer successfully asserts its patents, the Company may be enjoined from
selling its product until the Pfizer patent expires.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its corporate
partners, collaborators, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.
OTHER GENERIC DRUG RISKS; MARKET ACCEPTANCE. Certain of the Company's
product candidates would compete with existing drugs for the treatment of
epilepsy, Parkinson's Disease, migraine headache, anxiety, cardiovascular
disease, viral infection and diabetes. The Company's strategy generally has been
to develop reformulations for existing compounds for which patent protection or
market exclusivity is no longer available or will no longer be available at the
time the Company's product is introduced. To the extent that the Company's
products consist of reformulations of available compounds, the Company's
products will be competing with the original brand-name product. Generally, such
brand-name versions of pharmaceutical compounds have a market advantage over
generic products using the same compound. Accordingly, the Company and any
potential collaborator may be required to demonstrate to physicians, other
heathcare providers and administrators that the Company's reformulations of
previously available compounds will in fact offer distinct advantages over such
products. In addition, to the extent that the manufacturers of the brand-name
products seek to develop their own generic or improved versions of these
products that provide benefits similar to the Company's reformulations, the
Company may find itself at a competitive disadvantage by virtue of its
competitors' ability to use the name-brand in the advertising of its products.
DEPENDENCE UPON OTHERS. The Company's strategy for commercialization of
products will generally require entering into various arrangements with
corporate collaborators. The Company has entered into a license agreement with
Rhone-Poulenc Rorer with respect to the development, production and marketing of
its two BChE Injectable products and with Athena with respect to the marketing,
sale and distribution of Carbatrol. The Company has also had discussions with
other parties concerning additional product development, manufacturing and
marketing agreements. Although the Company believes that its collaborators would
have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities by them are not within the control of the Company. There can be no
assurance that such collaborators will perform their obligations as expected or
that the Company will derive any additional revenue from such arrangements.
There can also be no assurance that
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the Company's collaborators will not pursue existing or alternative technologies
in preference to products being developed in collaboration with the Company. In
addition, there can be no assurance that the Company's collaborators will pay
any additional option or license fees to the Company or that they will develop
and market any products under the agreements. Furthermore, there can be no
assurance that the Company will be able to negotiate additional collaborative
arrangements in the future on acceptable terms, if at all, or that such
collaborative arrangements will be successful. See "Business -- Strategy."
LIMITED MANUFACTURING CAPABILITY AND EXPERIENCE. The Company generally
intends to enter into collaborative arrangements to complete development,
manufacture and market its product candidates. The Company expects that its
collaborators will assume responsibility for manufacturing, as Rhone-Poulenc
Rorer has done for the Company's BChE Injectable products and as Athena in the
future is obligated to do with respect to Carbatrol. Under the Company's
agreement with Athena, Athena has agreed to pay the Company's costs under its
current manufacturing agreements and, upon expiration of such agreements,
directly to arrange for manufacture of Carbatrol. However, there can be no
assurance that the Company will be able to enter into any other collaborative
arrangements or will enter into a collaborative arrangement where the
collaborator assumes responsibility for manufacturing. The Company currently
does not have facilities or personnel capable of directly manufacturing in
commercial quantities any of the products it may develop.
The Company has entered into an exclusive agreement with Niro Inc. ("Niro")
for the manufacture of the pellets to be used in Carbatrol. In addition, the
Company has entered into an agreement in with The P.F. Laboratories, Inc. ("P.F.
Labs") to encapsulate and package Carbatrol. Initially, the Company will be
relying solely on Niro for the manufacture of the pellets to be used in
Carbatrol and on P.F. Labs for encapsulation and packaging of this product. In
addition, the Company will initially have only a single source of carbamazepine
and capsules qualified by the FDA. Although the Company believes that there are
alternative sources available to manufacture Carbatrol and to supply
carbamazepine and the capsules, the substitution of an alternative manufacturer
would require additional FDA approval and could result in delays, which could
materially adversely affect the Company. In addition, Niro has no experience in
manufacturing pharmaceutical products and its facility will be subject to a
pre-approval inspection by the FDA. See "Business -- Government Regulation." No
assurance can be given that manufacturing or control problems will not arise or
that the manufacturing process will not be disrupted by circumstances beyond the
Company's control.
It is possible that, in the future, the Company may, if it becomes
economically attractive to do so, establish its own manufacturing facilities to
produce products, if any, that it may develop. In order to establish a
manufacturing facility, the Company will require substantial additional funding
and will be required to hire and retain significant additional personnel and
comply with the extensive current Good Manufacturing Practices ("cGMP")
regulations imposed by the FDA on such facilities. The Company has no experience
in manufacturing, and no assurance can be given that the Company will be able to
make the transition successfully to commercial production, should it choose to
do so. See "Business -- Manufacturing."
NO MARKETING AND SALES CAPABILITY; DEPENDENCE UPON THIRD PARTIES FOR
MARKETING. The Company has no marketing and sales staff and no experience with
respect to marketing pharmaceutical products. The Company generally intends to
enter into collaborative arrangements for completing the development,
manufacturing, distribution and marketing of its products. Therefore, the
Company will be dependent on the efforts of third parties to market its
products. There can be no assurance that the Company's collaborators will be
successful in penetrating the markets for any products developed. In the event
that the collaborator fails to develop a marketable product or fails to market a
product successfully, the Company's business may be adversely affected.
If the Company markets products directly, significant additional
expenditures and management resources would be required to develop an external
sales force and implement a marketing strategy for a product. The sale of
certain products outside the United States will also be dependent on the
successful completion of arrangements with future partners, licensees or
distributors in each territory. There can be no
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assurance that the Company will be successful in establishing any collaborative
arrangements or that, if established, such future partners will be successful in
commercializing products. See "Business -- Marketing."
UNCERTAINTY OF SUPPLY OF BCHE; PRODUCT SAFETY. The Company has licensed
exclusive, worldwide rights for the development, production and marketing of its
BChE Injectable products to Rhone-Poulenc Rorer. Because BChE is purified from
human blood plasma, the ability of Rhone-Poulenc Rorer to produce BChE will
depend upon its ability to obtain an adequate supply of human blood plasma.
While Rhone-Poulenc Rorer obtains and fractionates blood for other of its
products, there can be no assurance it will have, or be able to, contract for an
adequate supply of blood plasma to meet commercial needs. Additionally, plasma
suppliers obtain their supply from human donors who are limited as to the amount
and frequency of donations. Should the supply of suitable plasma donors decline,
Rhone-Poulenc Rorer's ability to produce and sell the Company's BChE Injectable
products could be adversely affected. In addition, although the Company believes
that plasma from human donors is screened for infectious diseases, there can be
no assurance that regulatory agencies, such as the FDA, will not impose
additional restrictions on products derived from human plasma or take regulatory
actions such as recalls of finished products already on the market. See
"Business -- Manufacturing."
COMPETITION. There are many companies engaged in the research and
development of products using drug delivery systems that may compete with the
Company's, most of which have substantially greater financial, technological,
research and development, marketing and personnel resources than the Company.
The Company is aware of several drug delivery companies and large pharmaceutical
companies that develop or market sustained-release oral dosage systems,
transdermal or transmucosal drug delivery systems or have active research and
development programs in controlled-release methods. Many companies also are
developing technologies for the oral delivery of peptides and other poorly
absorbed molecules. The Company is aware that CIBA-Geigy has recently received
FDA approval to market an extended-release formulation of carbamazepine under
its brand name Tegretol, which will compete directly with Carbatrol, if and when
it is approved. In addition, the Company is aware of a number of other companies
developing generic formulations of sustained-release nifedipine, improved
formulations of selegiline, transmucosal formulations of DHE and transdermal
formulations of certain benzodiazepines, including alprazolam and lorazepam and
improved methods of delivering anti-emetics. The Company is also aware of
companies working on antivirals with less frequent dosing requirements and oral
delivery systems for insulin and other peptides or proteins. Many of these
competitors have significantly greater experience than the Company in
undertaking preclinical testing and human clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals. Accordingly, certain
of the Company's competitors may succeed in obtaining FDA approval for products
more rapidly than the Company. Furthermore, if the Company is permitted to
commence commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing with companies having greater resources
and experience in these areas. The Company currently has limited or no
experience in these areas.
Some of the Company's competitors may succeed in developing products that
are more effective or less costly than any that may be developed by the Company
and may also prove to be more successful than the Company's products. The
Company will compete with off-patent drug manufacturers, brand-name
pharmaceutical companies that manufacture or market off-patent drugs, the
original manufacturers of brand-name drugs that continue to produce such drugs
after patents expire or introduce generic versions or improved reformulations of
their branded products, and manufacturers of new drugs that may compete with the
Company's products. In addition, the Company's products will compete not only
with products employing advanced drug delivery systems, but also with products
in traditional dosage forms. Because selling prices of off-patent drug products
typically decline as competition intensifies, the maintenance of profitable
operations will be dependent, in part, on the Company's cost of manufacturing,
its ability to demonstrate the benefits of the Company's product and its ability
to develop and introduce new products in a timely manner. The industry in which
the Company proposes to compete is characterized by extensive research and
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development efforts and rapid technological progress. There can be no assurance
that developments by others will not render the Company's products or
technologies noncompetitive or obsolete. See "Business -- Competition."
DEPENDENCE UPON KEY PERSONNEL. The Company's success depends on the
continued contributions of its executive officers, scientific and technical
personnel and consultants. During the Company's limited operating history, many
key responsibilities within the Company have been assigned to a relatively small
number of individuals. The competition for qualified personnel is intense, and
the loss of services of certain key personnel could adversely affect the
business of the Company. As the Company's development of products advances, the
Company will require additional expertise in areas such as preclinical testing,
analytical testing, clinical trial management, regulatory affairs, quality
assurance and control and, if applicable, manufacturing. Such activities will
require the addition of new personnel, including management, and the development
of additional expertise by existing management personnel. The inability to
acquire such services or to develop such expertise could have a material adverse
effect on the Company's operations.
UNCERTAINTY RELATED TO HEALTH CARE REIMBURSEMENT AND REFORM MEASURES. In
recent years, there have been numerous proposals to reform the healthcare system
in the United States, including currently pending legislation relating to
Medicare and Medicaid. Some of these proposals have included measures that would
limit or eliminate payments for certain medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. In addition,
significant uncertainty exists as to the reimbursement status of newly-approved
healthcare products. The Company's success in generating revenue from sales of
human therapeutic products may depend, in part, on the extent to which
reimbursement for the costs of such products and related treatments will be
available from third-party payors such as government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price and cost-effectiveness of medical
products, and significant uncertainty exists as to the reimbursement status of
newly-approved health care products. If the Company succeeds in bringing one or
more products to market, there can be no assurance that such products will be
considered cost-effective or that adequate third-party insurance coverage will
be available for the Company to establish and maintain price levels sufficient
to realize an appropriate return on its investment in product development.
Third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement of new therapeutic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage of uses of approved products for disease indications for
which the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's therapeutic products, the market acceptance of these
products would be adversely affected.
RISK OF PRODUCT LIABILITY; AVAILABILITY OF INSURANCE. The use of the
Company's product candidates in clinical trials and the marketing of any
pharmaceutical products may expose the Company to product liability claims. The
Company has obtained a level of liability insurance coverage that it deems
appropriate for its current stage of development. However, there can be no
assurance that the Company's present insurance coverage is adequate. Such
existing coverage will not be adequate as the Company further develops products,
and no assurance can be given that in the future adequate insurance coverage
will be available in sufficient amounts or at a reasonable cost, or that a
successful product liability claim or recall would not have a material adverse
effect on the business or financial condition of the Company.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research and
development processes involve the use of hazardous, controlled and radioactive
materials. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
There can be no assurance that the Company will not be required to
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incur significant costs to comply with environmental laws and regulations in the
future, or that the business or financial condition of the Company will not be
materially or adversely affected by current or future environmental laws or
regulations. See "Business -- Government Regulation."
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS. Upon the
completion of this offering, the principal stockholders of the Company will
beneficially own or control approximately 77% of the outstanding shares of
Common Stock, including immediately exercisable options and warrants
(approximately 74% if the Underwriters' over-allotment option is exercised in
full). As a result, such persons will be able to elect all of the Company's
directors, determine the outcome of all corporate actions requiring stockholder
approval and otherwise control the business of the Company. Such control could
preclude any unsolicited acquisition of the Company and consequently adversely
affect the market price of the Common Stock. In addition, the Company's Board of
Directors is authorized to issue from time to time shares of preferred stock,
without stockholder authorization, in one or more designated series or classes.
The issuance of preferred stock could make the possible takeover of the Company
or the removal of the Company's management more difficult, discourage hostile
bids for control of the Company in which stockholders may receive a premium for
their shares of Common Stock or otherwise dilute the rights of holders of Common
Stock and depress the market price of the Common Stock. See "Principal
Stockholders" and "Description of Capital Stock."
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to this offering, there has been no public market for the Common Stock, and
there is no assurance that an active market will develop or be sustained after
this offering. The initial public offering price will be determined by
negotiation between the Company and the Representatives of the Underwriters and
may not be indicative of the market price at which the Common Stock will trade
after completion of this offering. See "Underwriting" for factors to be
considered in determining such offering price. The market price of the shares of
Common Stock, like that of the common stock of many other early-stage
pharmaceutical companies, is likely to be highly volatile. Factors such as the
results of preclinical studies and clinical trials by the Company or its
competitors, other evidence of the safety or efficacy of products of the Company
or its competitors, announcements of technological innovations or new commercial
therapeutic products by the Company or its competitors, governmental regulation,
changes in reimbursement policies, healthcare legislation, developments in
patent or other proprietary rights, developments in the Company's relationships
with future collaborators, if any, public concern as to the safety and efficacy
of drugs developed by the Company, fluctuations in the Company's operating
results, and general market conditions may have a significant impact on the
market price of the Common Stock.
FUTURE SALES OF COMMON STOCK; REGISTRATION RIGHTS. Future sales of shares
of Common Stock by existing stockholders pursuant to Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), through the exercise
of outstanding registration rights or through the issuance of shares of Common
Stock upon exercise of options, warrants or otherwise, could have an adverse
effect on the price of the Company's Common Stock. In addition to the 2,200,000
shares of Common Stock offered hereby, approximately 4,756,577 shares of Common
Stock will be eligible for sale in the public market subject to compliance with
Rule 144 and Rule 701 under the Securities Act, beginning 90 days from the date
of this Prospectus. All of the Company's executive officers and directors and
certain stockholders, beneficially owning an aggregate of 7,569,968 shares of
Common Stock (including 3,752,114 shares eligible for sale commencing 90 days
after the date of this Prospectus), however, have agreed with the Underwriters
not to sell or otherwise dispose of their shares for a period of 180 days from
the date of this Prospectus without the prior written consent of Lehman Brothers
Inc. Additionally, commencing 180 days after the date of this Prospectus,
holders of 7,015,616 shares of Common Stock, including shares of Common Stock
issuable upon exercise of warrants, will have registration rights under certain
conditions. Additional shares of Common Stock, including shares issuable upon
exercise of options and warrants, will also become eligible for sale in the
public market from time to time in the future. No prediction can be made as to
the effect, if any, that future sales of shares of Common Stock, or the
availability of such shares for future sale, will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock (including shares issued upon exercise of stock options) in the
public market, or the perception that such sales could occur, could adversely
affect the
14
<PAGE>
prevailing market price of the Common Stock or the ability of the Company to
raise capital through a public offering of its equity securities. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."
DILUTION. The initial public offering price will be substantially higher
than the book value per share of the Common Stock. Investors purchasing shares
of Common Stock in this offering will incur immediate net tangible book value
dilution of $8.22 per share, assuming an initial public offering price of $11.00
per share. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$11.00 per share and after deducting the underwriting discount and estimated
expenses payable by the Company, are estimated to be approximately $21,700,000
($25,085,000 if the Underwriters' over-allotment option is exercised in full).
The Company currently anticipates using substantially all of the net proceeds,
including interest thereon, for research and development and other product
development activities and the balance of the net proceeds will be used for
general corporate purposes.
The amounts and timing of such expenditures may vary significantly depending
upon numerous factors, including whether and when the Company enters into
license agreements for product candidates and the terms of any such agreements,
whether the Company receives license fees or milestone payments under any
collaborative arrangements, the progress of the Company's research and
development programs, the results of clinical studies, the timing of regulatory
submissions, technological advances, determinations as to commercial potential
and the status of competitive products. Expenditures will also be dependent upon
the establishment of collaborative arrangements with other companies, the
availability of financing and other factors. Subject to the foregoing, the
Company believes that the net proceeds of this offering, together with its
available cash (including the $2 million payment due from Athena under its
license agreement with the Company), will be sufficient to finance its
operations for at least the next 24 months.
Pending such uses, the net proceeds from this offering will be temporarily
invested by the Company in short-term, interest bearing investment grade
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for the development of its
business.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996: (a) the actual
capitalization of the Company, (b) the pro forma capitalization of the Company
after giving effect to the transactions described in the footnotes to the table
below, and (c) the pro forma capitalization as adjusted to reflect the sale by
the Company of 2,200,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share. This table should be read in
conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion
Convertible Notes................................................... $ 938 $ -- $ --
Obligations under capital leases.................................... 784 784 784
---------- ----------- -----------
Total long-term debt............................................ 1,722 784 784
---------- ----------- -----------
Mandatorily Redeemable Series A Convertible Preferred Stock, $.01 par
value, 25,363,997 issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma and as adjusted......... 24,697 -- ( (2) --
---------- ----------- -----------
Stockholders' (deficit) equity:
Preferred Stock -- $.01 par value; 5,000,000 shares authorized, no
shares issued and outstanding...................................... -- -- --
Common Stock -- $.01 par value; 25,000,000 shares authorized,
289,514 shares issued and outstanding, actual; 6,472,332 shares
issued and outstanding, pro forma; 8,672,332 shares issued and
outstanding, as adjusted (3)(4).................................... 3 65 87
Paid-in capital..................................................... 5,200 35,071 56,749
Deficit accumulated during the development stage.................... (29,496) (32,694) (32,694)
---------- ----------- -----------
Total stockholders' (deficit) equity............................ (24,293) 2,442 24,142
---------- ----------- -----------
Total capitalization........................................ $ 2,126 $ 3,226 $ 24,926
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- --------------
(1) Upon consummation of this offering, the 25,363,997 shares of Preferred Stock
then outstanding will be converted into an aggregate of 5,636,452 shares of
Common Stock.
(2) In January 1996, the Company amended its Certificate of Incorporation to
authorize the issuance of an additional 5,000,000 shares of undesignated
preferred stock. Upon conversion of the outstanding Preferred Stock upon
consummation of this offering, such shares of Preferred Stock will be
cancelled and, accordingly, immediately thereafter, the Company will be
authorized to issue 5,000,000 shares of preferred stock.
(3) 6,182,818 shares of Common Stock were or will be issued subsequent to March
31, 1996, as follows: (i) 5,636,452 shares to be issued at the time of the
consummation of this offering upon conversion of the Preferred Stock (see
Note (2) above); (ii) 545,455 shares to be issued at the time of the
consummation of this offering upon conversion of all borrowings under the
1996 Credit Agreement into Common Stock ($3,000,000 of such borrowings were
outstanding on July 1, 1996 and the foregoing assumes no additional
borrowings under the 1996 Credit Agreement and an initial public offering
price of $11.00 per share); and (iii) the issuance on June 17, 1996 of 991
shares of Common Stock upon exercise of options under the Stock Option Plan.
(4) Excludes as of July 1, 1996: (i) 1,827,759 shares of Common Stock reserved
for issuance upon exercise of options granted, to be granted or available
for grant under the Stock Option Plan, as follows: (a) options to purchase
an aggregate of 1,202,608 shares that have been granted, (b) options to
purchase 53,336 shares that the Company has committed to grant to certain
officers upon consummation of this offering at an exercise price equal to
the initial public offering price, and (c) options to purchase 571,815
shares that are available for grant; and (ii) 665,084 shares of Common Stock
reserved for issuance upon exercise of warrants that are outstanding or that
the Company has agreed to issue. See "Management -- Stock Options," "Certain
Transactions" and "Description of Capital Stock."
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at March 31, 1996,
after giving effect to transaction described in footnote (1) to "Selected
Financial Data," would have been $2,441,727, or $0.38 per share. Net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of the 2,200,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share, and
after deducting the underwriting discount and estimated expenses payable by the
Company, the pro forma net tangible book value at March 31, 1996 would have been
$24,141,727, or $2.78 per share. This represents an immediate increase in such
net tangible book value of $2.40 per share to existing stockholders and an
immediate dilution in net tangible book value of $8.22 per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<CAPTION>
Assumed initial public offering price per share........... $ 11.00
<S> <C> <C>
Pro forma net tangible book value per share............. $ 0.38
Increase per share attributable to new investors........ 2.40
---------
Pro forma net tangible book value per share after
offering................................................. 2.78
---------
Dilution per share to new investors....................... $ 8.22
---------
---------
</TABLE>
The following table summarizes on a pro forma basis, as of March 31, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by new investors in this offering (assuming an initial
public offering price of $11.00 per share and before deducting the underwriting
discount and estimated expenses payable by the Company):
<TABLE>
<CAPTION>
AVERAGE TOTAL
SHARES PURCHASED CONSIDERATION
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders...................... 6,472,332 74.6% $ 27,748,168 53.4% $ 4.29
New Investors.............................. 2,200,000 25.4 24,200,000 46.6 11.00
---------- ----- ------------- -----
Total.................................. 8,672,332 100.0% $ 51,948,168 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing assumes no exercise of the Underwriters' over-allotment option
and assumes no exercise of any outstanding stock options or warrants. At July 1,
1996: (i) there were outstanding options under the Stock Option Plan to purchase
an aggregate of 1,202,608 shares of Common Stock at a weighted average exercise
price of $4.39 per share; (ii) the Company had agreed to grant options under the
Stock Option Plan to purchase 53,336 shares of Common Stock to certain officers
upon consummation of this offering, at an exercise price equal to the initial
public offering price; and (iii) there were outstanding warrants to purchase up
to an aggregate of 665,084 shares of Common Stock at a weighted average exercise
price of $4.17 per share, assuming an initial public offering price of $11.00
per share. To the extent additional shares and warrants are issued and such
outstanding options and warrants are exercised, there will be further dilution
to new investors. However, if all of the foregoing options and warrants were
exercised, the amount of dilution per share to new investors would decrease. See
"Management -- Stock Options," "Certain Transactions," "Description of Capital
Stock" and Notes 5 and 6 of Notes to Financial Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for each of the three years in the period
ended December 31, 1995 and for the period February 16, 1990 (date of inception)
to December 31, 1995 and balance sheet data at December 31, 1994 and 1995 have
been derived from the financial statements of the Company included elsewhere in
this Prospectus that have been audited by Coopers & Lybrand L.L.P., independent
accountants, as indicated in their report included elsewhere in this Prospectus.
The statement of operations data for the years ended December 31, 1991 and 1992
and the balance sheet data at December 31, 1991, 1992 and 1993 have been derived
from the financial statements audited by Coopers & Lybrand L.L.P. but not
included in this Prospectus. The statement of operations data for the three
months ended March 31, 1995 and 1996 and the balance sheet data at March 31,
1996 are derived from unaudited financial statements included in this Prospectus
and, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of the
Company's financial position and results of operations at the end of and for
such periods. Operating results for the three months ended March 31, 1996 are
not necessarily indicative of results that may be expected for the full year.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis" and the Financial Statements and Notes
related thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE
PERIOD
FEBRUARY 16, FOR THE THREE MONTHS
1990 (DATE OF
FOR THE YEARS ENDED DECEMBER 31, INCEPTION) TO ENDED MARCH 31,
----------------------------------------------------- DECEMBER 31, --------------------
1991 1992 1993 1994 1995 1995 1995 1996
--------- --------- --------- --------- --------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licensing revenue................... $ -- $ -- $ -- $ 2,000 $ -- $ 2,000 $ -- $ --
Research and development revenue.... -- -- -- -- 111 111 95 19
Research and development grants..... 50 -- 269 194 -- 513 -- --
Interest income..................... 59 27 19 46 35 191 5 10
--------- --------- --------- --------- --------- ------------- --------- ---------
Total revenues.................... 109 27 288 2,240 146 2,815 100 29
--------- --------- --------- --------- --------- ------------- --------- ---------
Expenses:
Research and development............ 1,570 3,385 3,932 4,936 4,987 19,131 1,230 1,266
General and administrative.......... 675 1,164 1,413 1,317 1,392 6,299 369 478
Interest expense.................... 5 581(1) 426(1) 132 446 1,594 58 3,572(1)
--------- --------- --------- --------- --------- ------------- --------- ---------
Total expenses.................... 2,250 5,130 5,771 6,385 6,825 27,024 1,657 5,316
--------- --------- --------- --------- --------- ------------- --------- ---------
Net loss.............................. $ (2,141) $ (5,103) $ (5,483) $ (4,145) $ (6,679) $ (24,209) $ (1,557) $ (5,287)
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
Net loss per common and common
equivalent share..................... $ (0.66) $ (1.54) $ (1.59) $ (1.20) $ (1.91) $ (7.19) $ (0.45) $ (1.51)
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
Weighted average common and common
equivalent shares outstanding........ 3,243 3,307 3,455 3,458 3,495 3,366 3,466 3,508
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
<CAPTION>
FOR THE
PERIOD
FEBRUARY 16,
1990 (DATE OF
INCEPTION) TO
MARCH 31,
1996
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licensing revenue................... $ 2,000
Research and development revenue.... 130
Research and development grants..... 513
Interest income..................... 201
-------------
Total revenues.................... 2,844
-------------
Expenses:
Research and development............ 20,397
General and administrative.......... 6,777
Interest expense.................... 5,166
-------------
Total expenses.................... 32,340
-------------
Net loss.............................. $ (29,496)
-------------
-------------
Net loss per common and common
equivalent share..................... $ (8.76)
-------------
-------------
Weighted average common and common
equivalent shares outstanding........ 3,366
-------------
-------------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
18
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, ------------------------
-----------------------------------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA (2)
--------- --------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 1,163 $ 529 $ 1,187 $ 1,045 $ 408 $ 586 $ 2,590
Working capital (deficit)........... 550 (2,096) 348 (2,470) (955) (225) 1,067
Total assets........................ 1,626 1,189 2,016 1,737 2,613 3,802 4,901
Series A Convertible Preferred
Stock.............................. 3,700 5,697 13,372 14,697 16,697 24,697 --
Capital lease obligations, less
current portion.................... 80 196 218 167 748 784 784
Deficit accumulated during the
development stage.................. (2,800) (7,902) (13,385) (17,530) (24,209) (29,496) (32,694)
Paid-in capital..................... 6 515 808 811 838 5,200 35,071
Total stockholders' (deficit)
equity............................. (2,793) (7,384) (12,574) (16,716) (23,368) (24,293) 2,442
<CAPTION>
PRO FORMA
AS ADJUSTED(2)(3)
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 24,288
Working capital (deficit)........... 22,766
Total assets........................ 26,600
Series A Convertible Preferred
Stock.............................. --
Capital lease obligations, less
current portion.................... 784
Deficit accumulated during the
development stage.................. (32,694)
Paid-in capital..................... 56,749
Total stockholders' (deficit)
equity............................. 24,142
</TABLE>
- --------------
(1) Includes non-cash charges of $501,000 and $292,000 during the fiscal years
ended December 31, 1992 and 1993, respectively, relating to the issuance of
warrants to purchase Common Stock at an exercise price below the fair market
value per share of the Common Stock and of $3,325,000 during the period
ended March 31, 1996 in connection with the conversion of an aggregate of
$8,000,000 principal amount of Convertible Notes into Preferred Stock at a
conversion price below the originally agreed upon conversion price. See
"Management's Discussion and Analysis," "Certain Transactions" and Notes 5
and 11 of Notes to Financial Statements.
(2) Gives effect to following events subsequent to March 31, 1996: (i) the
borrowing on April 25 and June 11, 1996 of an aggregate of $2,000,000
principal amount under the 1996 Credit Agreement; (ii) the conversion of all
of the shares of Preferred Stock outstanding into an aggregate of 5,636,452
shares of Common Stock upon the consummation of this offering; (iii) the
conversion of all borrowings under the 1996 Credit Agreement into 545,455
shares of Common Stock upon consummation of this offering ($3,000,000 of
such borrowings were outstanding on July 1, 1996 and the foregoing assumes
no additional borrowings under the 1996 Credit Agreement and an initial
public offering price of $11.00 per share); and (iv) the issuance on June
17, 1996 of 911 shares of Common Stock upon the exercise of options under
the Stock Option Plan. See "Capitalization," "Certain Transactions,"
"Description of Capital Stock" and the Notes to the Financial Statements.
(3) Adjusted to give effect to the sale of 2,200,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per
share. See "Capitalization."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company commenced operations in February 1990. The Company is in the
development stage and has devoted substantially all of its resources to the
research and development of its product candidates and general and
administrative expenses. Since inception, the Company has not generated any
revenue from product sales, but has received an aggregate of $2,643,000 in
licensing and research and development revenues and grants, its sole sources of
revenue. There can be no assurance that the Company will receive any such
revenue in the future.
The Company has not been profitable since inception and expects to incur
substantial operating losses for at least the next few years. For the period
from inception to March 31, 1996, the Company incurred a cumulative net loss of
$29,496,000 and, as of March 31, 1996, had a working capital deficit of
$225,000. The Company expects its expenses to increase substantially as it
expands its product development activities. The Company's results of operations
may vary significantly from quarter to quarter due to timing of license
payments, if any, as well as the pace of research and development expenses.
Accordingly, quarterly operating results may not necessarily be indicative of
results that may be expected for the full year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Total revenues were $29,000 in the three months ended March 31, 1996
compared to $100,000 in the same period in 1995. Research and development
revenue was $19,000 in the three months ended March 31, 1996 compared to $95,000
in the same period in 1995 as a result of payments under the Company's licensing
agreement with Rhone-Poulenc Rorer for the BChE technology in the three months
ended March 31, 1995. The Company does not expect that research and development
revenue will be significant in the future unless additional licensing or other
collaborative agreements are completed. Interest income increased to $10,000 in
the three months ended March 31, 1996 from $5,000 for the same period in the
prior year due primarily to higher average cash balances available for
short-term investment.
Research and development expenses primarily consist of compensation expenses
for research and development personnel, contract research and development costs,
costs of clinical trials, clinical and laboratory supplies and facilities.
Research and development expenses increased 3% to $1,266,000 in the three months
ended March 31, 1996 from $1,230,000 in the three months ended March 31, 1995.
The increase was attributable to higher compensation expenses and facility
costs, partially offset by lower costs of clinical trials and clinical supplies.
Research and development expenses accounted for 73% and 77% of total operating
expenses for the three months ended March 31, 1996 and 1995 respectively.
General and administrative expenses primarily consist of compensation
expenses for management and administrative personnel, professional fees and
other expenses. General and administrative expenses increased 30% to $478,000 in
the three months ended March 31, 1996 from $369,000 in the same period in the
prior year due primarily to higher compensation costs and recruiting costs of
management and administrative personnel.
Interest expense increased to $3,572,000 in the three months ended March 31,
1996 from $58,000 for the same period in the prior year. Interest expense in
1996 included a non-cash charge of $3,394,000 related primarily to the
conversion of Convertible Notes into Preferred Stock at a conversion price below
the originally negotiated conversion price. See "Liquidity and Capital
Resources" and Note 11 of Notes to Financial Statements. Excluding the non-cash
charge, interest expense increased to $178,000 in the three months ended March
31, 1996 from $58,000 in the same period of the prior year as a result of
increased borrowings under credit agreements and capitalized leases.
FISCAL YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Total revenues were $146,000 in 1995, $2,240,000 in 1994 and $288,000 in
1993. Research and development revenue was $111,000 in the year ended December
31, 1995 resulting from payments under the licensing agreement with
Rhone-Poulenc Rorer relating to the BChE technology transfer. In 1994, the
20
<PAGE>
Company received licensing revenue of $2,000,000, attributable to the initial
payment under the Company's licensing agreement with Rhone-Poulenc Rorer for its
BChE technology and $194,000 in research and development revenue from a Phase II
Small Business Innovation Research ("SBIR") grant from the National Institute on
Drug Abuse ("NIDA") for the study of cocaine detoxification. The study was
completed in 1994. The Company was awarded the grant in 1993 in the total amount
of $500,000, under which $194,000 was recognized as revenue in 1994 and $220,000
was recognized as revenue in 1993. The remaining balance of $86,000 has expired.
In addition, the Company was awarded a $49,000 Phase I SBIR grant from the
National Institute of General Medical Sciences ("NIGMS") to study post-surgical
apnea. The study was completed in 1993, and the $49,000 was recognized as
revenue in 1993. Interest income was $34,000 in 1995, $46,000 in 1994 and
$19,000 in 1993. Interest income resulted primarily from the temporary
investment of proceeds from the Company's private placements of Preferred Stock.
Research and development expenses increased 1% to $4,987,000 in the year
ended December 31, 1995 from $4,936,000 in the year ended December 31, 1994.
Research and development expenses increased 26% in 1994 from $3,932,000 in 1993.
In 1995, higher compensation expenses and recruiting costs for additional
research and development personnel, consulting expenses relating to review of
clinical and regulatory progress on the Carbatrol 505(b)(2) NDA and higher
facilities costs due to the Company's relocation, were offset by lower costs of
clinical trials, clinical and laboratory supplies and lower contract research
and development costs. The increase in 1994 from 1993 were primarily due to
higher compensation expenses and recruiting costs for additional research and
development personnel, costs of clinical and laboratory supplies, equipment
costs and the costs of clinical trials. The number of full-time employees in
research and development was 44 at December 31, 1995, 35 at December 31, 1994
and 30 at December 31, 1993. Research and development expenses accounted for
78%, 79% and 74% of total operating expenses of the Company in 1995, 1994 and
1993, respectively.
General and administrative expenses increased 6% to $1,392,000 in the year
ended December 31, 1995 from $1,317,000 in the year ended December 31, 1994,
primarily as a result of increased professional fees. General and administrative
expenses in 1994 decreased 7% from $1,413,000 in 1993, primarily due to lower
recruiting and relocation expenses for management and administrative personnel
and lower professional fees, which were partially offset by an increase in
compensation expenses.
Interest expense increased 238% to $446,000 in 1995 from $132,000 in 1994.
Interest expense decreased 69% in 1994 from $426,000 in 1993. Interest expense
in 1993 included $292,000 of non-cash charges relating to interest expense on
warrants issued at an exercise price below fair market value in connection with
the Company's credit agreements. See "-- Liquidity and Capital Resources,"
"Certain Transactions" and Note 4 of Notes to Financial Statements. Excluding
the non-cash charges, increased interest expense resulted from additional
financings under credit agreements and capitalized leases.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1990, the Company has financed its operations
primarily from (i) private sales of its Preferred Stock, (ii) loans from certain
of its stockholders, (iii) licensing and research and development revenues and
grants and (iv) to a lesser extent, capital leases.
Through March 31, 1996, the Company had received proceeds of $24,697,000
from the sale of its Preferred Stock, primarily to HealthCare Ventures II, L.P.,
HealthCare Ventures III, L.P., HealthCare Ventures IV, L.P. and certain other
institutional investors. Upon consummation of this offering, the Preferred Stock
will be converted into Common Stock.
Since 1991, the Company has also obtained loans from certain of its
stockholders. In 1994, the Company entered into the 1994 Credit Agreement
permitting it to borrow, under certain circumstances, up to $4,395,000 at the
rate of 7 1/4% per annum. The Company borrowed $2,000,000 under the 1994 Credit
Agreement. These loans were converted into Preferred Stock and the facility was
terminated in May 1995.
In May 1995, the Company entered into the 1995 Credit Agreement with certain
of its stockholders permitting it to borrow up to $8,000,000 at the rate of 9%
per annum. The Company issued $8,000,000 of
21
<PAGE>
Convertible Notes under the 1995 Credit Agreement through January 1996. All of
the Convertible Notes were converted into 8,000,000 shares of Preferred Stock in
March 1996. In connection with the conversion of the Convertible Notes into
Preferred Stock at a conversion price of $1.00 per share, which was $0.25 per
share less than the originally negotiated conversion price, the Company recorded
a non-cash expense of $3,325,000 in the first quarter of 1996.
Also in March 1996, the Company entered into the 1996 Credit Agreement,
permitting it to borrow up to $7,300,000 at the rate of 8 1/2% per annum prior
to the consummation of this offering. As of July 1, 1996, the Company had
borrowed $3,000,000 under the 1996 Credit Agreement. All borrowings under the
1996 Credit Agreement will convert into Common Stock at one-half of the initial
public offering price upon consummation of this offering and the 1996 Credit
Agreement will be terminated. The Company expects to record a $2,100,000
non-cash expense upon closing of this offering to reflect this discount. In
connection with the issuance of 880,000 warrants to purchase Preferred Stock
under the 1996 Credit Agreement, the Company expects to record, upon closing of
this offering, a non-cash expense of $1,098,000 to reflect ascribed debt
issuance costs. See Note 12 of Notes to Financial Statements.
From its inception through March 31, 1996, the Company received an aggregate
of $2,643,000 in licensing and research and development revenues and grants. Of
this amount, $2,000,000 represented an upfront fee from Rhone-Poulenc Rorer
under the BChE license agreement and most of the balance represented grants from
NIDA, an organization that is part of the National Institutes of Health, to fund
the Company's research of a treatment for cocaine addiction. Over this period,
the Company also entered into capital leases of certain equipment, which had a
balance of $1,167,000 at March 31, 1996.
On July 1, 1996, the Company entered into an exclusive licensing agreement
with Athena for the worldwide marketing, sale and distribution of Carbatrol.
Under the agreement, Athena (i) will make a $2.0 million payment within ten days
of execution of the agreement, (ii) will fund all future development costs
associated with Carbatrol which are approved by a steering committee, (iii) will
make a milestone payment, upon satisfaction of certain conditions, of up to $8.0
million, of which $5.0 million is creditable against future royalty payments
which may be earned on product sales, and (iv) will make future royalty payments
to the Company based on net sales of Carbatrol. See "Business -- Licensing
Agreements."
The cash generated by the Company was used to fund its operating activities,
which used $24,778,000 through March 31, 1996, as well as its capital
expenditures for the purchase of equipment and leasehold improvements of
$866,000 and principal payments on its capital leases of $817,000. At March 31,
1996, the Company had $586,000 of cash and cash equivalents and negative working
capital of $225,000. The increase at December 31, 1995 from December 31, 1994 in
prepaid assets of $117,000 and in fixed assets of $999,000 related primarily to
deposits, equipment and leasehold improvements for the renovation of the
subleased facility the Company occupied in 1995 in Rockville, Maryland. The
increase in other assets of $416,000 related primarily to the deferred costs of
this offering.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $18,002,000, which may be available
to reduce future federal income taxes. The utilization of the loss carryforwards
to reduce future income taxes will depend on the Company's ability to generate
sufficient taxable income prior to the expiration of the net operating loss
carryforwards. The carryforwards begin to expire in the year 2005. However, the
Tax Reform Act of 1986 limits the maximum annual use of net operating loss and
tax credit carryforwards in certain situations where changes occur in the stock
ownership of a corporation. As a result of a private sale of Preferred Stock in
June 1993, a change of ownership was deemed to occur restricting the Company's
use of its net operating loss carryforwards. As a result, the Company estimates
that its use of approximately $7,500,000 of these net operating loss
carryforwards (those incurred before June 1993) will be subject to an annual use
limitation. See Note 8 of Notes to Financial Statements.
Following this offering, the Company will require funds to continue its
research and development and other product development activities, to fund its
other operating activities and to fund its capital expenditures. In 1996 and
1997, the Company plans to substantially increase its research and development
and other product development activities.
22
<PAGE>
Following this offering, the Company will not have any credit facilities in
place and will not be entitled to a significant amount of licensing payments or
research and development payments or grants, unless certain milestones are
achieved under its BChE license agreement, its Carbatrol license agreement or it
enters into a license agreement relating to another of its product candidates.
The Company's future capital requirements will depend on many factors, including
the progress of the Company's research and development programs, its success in
entering into new collaborative arrangements and the amount of payments it
receives thereunder, the results and costs of preclinical and clinical testing
for the Company's product candidates, the costs associated with and the timing
of regulatory approvals and product introductions, technological advances, the
status of competitive products and the commercial success of the Company's
products. There can be no assurance that additional funds, if required, will be
available to the Company on favorable terms, if at all, to permit the Company to
continue with its plan for operations. Subject to the foregoing, the Company
believes that the net proceeds of this offering, together with its available
cash (including the $2 million payment due from Athena under its license
agreement with the Company) will be sufficient to finance its operations for at
least the next 24 months. See "Risk Factors -- Future Capital Needs; Uncertainty
of Additional Funding" and "Use of Proceeds."
23
<PAGE>
BUSINESS
GENERAL
The Company develops pharmaceutical products utilizing advanced drug
delivery systems. The Company has developed a portfolio of drug delivery and
screening technologies designed to produce optimal delivery of a particular
pharmaceutical product for a given indication. These technologies include its
proprietary Peptitrol systems for the oral delivery of hard-to-deliver
compounds, oral controlled-release and sustained-release delivery, transmucosal
delivery through tissues in the oral cavity and transdermal delivery. Instead of
emphasizing a specific drug delivery system, the Company selects the drug
delivery system that it believes is most effective for delivery of a specific
compound and that can result in such advantages as convenient dosing, reduced
side effects, improved bioavailability or easier administration. The Company has
also developed various screening technologies, including its proprietary
Peptiscreen system, to systematically and rapidly test a large number of
formulations.
The Company's strategy in selecting its current product candidates has been
to select a pharmaceutical product for reformulation based on its analysis of
the potential market and the likely time and expense required to develop the
reformulated pharmaceutical product. Accordingly, the Company has selected
pharmaceutical products that the Company believes have a significant commercial
market, that are off-patent or for which patent protection will no longer be
available at the time the Company's product is introduced and where enhancement
of the method of delivery is expected to have measurable clinical value as
compared to the existing delivery method. The Company generally selects products
for reformulation that treat indications which have relatively simple, clear-cut
clinical end-points. Most of the Company's product candidates are reformulations
of existing compounds approved by the FDA and the Company's delivery systems
usually contain inactive ingredients that are generally recognized as safe
(GRAS) for food use as determined by the FDA or are inactive ingredients that
the Company believes are safe for such use. Therefore, the Company believes that
the development process for its products may be expedited and some of the
regulatory approval risks may be reduced. In addition to reformulating existing
compounds, the Company also intends to seek arrangements with other companies
developing pharmaceutical products based on new molecular entities to use the
Company's drug delivery systems to formulate these products.
DRUG DELIVERY SYSTEMS
Many pharmaceutical products on the market are administered using
conventional oral, injectable and other delivery methods that have certain
limitations. For example, injections are uncomfortable and frequently can be
given only in a hospital or physician's office and, accordingly, are generally
not suitable for home use. Conventional immediate-release pharmaceutical
compounds can initially produce higher drug levels in blood than required,
increasing risks of side effects and subsequently producing lower drug levels in
blood than are therapeutically optimal as the drug is metabolized and cleared
from the body. While some of these problems can be alleviated through more
frequent administration of lower doses or continuous infusions, these modes of
drug therapy can increase costs and can result in patient inconvenience and
patient noncompliance.
Advanced drug delivery technologies are designed to allow for more
consistent and appropriate drug levels in the bloodstream than conventional
methods of drug delivery, thereby usually improving a drug's efficacy and
reducing its side effects. Sustained-release delivery technologies also allow
for the development of dosage forms that reduce the need for frequent
administration, thus improving patient compliance. Additionally, these
technologies may permit the more convenient oral delivery of drugs that
otherwise could only be delivered by injection.
The Company believes that, for most indications, oral delivery is the
preferred method of administration and that once- or twice-a-day dosing is
convenient and results in greater patient compliance than more frequent dosing.
The Company uses a variety of oral technologies for the sustained-release of
drugs aimed at controlling the pattern of drug delivery. These technologies
include multiparticulate formulations that use a variety of controlled-release
coatings and sustained-release matrix tablet technologies. In addition, the
Company has developed its Peptitrol drug delivery systems, which enhance the
oral delivery of hard-to-deliver pharmaceutical products by using materials that
increase absorption of a compound from the gastrointestinal tract.
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<PAGE>
In reformulating hard-to-deliver pharmaceutical compounds, the Company seeks
to improve the "bioavailability" of a drug. Bioavailability, which is the rate
and extent to which the active ingredient of a drug is absorbed into the
bloodstream and becomes available at the site of action, is an important
component of the determination of the effectiveness of a drug. The Company is
seeking to increase the bioavailability of certain hard-to-deliver drugs using
its Peptitrol delivery systems.
The Company also designs controlled-release reformulations through which it
seeks to develop formulations which have more convenient dosing but are
bioequivalent to the existing drug in order to expedite the regulatory review
process and the time for the development of a commercial pharmaceutical product.
When the administration of one compound results in the same bioavailability,
peak drug concentration and time to reach peak concentration in the blood as the
already FDA-approved drug, the compounds are said to be "bioequivalent."
STRATEGY
PRODUCT SELECTION. The Company's strategy in selecting its current product
candidates has been to select a pharmaceutical product for reformulation based
on its analysis of the potential market and the likely time and expense required
to develop the reformulated pharmaceutical product. The Company selects
pharmaceutical products for reformulation that have a significant commercial
market, that are off-patent or that have patent protection expiring prior to the
expected market introduction of the Company's product and where enhancement of
the method of delivery is expected to have measurable clinical value as compared
to the existing delivery method. The Company generally selects products for
reformulation that treat indications that have relatively simple, clear-cut
clinical end-points, which the Company believes should result in a more
straightforward development and regulatory review process. In addition to
reformulating existing compounds, the Company also intends to seek arrangements
with other companies developing pharmaceutical products based on new molecular
entities to use the Company's drug delivery systems to formulate these products.
SELECTION OF DRUG DELIVERY SYSTEM. Instead of focusing on a single drug
delivery system, the Company has developed an expertise in a number of drug
delivery technologies. The Company selects the drug delivery system that it
believes will optimize delivery and address the clinical needs that are not
being met by existing formulations. The drug delivery systems used by the
Company generally do not chemically modify the compounds being delivered and
usually contain inactive ingredients that are GRAS for food use as determined by
the FDA or are inactive ingredients that the Company believes are safe for such
use. Therefore, the Company believes that the development process for its
reformulated products may be expedited and some of the regulatory approval risks
may be reduced.
SCREENING. Because of the time and expense involved in clinical testing,
the Company seeks to optimize each reformulation of a drug before such testing
begins. The Company has developed efficient, high-throughput screening
technologies to evaluate specific drug delivery approaches. The Company
generally uses these screening systems to rapidly and systematically test
different reformulations of a compound to determine the formulation with the
greatest chance of success.
COMMERCIALIZATION. The Company generally intends to develop its products
and commence clinical testing in humans and then to seek collaborators to
undertake further testing, obtain regulatory approval, manufacture, distribute
and market such products. The Company intends to evaluate each product under
development to determine the optimal time for seeking a collaborator. Generally,
the Company believes that the optimal time to seek collaborators is after
successful results from the first bioavailability studies in humans have been
obtained. The Company believes that this is the stage in the development process
which will allow the Company to obtain the most favorable terms for up-front
licensing fees, milestone payments and royalties in relation to the Company's
costs for developing the product.
PRODUCTS IN DEVELOPMENT
The Company currently has 12 product candidates, one for which an NDA was
accepted for filing by the FDA on June 1, 1996 and one of which is in Phase III
clinical trials. The Company has been concentrating its recent efforts on
developing and commercializing Carbatrol for the treatment of epilepsy and, to a
lesser extent, on the development of Selegiline SR for the treatment of cocaine
craving, Nifedipine SR and Acyclovir CD. During the next two years, the Company
expects to focus substantial efforts to support the 505(b)(2) NDA approval
process for Carbatrol and market introduction of Carbatrol. In addition to
Carbatrol, the Company intends to focus most of its development efforts during
the next year on Nifedipine SR and Acyclovir CD.
25
<PAGE>
The following table lists each of the Company's 12 product candidates and
its intended therapeutic indication, method of drug delivery and current stage
of development. There can be no assurance that any of these products will be
developed successfully or approved by the FDA in a timely manner.
<TABLE>
<CAPTION>
PRODUCT CANDIDATE INDICATION DRUG DELIVERY TECHNOLOGY DEVELOPMENT STAGE(1)
- ----------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Carbatrol Epilepsy Oral sustained-release 505(b)(2) NDA accepted for
filing by the FDA on June
1, 1996/
licensed to Athena
Selegiline SR Cocaine craving and Oral sustained-release Phase III commenced in
withdrawal November 1994
Selegiline SR Parkinson's Disease Oral sustained-release Ready to enter Phase III
BChE Injectable Cocaine overdose Injectable Preclinical safety and
efficacy studies
substantially completed/
licensed to Rhone-Poulenc
Rorer
BChE Injectable Post-surgical apnea Injectable Preclinical safety and
efficacy studies
substantially completed/
licensed to Rhone-Poulenc
Rorer
Acyclovir CD Viral infection Peptitrol/sustained-release Formulation development
DHE IR Migraine headache Transmucosal Formulation development
immediate-release/
Peptitrol
Alprazolam TD Anxiety Transdermal sustained- Formulation development
release
Lorazepam TD Anxiety Transdermal sustained- Formulation development
release
PI 181.2 TD Emesis Transdermal sustained- Formulation development
release
Nifedipine SR Cardiovascular disease Oral sustained-release Formulation development
Insulin CD Diabetes Peptitrol Formulation development
</TABLE>
- ------------------
(1) The tests required by the FDA before approval of a pharmaceutical product
are generally divided into three categories. "Phase I clinical trials" refer
to the first phase of human pharmaceutical trials required to gain evidence
of safety and to characterize the pharmacokinetic and/or pharmacodynamic
profile of a drug. "Phase II clinical trials" are designed to provide
evidence of efficacy, dose response and safety in a limited number of
patients with the targeted disease. "Phase III clinical trials" are
generally designed to provide evidence of the efficacy and further safety of
a compound in a large number of patients with the targeted disease. See "--
Government Regulation."
"Preclinical safety and efficacy studies" are conducted in the laboratory
using animal models to evaluate the potential safety and efficacy of a
product.
"Formulation development" refers to the process of developing a prototype of
a drug using a variety of materials to achieve a desired pattern of delivery
of the drug and screening and optimizing the formulation.
26
<PAGE>
CARBATROL: Carbatrol is an oral, controlled-release, twice-per-day
formulation of carbamazepine for the treatment of epilepsy. A major problem in
the treatment of epilepsy is patient noncompliance with treatment regimen, which
often may be caused by frequent daily dosing requirements or unpleasant side
effects. A consequence of patient noncompliance is a greater risk of developing
seizures. Utilizing a novel multiparticulate oral drug delivery system,
Carbatrol consists of three different types of pellets incorporated into a
capsule. The Company believes Carbatrol has the potential to improve patient
compliance since its twice-a-day dosing regimen is more convenient than the
dosing requirements of currently marketed immediate-release formulations of
carbamazepine, which should be taken three to four times a day. Carbatrol 200 mg
and 300 mg capsules are designed to deliver steady blood levels of the drug,
both during the day and at night. Finally, Carbatrol offers the potential of
being administered orally as a capsule, or sprinkled on the food of patients who
have difficulty swallowing (e.g., young children, the elderly); however, such
use is specifically subject to FDA approval. In 1994, a patent covering the
Company's formulation of Carbatrol was issued.
Approximately one percent of the population in the United States (e.g.,
2.0-2.5 million people) suffers from epilepsy. There are several types of
seizures associated with epilepsy. Carbamazepine is a drug of choice in treating
two types of epileptic seizures, complex partial and secondarily generalized
tonic-clonic seizures (occurring in approximately one-half of all epilepsy
patients). In 1993, three products -- CIBA-Geigy's Tegretol (carbamazepine),
Warner Lambert's Dilantin (phenytoin) and Abbott's Depakene/ Depakote
(valproate) accounted for approximately 70% of the prescriptions written for
anti-convulsants.
In 1993, U.S. sales of carbamazepine were $142 million, of which
approximately 80% represented sales of Tegretol. Since 1993, three new products
have been introduced -- Carter Wallace's Felbatol, Warner Lambert's Neurontin
and Glaxo Wellcome's Lamictal. The latter two of these products are indicated
for use as adjunct therapy in the treatment of complex partial seizures. The
Company is aware that CIBA-Geigy received FDA approval on March 25, 1996 to
market Tegretol XR, an extended-release formulation of carbamazepine permitting
twice-a-day dosing, and has announced a possible third quarter 1996 market
introduction of the product. Carbatrol, should it be approved, will compete
directly in the marketplace with Tegretol XR.
The Company completed a Phase II/III double blind, double dummy,
placebo-controlled clinical trial in 24 patients with epilepsy, which the
Company believes demonstrated that Carbatrol given every 12 hours was
bioequivalent with Tegretol given every six hours. In 1995, the Company also
completed a multi-center Phase III efficacy/safety study of Carbatrol. In this
study, 75% of the patients furnished Carbatrol did not have a level of seizures
requiring withdrawal from the study as compared to 20% of the patients in a
control group. The Company believes that the study showed that Carbatrol was
statistically significantly more efficacious than the control medication. In
1996, the Company completed an additional multi-center Phase III safety study.
To date, the Company has documented no serious treatment-related adverse side
effects from Carbatrol. The Company's 505(b)(2) NDA which was based on the
bioequivalence of its product to Tegretol, was accepted for filing by the FDA on
June 1, 1996.
In July 1996, the Company licensed the exclusive worldwide marketing, sale
and distribution rights relating to Carbatrol to Athena. Athena has agreed to
fund all future costs of development of Carbatrol. See "-- Licensing
Agreements."
SELEGILINE SR FOR COCAINE CRAVING AND WITHDRAWAL: Selegiline SR, an oral
sustained-release formulation of selegiline, a drug currently used for the
treatment of Parkinson's Disease, is being developed by the Company as a
medication to reduce craving for cocaine. Selegiline SR, a once-a-day
formulation, uses the Company's oral sustained-release delivery technology.
Since there are no adequate animal models for cocaine craving, the Company
selected selegeline for clinical evaluation based on the pharmacology of cocaine
and the presumed mechanism of action of selegeline. Cocaine, among other
actions, increases levels of the neurotransmitter dopamine in the brain. The
Company believes that, in chronic cocaine users, the levels of dopamine decrease
below normal levels in the absence of cocaine. The Company also believes that
such decreased levels of dopamine may lead to a craving for cocaine and
withdrawal symptoms. Selegiline
27
<PAGE>
elevates dopamine levels by inhibiting the enzyme, monoamine oxidase B (MAO-B),
which degrades dopamine. The Company believes that this increase in dopamine may
suppress the craving for cocaine and the symptoms of withdrawal.
The National Institute on Drug Abuse ("NIDA") has estimated that
approximately five million people in the United States used cocaine at least
once during 1992 and approximately 1.3 million people used cocaine at least once
a month during such year. The Company believes that many of these individuals
could benefit from treatment. Despite the need for an effective medication to
reduce physiological craving and serve as part of an integrated treatment
program, no such product exists. The Company believes that Selegiline SR, if
safe and effective, could be used in treatment programs as part of an integrated
approach for treatment of cocaine addiction.
Since there are no adequate animal models for this indication, the Company
proceeded directly into clinical studies in humans to evaluate Selegiline SR's
safety and efficacy. A Phase II safety/drug interaction study of Selegiline SR
and cocaine was conducted in a limited number of cocaine addicts. The study,
supported by NIDA, showed no problematic effects when cocaine and Selegiline SR
were administered together. In November 1994, the Company commenced a Phase III
multi-center clinical trial of Selegiline SR as a cocaine craving reducer, which
is being funded by NIDA. The clinical portion of this trial was completed in
December 1995. This Phase III trial will be the first indication of Selegiline
SR's potential efficacy. If Selegiline SR proves to be effective, the Company
plans to seek a collaborative partner for the remainder of the development and
testing of this product. In 1996, a patent was issued to the Company with
respect to its formulation of Selegiline SR.
SELEGILINE SR FOR PARKINSON'S DISEASE: The Company is also developing
Selegiline SR for the treatment of Parkinson's Disease. Selegiline, marketed as
Eldepryl by Somerset/Sandoz, is currently indicated for the treatment of
Parkinson's Disease as an adjunct to levodopa therapy. Orphan Drug exclusivity
for the use of Eldepryl for this indication expires in 1996. Selegiline is a
selective inhibitor of the enzyme monoamine oxidase type B (MAO-B), which is
responsible for the degradation of dopamine in the human brain. By inhibiting
MAO-B, selegiline increases dopamine levels, thereby potentiating and prolonging
the effect of levodopa, which is the primary drug currently used in the
treatment of Parkinson's Disease. Certain studies have also indicated that
selegiline may be effective as monotherapy in early Parkinson's Disease.
There are approximately 500,000 patients with Parkinson's Disease in the
United States. In 1994, the U.S. market for selegiline (Eldepryl) was
approximately $84 million.
Selegiline SR is designed to provide more convenient dosing than Eldepryl
(once versus twice-a-day). The Company has completed a Phase I clinical study of
Selegiline SR, which the Company believes, demonstrated that it selectively
inhibits MAO-B and that it has equivalent bioavailability to Eldepryl given
twice-a-day. The Company anticipates that if it enters into an agreement for the
development and testing of Selegiline SR for cocaine craving, development of
Selegiline SR for Parkinson's Disease will also be included. The Company has
received a patent in 1996 with respect to its formulation of Selegiline SR.
BCHE INJECTABLE FOR COCAINE OVERDOSE: The Company is developing an
injectable form of BChE as an antidote for use in the treatment of cocaine
overdose. BChE is an enzyme found principally in human blood plasma that acts
rapidly to metabolize cocaine. The Company's BChE Injectable formulation is a
highly stable solution that can be stored at room temperature, making it
convenient for use in emergency rooms and emergency vehicles. Historically,
there have been approximately 100,000 emergency room visits in the United States
each year for cocaine overdose. There is currently no antidote for cocaine
overdose and current therapies focus on the treatment of its symptoms.
The Company has completed preclinical safety and efficacy studies funded by
grants from NIDA, which the Company believes showed BChE to be safe and
well-tolerated in animal models. These studies showed no effects of BChE on
cardiovascular and central nervous system parameters or general behavior. They
also showed that BChE significantly reduced the development of seizures and
death in animals given large doses of
28
<PAGE>
cocaine. Preclinical toxicity and viral inactivation studies need to be
completed prior to submission of an Investigational New Drug ("IND") filing for
this product. Clinical testing cannot begin until the Company files an IND to
which the FDA does not object.
A patent was issued in January 1994 covering the Company's process for
obtaining BChE derived from human plasma. See "-- Patents, Licenses and
Proprietary Rights." In March 1992, the FDA granted Orphan Drug designation for
the use of the BChE in the reduction and clearance of toxic blood levels of
cocaine encountered during a drug overdose. See "-- Government Regulation."
In August 1994, the Company licensed exclusive, worldwide rights to develop,
produce and market its two BChE Injectable products to Rhone-Poulenc Rorer.
Rhone-Poulenc Rorer has the responsibility for conducting the necessary
preclinical and clinical studies, obtaining regulatory approvals and
manufacturing and marketing the product worldwide. The Company will, upon
request, provide consultation to Rhone-Poulenc Rorer pursuant to the terms of
the license agreement. See "-- Licensing Agreements."
BCHE INJECTABLE FOR POST-SURGICAL APNEA: The Company has also been
developing BChE Injectable as a treatment for post-surgical apnea, a condition
that sometimes results in death. Anesthesiologists use muscle blocking agents
such as succinylcholine or mivacurium in connection with the administration of
general anesthesia to patients undergoing surgery. After surgery, most patients
resume breathing on their own because plasma BChE, which is naturally found in
the blood, inactivates the neuromuscular blocker over a period of time. A small
number of patients who have BChE deficiency, which can be genetic or acquired,
do not resume breathing on their own and require mechanical ventilation. In
addition, BChE could be useful in those situations where the anesthesiologist
may wish to have control over neuromuscular blockade (such as with failed
intubation, interrupted surgery, or surgery involving high risk patients). The
Company estimates that there are approximately 30,000 surgical patients in the
United States each year with a genetic or an acquired BChE deficiency.
There is currently no adequate treatment for post-surgical apnea. Current
treatments include ventilating the patient or using neostigmine. Neostigmine,
although effective in certain situations, is ineffective during complete
neuromuscular paralysis with mivacurium. The Company believes that its BChE
Injectable product may be useful in these circumstances.
The Company has completed preclinical studies suggesting BChE is safe and
effective in reversing neuromuscular blockade. The Company has been granted
Orphan Drug Designation for BChE Injectable in the treatment of post-surgical
apnea. Such designation, however, does not assure that the FDA has not granted
or will not grant orphan drug designation to similar products under development
nor does it assure that the Company or its licensee will receive or maintain
marketing exclusivity nor that it may be blocked from the market by a
competitor's product. See "Business -- Government Regulations." The license
granted to Rhone-Poulenc Rorer to develop, produce and market BChE Injectable
also applies to BChE Injectable for post-surgical apnea. See "-- Licensing
Agreements."
ACYCLOVIR CD FOR VIRAL INFECTION: The Company is developing a
controlled-release formulation of acyclovir, a compound used in the treatment of
viral infections. The Company's formulation uses its Peptitrol technologies and
is designed to enhance oral bioavailability and to be administered less
frequently (e.g., once or twice-a-day). Acyclovir is currently available in oral
form (tablets, capsules or as a suspension), as a topical application and as an
injectable. The oral formulations are indicated for the treatment of initial
episodes and management of recurrent episodes of genital herpes infections and
acute treatment of herpes zoster ("shingles"). In addition to these uses, the
injectable is approved for the treatment of herpes simplex encephalitis and for
use in immunocompromised patients (e.g., AIDS and transplantation patients.).
Acyclovir, marketed by Glaxo Wellcome as Zovirax, is the largest selling
antiviral drug, with 1994 U.S. sales of approximately $569 million. Acyclovir
will be off-patent in 1997.
While current oral formulations of acyclovir allow the use of acyclovir
outside of the institutional setting, there are problems associated with these
formulations. Acyclovir is poorly and erratically absorbed (i.e., about 10% to
20% of the dose is absorbed), and bioavailability decreases with increasing dose
levels. Therefore, in certain circumstances, the drug may need to be
administered in very large doses
29
<PAGE>
(e.g., 600-4000 mg per day). In addition, the drug may need to be given several
times a day (e.g., every four hours, five times a day). This profile can result
in poor patient compliance that can, in turn, compromise efficacy. The Company
believes that these limitations can be addressed by a formulation that has good
oral bioavailablity and that can be dosed more conveniently (e.g., once- or
twice-a-day).
The Company has substantially completed formulation development on two
prototypes of Acyclovir CD. The Company has observed substantial increases in
cellular transport in its Peptiscreen model using these formulations. The
Company intends to file an IND for Acyclovir CD during 1997. The Company has
applied for a patent covering one of its formulations of Acyclovir CD and
intends to file a patent application covering the other formulation of Acyclovir
CD, which is currently the Company's lead formulation for this product
candidate.
DHE IR FOR MIGRAINE HEADACHE: Using its Peptitrol technologies, the Company
is designing a transmucosal formulation of DHE for treatment of migraine
(vascular) headache by means of a buccal or sublingual tablet or a sublingual
spray.
Approximately 10% of the population (i.e., 25 million people) suffer from
migraine headache. Of these, the Company believes that only about 40% (i.e., 10
million people) seek treatment. Currently marketed drugs can be classified into
those used to: (a) terminate headache, (b) prevent headache or (c) provide
symptomatic relief. Despite the large potential market and the availability of a
large number of medications, none is ideal. Many products have poor efficacy or
side effect profiles. In addition, the means of administration of many of the
available medications (e.g., injectables or suppositories) are poorly accepted
by patients.
An injectable form of DHE, marketed as DHE-45 by Sandoz, is a highly
effective medication that is indicated for both the termination and the
prevention of migraine headache. Sumatriptan, indicated for the termination of
migraine headache, was introduced originally by Glaxo Wellcome as an injectable,
and in 1995 in oral form. In 1994, sumatriptan had sales in the U.S. of $241
million. The Company believes that the headache market has expanded with the
introduction of sumatriptan formulations and could be expanded further if DHE
were available in a formulation that could be administered transmucosally or
orally instead of by injection.
The current method of administering DHE-45 by injection is poorly accepted
by patients and most patients need to see their physician or go to a clinic or
hospital emergency room for treatment. In addition, a delay in treatment may
reduce the potential efficacy of DHE because the longer the migraine headache
lasts, the more difficult it is to terminate. The formulation being developed by
the Company is designed for administration at first sign of migraine. The
Company's DHE product candidate could be self-administered by the patient. The
transmucosal approach would offer the additional advantage over an oral
formulation of rapid absorption of the drug directly into the bloodstream (with
no first pass metabolism by the liver), resulting in more rapid termination of
the headache.
The Company initiated a Phase I clinical study of a rapidly dissolving
buccal tablet formulation of DHE, but the results of this study were not
favorable. Thereafter, the Company has used its Peptitrol drug delivery system,
which is designed for oral delivery, to develop a new formulation of DHE.
Preliminary screening in Peptiscreen has shown positive results in transport of
DHE formulations across cell lines, as well as from the gastrointestinal tracts
of animals. Because of the advantages of transmucosal delivery, the Company
intends to initially focus on transmucosal delivery of DHE. If transmucosal
delivery is not successful, the Company will focus on oral delivery of this
product. The Company is seeking a collaborator prior to conducting further
research and development of its DHE IR product.
ALPRAZOLAM TD AND LORAZEPAM TD FOR ANXIETY: The Company is developing a
once-a-day transdermal formulation of alprazolam and of lorazepam, both of which
are benzodiazepine compounds for the treatment of anxiety. Currently available
medications for the treatment of anxiety are immediate release and, although
effective, result in fluctuating blood levels that the Company believes can lead
to product dependence. The Company has utilized its transdermal delivery
technology using flux enhancers to facilitate
30
<PAGE>
delivery of both alprazolam and lorazepam across skin. Alprazolam TD and
Lorazepam TD, the Company's products under development, are both once-a-day
transdermal formulations, designed to deliver steady blood levels of the
medication.
Research conducted by the American Psychiatric Association indicates that
8.3% of Americans (i.e. approximately 21 million people) suffer from anxiety. In
1992, $1.2 billion of anti-anxiety agents were marketed in the United States and
Canada, and $2.4 billion were marketed worldwide. Alprazolam (marketed as Xanax
by Upjohn) was the largest selling anti-anxiety medication in the United States,
with sales in 1993 of approximately $510 million, which sales fell significantly
in 1994 due to sales of generic versions of the drug. Lorazepam (marketed as
Ativan by Wyeth Ayerst) is the second largest selling benzodiazepine medication,
with 1994 sales of $148 million in the United States.
Although the currently marketed anti-anxiety products are therapeutically
effective, they have frequent dosing requirements (typically three to four times
a day), the potential for adverse side effects (attributable to peak blood
levels seen with administration of immediate-release products) and the potential
for patients becoming dependent on the anti-anxiety product (which the Company
believes is related to the sharp peaks and troughs in blood levels seen with
immediate-release formulations). The Company believes that these drawbacks can
be overcome with a sustained-release, long-acting (e.g., once-a-day) transdermal
product. Should undesirable side effects occur, delivery of the medication can
be stopped by simple removal of the transdermal patch.
The Company is in the process of formulating prototypes of Lorazepam TD and
Aprazolam TD to deliver the required dosage in transdermal screening models. The
Company has developed a prototype of Lorazepam TD that is of a cosmetically
acceptable size and that delivers the proper drug dosage but further development
work is necessary in order to control the stability of the formulation.
Preclinical testing in animal models has not yet commenced. The development of
Lorazepam TD and Alprazolam TD is still in the very early stages and there can
be no assurance that the Company will be successful in formulating a stable
formulation of a cosmetically acceptable size.
PI 181.2 TD FOR EMESIS: The Company is developing a long-acting
(once-a-day) transdermal formulation of an FDA-approved compound that the
Company believes has anti-emetic (anti-vomiting) properties. The Company
believes that this compound (which it calls PI 181.2) could be used for a
variety of indications, including chemotherapy-induced emesis, post-surgical
nausea, pre-surgical nausea prophylaxis and weight maintenance in patients with
AIDS. The Company estimates that there are 2.5 million episodes annually of
chemotherapy in the United States requiring administration of an anti-emetic.
Post-operative nausea occurs in about one-third of the estimated 25 million
surgical procedures performed annually in the United States. Additionally,
weight loss is a significant complication in many AIDS patients, and an easily
administered, well-tolerated anti-emetic is expected to have benefits in this
area.
Most of the products sold in this area are off-patent medications that are
administered orally or by injection. The major new entrant into this market is
Zofran, an injectable marketed by Glaxo Wellcome. Both injectables and oral
medications have certain drawbacks for this indication. Injectables must be
given every few hours by a caregiver, are uncomfortable and can exacerbate an
already traumatic procedure. Administration of oral medications can trigger
emesis (vomiting) and, if emesis occurs subsequently, it is impossible to
determine how much of the anti-emetic the patient absorbed. Transdermal delivery
is the preferred route of administration because a patch can be easily applied,
either by a caregiver in the hospital setting or by the patient at home, making
it more cost effective than an injectable. Transdermal delivery also provides
steady blood levels and a transdermal patch can be removed when desired.
The Company has conducted experiments with different flux enhancers for
transdermal delivery of PI 181.2 TD and has found drug delivery vehicles that
deliver targeted amounts of the drug through human skin samples. The development
of PI 181.2 TD is still in the very early stages and there can be no assurance
that the Company will be successful in formulating a stable formulation of a
cosmetically acceptable size.
NIFEDIPINE SR FOR CARDIOVASCULAR DISEASE: The Company is conducting
research for the purpose of developing a generic version of a once-a-day oral
sustained-release formulation of nifedipine. Nifedipine is a
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calcium channel blocker used for the treatment of hypertension and angina.
Nifedipine is marketed as Procardia by Pfizer in the United States and as Adalat
by Bayer AG both inside and outside of the United States. Procardia was
originally introduced as a three to four times a day product for the treatment
of angina. Subsequently, Pfizer introduced Procardia XL, an extended-release
tablet that has expanded labeling (as a treatment for hypertension as well as
angina) and is administered once a day. In 1993, sales of calcium channel
blockers were estimated at $2.4 billion in the United States. In 1994, Procardia
XL, the leading calcium channel blocker, had approximately $1.2 billion in sales
in the United States.
The Company believes that there is a significant market opportunity for
products that are bioequivalent to Procardia XL. The Company is conducting
research for the purpose of identifying and developing a formulation of
nifedipine that is bioequivalent to Procardia XL, but which does not infringe
Pfizer's existing patents on Procardia XL. The Company is aware that a number of
companies are also attempting to develop generic formulations of Procardia XL.
Although the patent on the compound nifedipine has expired, Pfizer has been
issued patents with respect to its once-a-day formulation of nifedipine, which
it markets as Procardia XL. There can be no assurance that the Company will be
successful in developing a generic formulation that is bioequivalent to
Procardia XL and that does not infringe Pfizer's patents. If the Company
successfully develops the reformulation, the Company expects that it or its
licensee will file an ANDA with the FDA with respect to the reformulation. Since
the filing of an ANDA for a product covered by a patent is an act of
infringement, the Company believes Pfizer would file a lawsuit against the
Company and its licensee, if any, if it believed it had a claim that the
Company's formulation was covered by Pfizer's patents. The Company is also aware
that Pfizer has raised objections with the FDA in connection with attempts by
other developers of generic sustained-release nifedipine to file ANDAs on the
basis of bioequivalence to Procardia XL and Pfizer may institute other legal or
regulatory challenges against developers of sustained-release generic
nifedipine. See "Risk Factors -- Dependence on Patents and Proprietary Rights."
INSULIN CD FOR DIABETES: The Company is in the process of evaluating a
microemulsion formulation of insulin using its Peptitrol technologies. The
Company's product candidate is designed to be administered orally as a liquid or
in a soft gelatin capsule, with either immediate or sustained-release
characteristics. Diabetes mellitus is the most common endocrine disease. The
American Diabetes Association estimates that 14 million Americans have diabetes,
only half of which are diagnosed; about 10% have insulin-dependent disease
(IDDM) and 90% have non-insulin-dependent disease (NIDDM). Insulin is required
for treatment of all patients with IDDM and many patients with NIDDM.
In preliminary tests using the Company's Peptiscreen model, a microemulsion
formulation of insulin has exhibited increased cellular transport. A significant
number of companies have attempted to develop an oral insulin product and,
because of the difficulties of development, have not been successful. The
development and testing of the Company's formulation of insulin is still in the
very early stages and there can be no assurance that the Company will be
successful in developing a product based on this research. The Company has filed
a patent application on its formulation of insulin.
PEPTITROL AND PEPTISCREEN TECHNOLOGIES
The Company has developed a portfolio of drug delivery and screening
technologies designed to produce optimal delivery of a particular pharmaceutical
product for a given indication. These technologies include its proprietary
Peptitrol systems for the oral delivery of hard-to-deliver compounds, oral
controlled-release and sustained-release delivery, transmucosal delivery through
tissues in the oral cavity and transdermal delivery.
The Company has developed its proprietary Peptitrol drug delivery
technologies for the enhanced oral delivery of poorly absorbed pharmaceutical
compounds that are hard to deliver or have poor oral bioavail-
ability, such as peptides and other large molecules. The Peptitrol drug delivery
systems use one or more hydrophobic or hydrophilic materials to protect the
pharmaceutical compound from degradation and to increase absorption of the
compound from the gastrointestinal tract. The Company then uses its Peptiscreen
cell culture screens to rapidly test formulations developed using Peptitrol
technologies. Peptitrol consists of
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several drug delivery approaches -- a drug delivery system consisting of
hydrophobic materials to enhance absorption; a multilamellar system comprised of
alternating layers of hydrophobic and hydrophilic materials that can incorporate
the compound as well as sustained-release materials, and two microemulsion
systems.
The Company uses its Peptiscreen system to systematically screen its
formulations. Peptiscreen permits high throughput screening of a large number of
formulations to test the extent to which various formulations may be absorbed
from the gastrointestinal tract and which of the formulations may result in
commercially acceptable levels of transport. The screens utilize cell lines that
mimic different aspects of the gastrointestinal mucosa. One principal screen,
for example, uses cells that grow and differentiate, develop tight junctions,
which prevent most materials from passing between the cells, actively transport
glucose, develop a brush border, and have barrier properties, all similar to
gastrointestinal cells. Different screens are used depending on the formulation
characteristics desired.
The Company believes that its Peptitrol systems have general applicability
to the formulation of peptides and proteins (such as those developed by
biotechnology companies), as well as small molecular weight compounds (such as
those traditionally developed by pharmaceutical companies). The Company has
tested its systems in its Peptiscreen cell cultures on peptides having a
molecular weight of up to approximately 5600 daltons, and the systems appear to
be able to transport peptides having a molecular weight up to this level.
However, the Company's testing is preliminary and there can be no assurance of
the extent to which the technology will prove to be effective for peptides or
other large molecules in clinical testing.
LICENSING AGREEMENTS
On August 25, 1994, the Company and Rhone-Poulenc Rorer signed a worldwide
licensing agreement to develop BChE for use in the treatment of cocaine overdose
and the reversal of post-surgical apnea. The agreement grants Rhone-Poulenc
Rorer the exclusive right to develop, produce and market, at its sole expense,
human pharmaceutical or diagnostic products that contains BChE as an active
ingredient for the diagnosis, prevention or treatment of any human disease or
medical condition. Under the terms of the agreement, the Company received a
$2,000,000 license fee upon execution and will receive certain milestone
payments and royalties based on net sales. Rhone-Poulenc Rorer has assumed
responsibility for the further preclinical and clinical development and
commercialization of this product and the Company has agreed to assist in such
development by providing consultation, at the request and expense of
Rhone-Poulenc Rorer. Rhone-Poulenc Rorer has the right to investigate additional
indications for this product.
On July 1, 1996, the Company entered into an exclusive license agreement
with Athena for the worldwide marketing, sale and distribution of Carbatrol.
Carbatrol will be marketed (under the name Carbatrol or under another name
selected by Athena) in the United States by Athena and by its affiliates or
sublicensees in the rest of the world. Under the agreement, Athena (i) will make
a $2.0 million payment within ten days of execution of the agreement, (ii) will
fund all future development cost associated with Carbatrol which are approved by
a steering committee, (iii) will make a milestone payment of up to $8.0 million
upon FDA approval of the Company's Carbatrol NDA, of which $5.0 million is
creditable against future royalty payments which may be earned on product sales,
and (iv) will make future royalty payments to the Company based on net sales of
Carbatrol and sublicensing revenues. The milestone payment is conditioned upon
the absence of any finding of exclusivity for CIBA-Geigy's Tegretol XR or any
actual or threatened proceeding seeking such a finding. Further, the agreement
may be terminated in Athena's discretion under certain circumstances. The
Company is responsible initially for supplying Carbatrol to Athena. The Company
has entered into an exclusive agreement with a third party to manufacture the
pellets that contain the active ingredient of Carbatrol and has entered into an
agreement with another third party to encapsulate and package the product.
Athena has agreed to be responsible for the costs under these agreements and for
the manufacture of Carbatrol after the expiration of these agreements. See " --
Manufacturing." Athena has been granted the right to purchase 220,000 shares of
Common Stock in this offering.
COMPETITION
Most of the Company's product candidates are reformulations of drugs that
will be off-patent when the Company's products are introduced. All of the
Company's proposed products will face competition from
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existing therapies, more traditional forms of drug delivery and advanced
delivery systems and drugs being developed by others. Competition for the
development of drug delivery products is intense and expected to increase. The
Company is aware of a number of drug delivery companies and large pharmaceutical
companies that develop or market sustained-release oral dosage systems, have
developed transdermal drug delivery systems, transmucosal systems or have active
research and development programs in controlled-release methods. Many companies
also are developing technologies for the oral delivery of peptides and other
poorly absorbed molecules. Most of the Company's competitors have substantially
greater financial resources and larger research and development staffs than the
Company, as well as substantially greater experience in developing products, in
obtaining regulatory approvals and in manufacturing and marketing pharmaceutical
products. There can be no assurance that the Company will successfully develop
technologies and products that are more convenient, more effective, result in
fewer side effects or are more affordable than those being developed by its
competitors. Furthermore, there can be no assurance that product introductions
or developments by others will not render the Company's products or technologies
noncompetitive or obsolete or that patents issued to competitors may not prevent
the Company from pursuing certain products.
The Company will compete with off-patent drug manufacturers, brand-name
pharmaceutical companies that manufacture or market off-patent drugs, the
original manufacturers of brand-name drugs that continue to produce such drugs
after patent expirations or introduce generic or improved versions of their
branded products, drug companies developing formulations of off-patent drugs and
manufacturers of new drugs that may compete with the Company's formulations of
off-patent products and other drug delivery companies developing formulations of
off-patent drugs or new chemical entities. For example, CIBA-Geigy has developed
an extended-release formulation of Tegretol which was approved in March 1996 and
will compete directly with Carbatrol, if and when it is approved. In addition,
the Company is aware of several companies with significantly greater resources
that are seeking to develop generic formulations of sustained-release nifedipine
(Procardia XL).
The Company's products under development will compete with existing
therapies for epilepsy, Parkinson's Disease, migraine headache, anxiety, emesis,
cardiovascular disease, viral infection and diabetes. Specifically, to the
extent that the active ingredient in the Company's products consist of available
compounds such as carbamazepine or selegiline, the Company's products will be
competing with the brand-name product originally making use of the compound.
Generally, brand-name versions of pharmaceutical compounds have a market
advantage over other products using the same compound. In addition, to the
extent that the manufacturers of the brand-name products seek to develop or
market their own sustained-release versions of products, such as CIBA-Geigy's
extended-release formulation of Tegretol, the Company may find itself at a
competitive disadvantage by virtue of their ability to use the name-brand in the
advertising of their products.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often lengthy period between technological conception and commercial sales.
MANUFACTURING
The Company generally intends to develop its products and commence clinical
testing in humans and then to seek a collaborator to undertake further testing,
obtain regulatory approval, manufacture, distribute and market such products.
The Company expects that its collaborators will assume responsibility for
manufacturing, distribution and marketing. If the Company is unable to enter
into a collaborative arrangement for a particular product on acceptable terms or
enters into a license agreement where the licensee is unwilling to assume the
responsibility for manufacturing, then the Company may assume responsibility for
manufacturing the product. The Company has no manufacturing facilities and
generally plans to rely upon contract manufacturers to manufacture its initial
products. The Company believes that there is currently sufficient capacity
worldwide for the production of its product candidates. The Company intends to
establish manufacturing arrangements with manufacturers that comply with
FDA-mandated cGMP requirements and other applicable regulations, although there
is no assurance that the Company will be able to do so.
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The Company has contracted with Niro Inc. ("Niro") for the production of
pellets for Carbatrol. The Company's agreement with Niro provides for Niro to
act as the exclusive manufacturer of carbamazepine pellets according to the
Company's specification for a minimum period of three years from the
commencement of production. The Company is obligated to order a minimum quantity
of pellets and pay Niro a fixed price per kilogram of pellets for the first
three years of production under the agreement. Niro has further agreed not to
manufacture any carbamazepine product for a third party so long as the agreement
is in effect. The agreement with Niro will automatically renew from year to year
on terms mutually agreed upon not less than two years prior to such renewal.
Niro must provide a minimum of two-years prior written notice of non-renewal and
the Company must provide a minimum of one-year prior notice of non-renewal. If
the Company cancels this agreement prior to the initial year of production or
does not give notice to commence production on or before October 1, 1996, the
Company may be required to reimburse Niro for certain direct costs incurred by
Niro. The Company has also entered into an agreement with The P.F. Laboratories,
Inc. ("P.F. Labs") for the encapsulation and packaging of Carbatrol. The
Company's agreement with P.F. Labs provides for P.F. Labs to act as the
exclusive encapsulator of Carbatrol according to the Company's specifications
and requirements. The Company is obligated to order a minimum number of capsules
from P.F. Labs at a fixed price for the first year of the agreement, which price
shall be subject to negotiation thereafter. Under its agreement with Athena, the
Company will be responsible for supplying Carbatrol through its contract
manufacturers and Athena has agreed to pay the costs of manufacture under such
contracts. Athena is obligated to assume responsibility for manufacture of
Carbatrol after expiration of these agreements.
The Company has no experience in volume manufacturing. The Company intends
to establish and maintain its own quality control program for certain of its
products, including a set of standard operating procedures designed to assure
that the Company's products are manufactured in accordance with cGMP and other
applicable regulations. Should the Company need or elect to establish a
manufacturing facility, it will require substantial additional funds and will
need to hire significant additional qualified personnel.
The Company's revenues from BChE are dependent upon the ability of
Rhone-Poulenc Rorer to develop, produce, register and market the BChE Injectable
products and to obtain an adequate supply of blood plasma necessary to produce
commercial quantities of BChE. Additionally, plasma suppliers obtain their
supply from human donors who are limited as to the amount and frequency of
donations. Should the supply of suitable plasma donors decline, the ability of
Rhone-Poulenc Rorer to produce and sell BChE Injectable products could be
adversely affected. See "Risk Factors -- Limited Manufacturing Capability and
Experience" and "-- Uncertainty of Supply of BChE; Product Safety."
MARKETING
The Company's revenues from BChE will be dependent upon the ability of
Rhone-Poulenc Rorer to develop and market the BChE Injectable products. Revenues
from Carbatrol will be dependent upon Athena's ability to market, sell and
distribute Carbatrol on its own in the United States and by its affiliates or
sublicensees in the rest of the world. The Company generally intends to enter
into collaborative arrangements to complete development, manufacturing,
distribution and marketing of its product candidates or enter into agreements
for the distribution and marketing of the product. In either case, third parties
would be primarily responsible for marketing. However, in the future, the
Company may co-promote or retain U.S. marketing rights to certain of its
products. In selecting these products, the Company expects to target
concentrated market segments that can be addressed adequately by a relatively
small sales force; however, significant additional expenditures and management
resources will be required to develop an external sales force and implement its
marketing strategy if the Company decides to market products directly. There can
be no assurance that the Company's collaborators will be successful in marketing
products, or that the Company will be able to establish a successful marketing
force. See "Risk Factors -- No Marketing and Sales Capability; Dependence Upon
Third Parties for Marketing."
PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company's policy is to protect its technology by, among other things,
filing patent applications for technologies and products it considers important
in the development of its business. In addition to filing
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patent applications in the United States, the Company has filed, and intends to
file, patent applications in foreign countries on a selective basis. The Company
also relies on trade secrets, unpatented know-how and technological innovation
to develop and maintain its competitive position.
In 1994, a patent expiring in 2011 was issued to the Company covering the
process for obtaining BChE from plasma. The Company believes that another
approach may be available for producing BChE using recombinant methods. As a
result, other parties may be able to manufacture BChE for any and all purposes
without infringing the Company's patent. In 1994, a patent expiring in 2011 was
also issued covering the formulation of the Company's Carbatrol product. In
1995, two patents were issued based on the Company's Peptitrol technologies. One
of the patents, which expires in 2014, is directed to a pharmaceutical
preparation of a drug which is poorly soluble in water and which is incorporated
into particles comprised of hydrophobic fatty acid ester. The second patent,
which also expires in 2014, is directed to a pharmaceutical preparation of a
drug incorporated into particles formed of alternate layers of hydrophobic and
hydrophilic materials. In addition, in 1996, a patent, which expires in 2015,
was issued covering the formulation of the Company's Selegiline SR product.
Applications have also been filed for patents covering specific formulations
of acyclovir and insulin based on the Company's Peptitrol technologies. The
Company is aware of other pharmaceutical companies that are working with
microemulsions or hydrophobic materials for use in drug delivery. The Company
intends to prepare additional patent applications relating primarily to its
transdermal products and products using its Peptitrol technologies. Although a
patent has a statutory presumption of validity in the United States, the
issuance of a patent is not conclusive as to such validity or as to the
enforceable scope of the claims of the patent. There can be no assurance that
the Company's issued patents or any patents subsequently issued to or licensed
by the Company will not be successfully challenged in the future. The validity
or enforceability of a patent after its issuance by the patent office can be
challenged in litigation. If the outcome of the litigation is adverse to the
owner of the patent, third parties may then be able to use the invention covered
by the patent, in some cases without payment. There can be no assurance that the
Company's patents will not be infringed or successfully avoided through design
innovation.
There can be no assurance that patents or patent applications owned by or
licensed to the Company will result in patents being issued or that, if issued,
the patents will afford protection against competitors with similar technology.
For example, other companies are evaluating microemulsion, hydrophobic,
transdermal, transmucosal and sustained-release oral formulations. It is also
possible that third parties may obtain patent or other proprietary rights that
may be necessary or useful to the Company. In cases where third parties are
first to invent a particular product or technology, it is possible that those
parties will obtain patents that will be sufficiently broad so as to prevent the
Company from using certain technology or from further developing or
commercializing certain products. If licenses from third parties are necessary
but cannot be obtained, commercialization of the related products would be
delayed or prevented. The Company is aware of patent applications and issued
patents belonging to competitors and it is uncertain whether any of these, or
other filed patent applications of which the Company may not have any knowledge,
will require the Company to alter its potential products or processes, pay
licensing fees or cease certain activities.
The Company's principal products are reformulations of existing products.
Therefore, patents, if any, issued to the Company will only cover the Company's
formulation of the product or the process for manufacturing the product. Others
may be able to develop formulations which provide similar advantages to the
Company's, but which do not infringe the Company's patent. Additionally, patents
issued or which may be issued in the future with respect to Peptitrol or other
drug delivery systems may not be sufficiently broad to preclude others from
developing products that compete with products developed by the Company. For
example, although the Company's issued patents and patent applications relating
to Peptitrol may prevent competitors from developing products using formulations
covered by the Company's patents, the patents would not completely preclude
other companies from formulating drugs using these technologies or other
technologies that could provide similar results.
The Company's product candidates may conflict with patents that have been or
may be granted to competitors, universities or others. In addition, such other
persons could bring legal actions against the
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Company claiming damages and seeking to enjoin manufacturing and marketing of
the affected products. If any such actions are successful, in addition to any
potential liability for damages, the Company could be required to obtain a
license in order to continue to manufacture or market the affected products.
There can be no assurance that the Company would prevail in any such action or
that any license required under any such patent would be made available on
acceptable terms. The Company believes that there may be significant litigation
in the industry regarding patent and other intellectual property rights. If the
Company becomes involved in such litigation, it could consume substantial
resources.
The Company is conducting research to identify and develop a reformulation
of nifedipine which is bioequivalent to Procardia XL, without infringing
Pfizer's existing patents on Procardia XL. While the patent on the compound
nifedipine has expired, Pfizer has been issued patents with respect to its
once-a-day formulation of nifedipine, which it markets as Procardia XL. If the
Company successfully develops a nifedipine reformulation, the Company expects
that it or its licensee will file an ANDA with the FDA with respect to the
reformulation. There can be no assurance that the Company will be successful in
developing a generic reformulation that is bioequivalent to Procardia XL and
that does not infringe Pfizer's patents. Since the filing of an ANDA for a
product covered by a patent is an act of infringement, the Company believes
Pfizer would file a lawsuit against the Company and its licensee, if any, if it
believed it had a claim that the Company's formulation was covered by Pfizer's
patents. The good faith filing of a patent action could delay the approval of an
ANDA for a period of up to 30 months or longer if so ordered by a court. If
Pfizer successfully asserts its patents, the Company may be enjoined from
selling its product until Pfizer's patents expire.
The Company also relies on unpatented technology, trade secrets and
information and no assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to the Company's technology or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented technology, trade
secrets and information. The Company requires each of its employees, consultants
and advisors to execute a confidentiality agreement at the commencement of an
employment or consulting relationship with the Company. The agreements generally
provide that all inventions conceived by the individual in the course of
employment or in the providing of services to the Company and all confidential
information developed by, or made known to, the individual during the term of
the relationship shall be the exclusive property of the Company and shall be
kept confidential and not disclosed to third parties except in limited specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's information in the event of
unauthorized use or disclosure of such confidential information.
GOVERNMENT REGULATION
The Company's activities and products are subject to extensive and rigorous
regulation by a number of governmental entities, especially by the FDA in the
United States and by comparable authorities in other countries. These entities
regulate, among other things, research and development activities and the
testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising, promotion, distribution and sale of the Company's
products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources
and is often uncertain. Many products that initially appear promising ultimately
do not reach the market because they are not found to be safe or effective, as
demonstrated by testing required by government regulation during the development
process. In addition, there can be no assurance that this regulatory framework
will not change or that additional regulation will not arise at any stage of the
Company's product development that may affect approval, delay an application or
require additional expenditure by the Company. Moreover, even if approval is
obtained, failure to comply with present or future regulatory requirements, or
new information adversely reflecting on the safety or effectiveness of the
approved drug, can lead to FDA withdrawal of approval to market the product.
Failure to comply with applicable FDA and other regulatory requirements can
result in sanctions being imposed on the Company and any of its contract
manufacturers or distributors. Typical sanctions include warning letters, fines,
product recalls or seizures, injunctions, refusals to permit products to be
imported into or exported out of the United States, refusals of the FDA to grant
premarket approval of drugs or to allow the Company to enter into government
supply contracts, withdrawals of previously approved marketing applications and
criminal prosecution.
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The activities required before a pharmaceutical product may be marketed in
the U.S. primarily begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and other end points and animal
studies to assess the potential safety and efficacy of the product as
formulated. Many preclinical studies are regulated by the FDA under a series of
regulations called the current Good Laboratory Practice (cGLP) regulations.
Violations of these regulations can, in some cases, lead to invalidation of the
studies, requiring such studies to be replicated.
The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is summarized in an IND
submission to the FDA. FDA regulations provide that human clinical trials may
begin 30 days following the submission and receipt of an IND, unless the FDA
advises otherwise or requests additional information, clarification or
additional time to review the IND submission. There is no assurance that the
submission of an IND will eventually allow a company to commence clinical
trials. Once trials have commenced, the FDA may stop the trials, or particular
types of trials, by placing a "clinical hold" on such trials because of concerns
about, for example, the safety of the product being tested or the adequacy of
the trial design. Such holds can cause substantial delay and in some cases may
require abandonment of a product.
The regulatory process required to be completed by the FDA before a new drug
delivery system may be marketed in the United States depends significantly on
whether the drug (which will be delivered by the drug delivery system in
question) has existing approval for use and in what dosage forms. If the drug is
a new chemical entity that has not been approved, then the process includes (i)
preclinical laboratory and animal tests, (ii) an IND application that has become
effective, (iii) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug in its intended indication and (iv) FDA
approval of an NDA. If the drug has been previously approved, then the approval
process is similar, except that certain toxicity tests normally required for the
IND may not be necessary. Even with previously approved drugs, additional
toxicity testing may be required when the delivery form is substantially
changed. Approval of a drug in a new delivery system may require demonstration
of bioequivalence or clinical studies to demonstrate safety and efficacy.
Because certain of the Company's drug delivery mechanisms, by design, produce
high drug concentrations at the surface of the oral mucosa or skin, new toxicity
tests at this site may need to be performed.
Clinical testing involves the administration of the drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician pursuant to an FDA reviewed protocol. Each
clinical study is conducted under the auspices of independent Institutional
Review Boards (IRBs) at the institutions at which the study will be conducted.
An IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution. Human clinical trials
are typically conducted in three sequential phases, but the phases may overlap.
Phase I trials consist of testing the product in a small number of patients or
normal volunteers, primarily for safety, in one or more dosages, as well as
characterization of a drug's pharmacokinetic and/or pharmacodynamic profile. In
Phase II, in addition to safety, the efficacy of the product is evaluated in a
patient population. Phase III trials typically involve additional testing for
safety and clinical efficacy and an expanded population at geographically
dispersed test sites. A clinical plan, or "protocol," accompanied by the
approval of the IRB, must be submitted to the FDA prior to the commencement of
each clinical trial. All patients involved in the clinical trials must provide
informed consent prior to their participation. The FDA has the authority to
order the temporary or permanent discontinuation of a clinical trial.
A company seeking FDA approval of a drug must file an application with the
FDA pursuant to the FDC Act, as amended in 1984 by the DPCPTRA. The FDC Act, as
amended, provides for several types of applications, including an NDA, which may
be filed under either Section 505(b)(1) or Section 505(b)(2) of the Act, and an
ANDA under Section 505(j) of the FDC Act. The type of application required to be
filed depends upon a variety of factors, including the nature of the drug and
the extent and availability of scientific data supporting the application.
A 505(b)(2) NDA is an NDA submitted under section 505(b) of the FDC Act for
a drug for which the investigations described in section 505(b)(1)(A) of the FDC
Act (full reports of safety and effectiveness) and relied upon by the applicant
for approval of the application were not conducted by or for the applicant and
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<PAGE>
are not investigations for which the applicant has obtained a right of reference
or use from the person by or for whom the investigations were conducted. In
contrast, an ANDA may not contain human clinical data other than bioavailability
studies. Under the DPCPTRA, the FDA may not approve any version of a pioneer
drug for marketing which is submitted to FDA either in the form of a 505(b)(2)
NDA or an ANDA until all relevant patents for the pioneer drug have expired, or
until the patent owner is notified of the application and given an opportunity
to litigate any patent related disputes. The patent holder can bring a patent
suit against the ANDA or 505(b)(2) NDA applicant. If such a lawsuit is filed,
the DPCPTRA mandates an automatic stay of approval of the ANDA or 505(b)(2) NDA
application for up to 30 months (subject to extension), unless a court of last
appeal has ruled in favor of the ANDA or 505(b)(2) NDA applicant. A petition
submitted by Pfizer in 1993 to the FDA sought to prohibit reliance by an
applicant under a 505(b)(2) NDA on safety and other data in an approved NDA
file. The FDA recently denied the petition but did not decide the legal merits
of the issues presented. Accordingly, any future FDA decision in favor of legal
arguments similar to those in the denied petition could have a significant
adverse effect on the FDA's approval of 505(b)(2) NDAs because 505(b)(2)
applicants would have to obtain required data on the original pioneer drug
formulation that otherwise meets the data definition in 505(b)(2) or that the
applicant conducts itself. This could delay submission and/or approval of such
an application.
The DPCPTRA permits the FDA to approve for marketing a generic drug (i.e., a
duplicated or related version of an approved pioneer new drug) that has been
shown to be as safe and effective as a pioneer new drug whose patents have
expired, but without the submission of "full reports" of safety and
effectiveness. These provisions do not apply to insulin or biological products.
A sponsor may seek to obtain FDA approval through the submission of an ANDA if
the drug product is: (1) the same as an approved pioneer new drug product with
respect to active ingredient(s), route of administration, dosage form, strength
and conditions of use recommended in the labeling; or (2) a product with certain
changes from an approved product (i.e., a combination drug with one different
active ingredient or a product with a different route of administration, dosage
form or strength) if the FDA has approved a petition from the prospective
applicant. Generally, a sponsor of an ANDA need not conduct clinical
investigations of safety and effectiveness other than to demonstrate that its
product is bioequivalent to the pioneer new drug product. By law, the FDA cannot
approve an ANDA unless it finds that the generic drug product is both
bioequivalent and therapeutically equivalent to the pioneer drug product. Some
states, however, make their own bioequivalency determinations for purposes of
listing the generic drug on the state pharmacy formulary, which is necessary to
allow the generic drug to be substituted for the pioneer drug.
If the FDA does ultimately approve an NDA or 505(b)(2) NDA for a product, it
may require, among other things, postmarketing testing, including potentially
expensive Phase IV studies, and surveillance to monitor the safety and
effectiveness of the drug. In addition, the FDA may in some circumstances impose
restrictions on the use of the drug that may be difficult and expensive to
administer. Product approvals may be withdrawn if compliance with regulatory
requirements are not maintained or if problems occur after the product reaches
the market. After a product is approved for a given indication in an NDA (or
PLA/ELA), subsequent new indications or dosages for the same product are
reviewed by FDA via the filing and upon approval of a supplemental application
("sNDA"). The appropriate sNDA is much more focused than the NDA and deals
primarily with safety and efficacy data related to the new indication or dosage,
and labeling information for the sNDA indication or dosage. Finally, the FDA
requires reporting of certain information that becomes known to a manufacturer
of an approved drug.
Biologics, such as the Company's BChE product, are licensed pursuant to
Section 351 of the Public Health Service Act, rather than approved pursuant to
an NDA, 505(b)(2) NDA or ANDA under the FDC Act, as amended by the DPCPTRA. FDA
approval of both a product license application ("PLA") and an establishment
license application ("ELA") for the particular product and the facility
manufacturing the product, respectively, are required. The requirements for
approval of a PLA/ELA or supplemental PLA for new dosages or indications are
comparable to the requirements for approval of an NDA. However, there is no
procedure comparable to an ANDA for the approval of generic biologics based on
bioquivalence to an approved pioneer biologic.
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Under the Orphan Drug Act, the FDA may designate a product or products as
having Orphan Drug status to treat a "rare disease or condition," which is a
disease or condition that affects populations of less than 200,000 individuals
in the United States, or, if victims of a disease number more than 200,000, the
sponsor establishes that it does not realistically anticipate its product sales
will be sufficient to recover its costs. If a product is designated as an Orphan
Drug, then the sponsor is entitled to receive certain incentives to undertake
the development and marketing of the product, including high-priority FDA review
of an NDA (or PLA/ELA) if the indication is for a serious or life-threatening
disease. In addition, the sponsor that obtains the first marketing approval for
a designated Orphan Drug for a given indication is eligible to receive marketing
exclusivity for a period of seven years. There may be multiple designations of
Orphan Drug status for a given drug and for different indications. However, only
the sponsor of the first approved NDA (or PLA/ ELA) for the same drug (as
defined by the FDA) for its use in treating a given rare disease may receive
marketing exclusivity for such use. Similar products considered the same drug
will be blocked from the market for seven years from the approval of the first
Orphan Drug for that indication. Even if a sponsor of a product for an
indication for use with an Orphan Drug designation is the first to obtain FDA
approval of an NDA (or PLA) for that designation and obtains marketing
exclusivity, another sponsor's application for the same drug product may be
approved by the FDA during the period of exclusivity if the FDA concludes that
the second drug product is clinically superior or if the first sponsor is not
able to supply adequate quantities of the drug product.
Although it may be advantageous to obtain Orphan Drug status for eligible
products, there can be no assurance that the precise scope of protection that is
currently afforded by Orphan Drug status will be available in the future or that
the current level of exclusivity will remain in effect. The Company's BChE
Injectable product has been designated an Orphan Drug for both cocaine overdose
and post-surgical apnea indications by the FDA and, under current laws, the
Company is eligible to receive seven years of market exclusivity for each
indication if it is the first sponsor to receive FDA approval for such
indications. Such designation, however, does not assure that the FDA has not
granted Orphan Drug designation to similar products under development nor does
it assure that it will receive or maintain marketing exclusivity nor that it may
not be blocked from the market by a competitor's product. The Company has
granted Rhone-Poulenc Rorer an exclusive worldwide license to develop,
manufacture and market BChE Injectable, and its subsidiary Armour is pursuing
the clinical investigation necessary to obtain the required safety and efficacy
data to support the filing of a PLA for this product for the two Orphan Drug
indications. Only if Rhone-Poulenc Rorer successfully completes the required
clinical investigations and is the first sponsor to obtain FDA approval of a PLA
for the two Orphan Drug indications will it be eligible to receive market
exclusivity. There is no assurance, however, that Rhone-Poulenc Rorer will be
the first sponsor to obtain FDA approval to market BChE for either of these
indications for use or obtain a period of market exclusivity. The FDA may
approve a second application to market a drug for the same indication if the
developer establishes that its drug is a clinically superior product or not the
same drug as defined by FDA regulations. If FDA should approve BChE for an
indication broader than the Orphan Drug designation, the product might not be
entitled to exclusive marketing rights. The failure of Rhone-Poulenc Rorer to
obtain such marketing exclusivity could have an adverse affect on Rhone-Poulenc
Rorer's ability to market the BChE Injectable product.
Manufacture of a biologic product, such as the Company's BChE Injectable,
must be in a facility covered by an FDA-approved ELA. Manufacture, holding and
distribution of both biologic and non-biologic drugs must be in compliance with
cGMP. Manufacturers must continue to expend time, money and effort in the area
of production and quality control to ensure full technical and other compliance
with those requirements. The labeling, advertising and promotion of a drug or
biologic product must be in compliance with FDA regulatory requirements. Failure
to comply with applicable requirements relating to manufacture, distribution or
promotion can lead to FDA demands that manufacturing, production and shipment
cease until changes are made and approved by the FDA. In some cases, such
failures can lead to product recalls, or to enforcement actions that can include
seizures, injunctions and criminal prosecution or FDA withdrawal of approval to
market the product. If the Company is required to improve manufacturing
operations prior to receiving FDA approval of the product, marketing approval
could be substantially delayed.
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To date, the Company has filed INDs and is conducting clinical trials on two
of its products, and an additional five of the Company's product candidates
could be ready to enter either Phase I or Phase III clinical trials during the
next 12 months. The Company's NDA for Carbatrol was accepted for filing on June
1, 1996 and the Company has completed the clinical portion of the Phase III
study on its Selegiline SR product for the cocaine craving indication (although
the results of such study are not yet available). The Company has completed
Phase I clinical trials on its Selegiline SR product for the Parkinson's Disease
indication and intends to commence Phase III clinical studies on Selegiline SR
for the foregoing indication upon obtaining a collaborative partner. See "--
Products In Development." There can be no assurance that any required FDA or
other governmental approval will be granted or, if granted, will not be
withdrawn. Governmental regulation may prevent or substantially delay the
marketing of the Company's proposed products and cause the Company to undertake
costly procedures. A number of other factors related to the FDA approval
process, however, may delay or preclude approval of any of the Company's
products. In addition, the extent of potentially adverse government regulations
that might arise from future administrative action or legislation cannot be
predicted. Failure to obtain FDA approval to market Carbatrol, Selegiline SR or
any of its other products under development could have a material adverse effect
on the Company.
The Company has submitted or intends to submit 505(b)(2) NDAs or ANDAs for
Carbatrol, Selegiline SR and certain of its other non-biological drug products
under development. There can be no assurance, however, that the FDA would permit
the Company to obtain marketing approval of these products through such
submissions. Nor can there be any assurance that the Company, if challenged,
would be able to demonstrate that any applicable patent relating to the approved
new drug product will not be infringed or is invalid or be able to defend
successfully against any litigation brought by the patent holder. Failure to
obtain marketing approval for Carbatrol, Selegiline SR or any other drug product
for which the Company seeks to obtain approval through the submission of an ANDA
or 505(b)(2) NDA on a timely basis, if at all, could have a material adverse
effect on the Company.
The DPCPTRA grants marketing exclusivity to certain NDAs and NDA supplements
submitted to the FDA after 1984. To qualify for three years of marketing
exclusivity for an NDA supplement, the pioneer must submit an NDA supplement
that contains reports of new clinical investigations (other than bioavailability
studies) that are "essential to approval" and "conducted or sponsored by the
applicant." The three-year exclusivity will cover "a change approved in the
supplement." While the FDA has declined to formally define what changes are
covered by this language, it could include a new indication, dosage form,
strength, route of administration or dosing regimen. Therefore, if the FDA
approves a sponsor's NDA supplement and such NDA supplement contains clinical
studies (other than bioavailability studies) that are new, are essential to
approval, and are conducted or sponsored by the applicant, the FDA may not
approve a 505(b)(2) NDA or an ANDA for the same "change approved in the
supplement" for three years from the date of approval of the pioneer's NDA
supplement. Thus, 505(b)(2) NDAs or ANDAs submitted after the sponsor's NDA
supplement has been approved may not be approved or the product may not be
marketed in the United States until the end of that three-year period.
Until FDA approval of an NDA, FDA filings are not public and it is typically
not known what, if any, clinical studies are submitted by a sponsor. In this
connection, however, the Company received information pursuant to a FOIA request
that CIBA-Geigy has filed, and obtained approval on March 25, 1996, for, an NDA
supplement for an extended-release formulation of carbamazepine under its brand
name Tegretol. The FOIA documentation further discloses that CIBA-Geigy
requested that the FDA grant it three years market exclusivity commencing on the
date of approval of the Tegretol NDA supplement and that the FDA denied
CIBA-Geigy's request for such exclusivity.
In order to export an unapproved drug or biologic for commercial sale in a
foreign country, a company must comply with the FDA Export Reform and
Enhancement Act of 1996 (the "EREA"). The EREA permits a product not approved
for sale in the United States to be exported to any country, without FDA export
approval, if the following two requirements are met: first, the product must be
lawful in the country of destination; second, the product must have been
approved for marketing in one of the following countries:
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Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa and
countries in the European Union (EU) or European economic area. The EREA also
provides other methods which require FDA authorization for the export of
unapproved products.
In recent years, there have been numerous proposals to reform the healthcare
system in the United States, including currently pending legislation relating to
Medicare and Medicaid. Some of these proposals have included measures that would
limit or eliminate payments for certain medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. In addition,
significant uncertainty exists as to the reimbursement status of newly approved
healthcare products. The Company's ability to commercialize its products
successfully may also depend in part on the extent to which reimbursement for
the cost of such products and related treatment will be available from
government health administration authorities, private health insurers and other
organizations. Such third-party payors are increasingly challenging the price of
medical products and services. It is uncertain what legislative proposals will
be adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to proposed or actual legislation. The Company
cannot predict the effect health care reform may have on its business, and no
assurance can be given that any such reforms will not have a material adverse
effect on the company. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and there can be no assurance
that adequate third-party coverage will be available to enable the Company to
maintain price levels sufficient to realize an appropriate return on this
investment in product development.
The Company is also subject to regulation by the Occupational Safety and
Health Administration ("OSHA"), the Environmental Protection Agency ("EPA"), the
Drug Enforcement Administration ("DEA") and to regulation under the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
regulatory statutes, and may in the future be subject to other federal, state or
local regulations. Either or both of OSHA or the EPA may promulgate regulations
that may affect the Company's research and development programs. Establishments
handling controlled substances, such as alprazolam and lorazepam, must be
licensed and are inspected by the DEA. The Company is unable to predict whether
any agency will adopt any regulation which would have a material adverse effect
on the Company's operations.
To market its products abroad, the Company is also subject to numerous and
varying foreign regulatory requirements, implemented by foreign health
authorities, governing, among other things, the design and conduct of human
clinical trials, pricing regulations and obtaining marketing approval. The
approval procedure varies among countries and can involve additional testing,
and the time required to obtain approval may be longer or shorter from that
required to obtain FDA approval, and approval or other product requirements may
differ. At present, foreign marketing authorizations are applied for at a
national level, although within the EU, certain registration procedures are
available to companies wishing to market a product in more than one EU member
country. If a regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, marketing authorization is
almost always granted. The foreign regulatory approval includes all of the risks
associated with obtaining FDA approval set forth above. Approval by the FDA does
not ensure approval by other countries.
FACILITIES
The Company is located in a 44,500 square foot facility containing both
office and laboratory space in Rockville, Maryland. The facility is subleased
from Corning Clinical Laboratories, Inc. The sublease has a five-year term,
beginning May 1, 1995, with the first and second month rent abated, and nine
months of additional free rent. The initial rental rate is $601,000 per annum,
increasing by 3% per annum in each year of the sublease term.
HUMAN RESOURCES
As of July 1, 1996, the Company had 55 employees, 45 of whom were engaged in
research and development activities. The Company's employees are not governed by
any collective bargaining agreement and the Company believes that its
relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
July 1, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
James D. Isbister (1) 59 Chief Executive Officer and Chairman of the Board
of Directors
Robert S. Cohen 53 President and Chief Operating Officer
Krystyna Belendiuk, Ph.D. 45 Senior Vice President -- Business Development,
Director and Secretary
James D. Russo 49 Senior Vice President -- Chief Financial Officer
and Treasurer
Edward M. Rudnic, Ph.D. 40 Senior Vice President -- Development and Technical
Operations
James H. Cavanaugh, Ph.D. (1)(3) 59 Director
Max Link, Ph.D. (2)(3) 55 Director
Lawrence C. Hoff (2) 67 Director
</TABLE>
- --------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
The Board of Directors currently consists of five members. All directors
hold office until the next annual meeting of stockholders and until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
JAMES D. ISBISTER has been President, Chief Executive Officer and a Director
of the Company since January 1990 and was appointed to serve as the Chairman of
the Board of Directors in October 1995. Effective July 1, 1996, Mr. Isbister
resigned as President of the Company with the appointment of Robert S. Cohen as
President, but continues to serve as Chairman of the Board and Chief Executive
Officer. Mr. Isbister plans to retire as Chief Executive Officer no later than
January 1, 1997. From 1986 until January 1989, Mr. Isbister was Senior Vice
President of Consolidated HealthCare and served as President of its subsidiary,
Combined Technologies, Inc. Mr. Isbister served as Senior Vice President of the
National Blue Cross and Blue Shield Association (the "Association") from 1980 to
1986 and as a consultant to the Association from January 1989 to January 1990.
From 1978 to 1980, Mr. Isbister was the Associate Director for Management of the
U.S. International Communication Agency. Mr. Isbister served as Deputy Director
of the National Institute of Mental Health from 1970 to 1974 and as the first
Director of the U.S. Alcohol, Drug Abuse, and Mental Health Administration from
1974 to 1977.
ROBERT S. COHEN joined the Company as President and Chief Operating Officer
effective July 1, 1996. Prior to joining the Company, Mr. Cohen had extensive
experience as a pharmaceutical company executive. From September 1995 until June
1996, Mr. Cohen served as President and Chief Operating Officer of Trophix
Pharmaceuticals, Inc. ("Trophix"), where he remains a member of the Board of
Directors. From June 1993 until August 1995, Mr. Cohen served as President and
Chief Executive Officer of Gynopharma, Inc. From June 1980 to June 1993, Mr.
Cohen was employed by Berlex Laboratories, Inc., a division of Schering AG,
serving as Chief Operating Officer commencing in 1989. Mr. Cohen will continue
to assist Trophix with some projects through 1996 on a part-time basis. Mr.
Cohen has a B.S. and M.S. in Pharmacy from the Brooklyn College of Pharmacy and
is a registered pharmacist.
KRYSTYNA BELENDIUK has been Senior Vice President for Business Development,
a Director and Secretary since April 1991 and served as Treasurer from April
1991 to May 1994. Prior to joining the Company, Dr. Belendiuk served as
Executive Director, Corporate Planning and Control, from October 1990 to April
1991, and as Director, Corporate Planning and Analysis from June 1988 to
September 1990, at CIBA-Geigy Corp. From 1984 to May 1988, she served as
Director and then Executive Director of Portfolio Management
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with the Pharmaceuticals Division of CIBA-Geigy Corp. Prior to joining
CIBA-Geigy Corp., Dr. Belendiuk served as a marketing manager for Sandoz
Pharmaceuticals Corp. In addition to a doctorate in Biopsychology, she holds an
M.B.A. in Finance and Marketing, both from the University of Chicago.
JAMES D. RUSSO has been Senior Vice President, Chief Financial Officer and
Treasurer since May, 1994. Prior to joining the Company, Mr. Russo served as
Senior Vice President, Chief Financial Officer and Treasurer of Versar, Inc. an
environmental consulting firm from 1992 to 1994. Mr. Russo was a Senior Vice
President and Chief Financial Officer of ICF International, Inc., an
international environmental engineering firm and health care consulting firm
("ICF") from 1986 to 1992. From 1986 to 1988 he also served as Treasurer of ICF.
From 1977 to 1986, Mr. Russo was Vice President of Finance, Treasurer and served
on the Board of Directors of PRC Engineering, Inc., a subsidiary of Planning
Research Corporation, where he managed the international financial operations of
the consulting engineering firm. Mr. Russo is a Certified Public Accountant.
EDWARD M. RUDNIC has been Senior Vice President, Development and Technical
Operations, since February 1996. From April 1991 to February 1996, he was Vice
President for Pharmaceutical Research and Development. Dr. Rudnic has over
fifteen years of industry experience in the design, formulation and
commercialization of advanced drug delivery systems. From October 1990 to April
1991, Dr. Rudnic was an independent consultant. From 1987 to October 1990, Dr.
Rudnic served as Director of Formulation Development with Schering-Plough Corp.,
and from 1985 until 1987, as a Manager of Pharmaceutical Process Development.
From 1982 until 1985, Dr. Rudnic was a Research Investigator at E. R. Squibb and
Sons, developing oral controlled-release dosage forms and novel drug delivery
concepts. Dr. Rudnic has a B.S. in Pharmacy, an M.S. in Pharmaceutics and a
doctorate in Pharmaceutical Sciences from the University of Rhode Island. Dr.
Rudnic is a registered pharmacist.
JAMES H. CAVANAUGH has served as a Director of the Company since its
inception. Since 1989, Dr. Cavanaugh has been President of HealthCare Investment
Corporation LLC ("HIC") and is currently a general partner of each of HealthCare
Partners I, L.P. ("HCP I"), HealthCare Partners II, L.P. ("HCP II"), HealthCare
Partners III, L.P. ("HCP III") and HealthCare Partners IV, L.P. ("HCP IV"), the
general partners of HealthCare Ventures I, L.P. ("HCV I"), HealthCare Ventures
II, L.P. ("HCV II"), HealthCare Ventures III, L.P. ("HCV III") and HealthCare
Ventures IV, L.P. ("HCV IV"), respectively. HCV II, HCV III and HCV IV are
principal stockholders of the Company. Prior thereto, Dr. Cavanaugh served as
President of SmithKline & French Laboratories -- U.S., Inc. from March 1985 to
February 1989 and as President of SmithKline Clinical Laboratories from 1981 to
1985. In addition to serving on the Boards of Directors of several health care
and biotechnology companies, including MedImmune, Inc., Magainin
Pharmaceuticals, Inc., Human Genome Sciences, Inc. and Procept, Inc. Dr.
Cavanaugh currently serves on the Executive Committee of the Board of Trustees
of the National Committee for Quality Health Care (Chairman, 1988), the National
Committee of the American Refugee Committee, the Board of Councilors of the
School of Pharmacy of the University of Southern California and as Trustee
Emeritus of the California College of Medicine. Dr. Cavanaugh received his Ph.D.
from the University of Iowa.
MAX LINK has served as a Director of the Company since January 1995. In
addition, Dr. Link has held a number of executive positions with pharmaceutical
and healthcare companies. Most recently, he served as Chief Executive Officer of
Corange Limited, from May 1993 until June 1994. Prior to joining Corange,
Limited, Dr. Link served in a number of positions with Sandoz Pharma Ltd.,
including Chief Executive Officer, from 1990 until April 1992, and Chairman,
from April 1992 until May 1993. Dr. Link currently serves on the board of
directors of Alexion Pharmaceuticals, Inc., Human Genome Sciences, Inc.,
Procept, Inc. and Protein Design Labs, Inc. Dr. Link received his Ph.D. in
Economics from the University of St. Gallen.
LAWRENCE C. HOFF became a Director of the Company in February 1996. In 1990,
Mr. Hoff retired as President and Chief Operating Officer of the Upjohn Company
("Upjohn"). Mr. Hoff joined Upjohn in 1950 as a pharmaceutical sales
representative. He was appointed Vice President for Domestic Pharmaceutical
Marketing in 1969. In 1973, Mr. Hoff was elected to the Board of Directors of
Upjohn on which he served as a director until the Upjohn Company merged with
Pharmacia in 1995. In 1974, he became Vice President
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<PAGE>
and General Manager of Domestic Pharmaceutical Operations. From 1974 to 1984,
Mr. Hoff served as Executive Vice President at Upjohn. Mr. Hoff was elected to
the Board of Directors of the Pharmaceutical Manufacturers Association ("PMA")
in 1984. He was elected Chairman-elect of the PMA in 1986 and Chairman in 1987.
Mr. Hoff currently serves as a director of Curative Technologies, Inc.,
MedImmune, Inc., Alpha Beta Technologies and Pathogenesis, Inc. Mr. Hoff
graduated from Stanford University and has received honorary degrees from
Massachusetts College of Pharmacy and Allied Health Sciences and from Kalamazoo
College.
The Board of Directors established the Audit Committee in October 1995. The
Audit Committee is authorized to review with the Company's independent
accountants, the annual financial statements of the Company prior to
publication; to review the work of, and approve non-audit services performed by,
such independent accountants; and to make annual recommendations to the Board
for the appointment of independent public accountants for the ensuing year. The
Audit Committee also reviews the effectiveness of the financial and accounting
functions, organization, operations and management of the Company.
The Board of Directors established the Compensation Committee in May 1991.
The Compensation Committee is authorized to review and recommend to the Board of
Directors the compensation and benefits of all officers and directors of the
Company and to review general policy matters relating to compensation and
benefits of employees of the Company. The Compensation Committee also
administers the issuance of stock options to the Company's officers, employees
and consultants pursuant to the Company's 1991 Stock Option Plan.
Directors, with the exception of Dr. Link and Mr. Hoff, receive no cash
compensation for their services as directors but are reimbursed for expenses
actually incurred in connection with attending meetings of the Board of
Directors. Dr. Link receives $20,000 per annum and has been granted options to
purchase 7,822 shares of Common Stock at an exercise price of $4.50 per share
and 2,224 shares of Common Stock at an exercise price of the greater of $4.50
per share or 85% of the initial public offering price per share in this
offering. Mr. Hoff receives $15,000 per annum, plus expenses, and has been
granted options to purchase 6,850 shares of Common Stock at an exercise price of
the greater of $4.50 per share or 85% of the initial public offering price per
share in this offering. In addition, directors who are not employees of the
Company are entitled to receive automatic stock option grants. See "-- Stock
Options."
The Company's Restated Certificate of Incorporation includes certain
provisions permitted pursuant to Delaware law whereby officers and directors of
the Company are to be indemnified by the Company against certain liabilities.
The Company's Restated Certificate of Incorporation also limits, to the fullest
extent permitted by Delaware law, a director's liability for monetary damages
for breach of fiduciary duty, including gross negligence, except liability for
(i) breach of the director's duty of loyalty, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption and (iv) any transaction from which the director derives an improper
personal benefit. Delaware law does not eliminate a director's duty of care and
this provision has no effect on the availability of equitable remedies such as
an injunction or rescission based upon a director's breach of the duty of care.
In addition, the Company has obtained an insurance policy providing coverage for
certain liabilities of its officers and directors.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board currently consists of four
individuals who have extensive experience in the fields of pharmacology,
chemistry, neurosciences, enzymology and molecular genetics. At the Company's
request, the scientific advisors review and evaluate the Company's research
programs and advise the Company about technical matters in the scientific fields
in which the Company is involved. The Company's Scientific Advisory Board
generally meets as a group at least three times a year to review and discuss the
Company's progress in research and development. In addition, certain members of
the Scientific Advisory Board meet informally in smaller groups or individually
with Company scientists on a more frequent basis.
45
<PAGE>
The following table sets forth the name and current position of each
scientific advisor:
<TABLE>
<CAPTION>
NAME POSITION
- ---------------------------- -----------------------------------------------------------------------
<S> <C>
Floyd Bloom, M.D. Chairman of the Scientific Advisory Board. Chairman, Department of
Neuropharmacology, The Scripps Research Institute
Roscoe Brady, M.D. Chief, Developmental and Metabolic Neurology Branch, National
Institutes of Health
John J. Burns, Ph.D. Adjunct Member, Roche Institute of Molecular Biology and Adjunct
Professor, The Rockefeller University
Paul Greengard, Ph.D. Vincent Astor Professor, Laboratory of Molecular and Cellular
NeuroScience, The Rockefeller University
</TABLE>
The Company has entered into consulting agreements with each member of the
Scientific Advisory Board. The Consulting Agreements are for varying terms and
provide for each of the members to serve on the Scientific Advisory Board of the
Company and/or to render advice to the Company in the area of the Company's
business and such member's expertise for specified annual compensation for their
services. The Company's scientific advisors are employed by other entities and
some have consulting agreements with entities other than the Company, some of
which may in the future compete with the Company. The scientific advisors are
expected to devote only a small portion of their time to the Company and are not
expected to participate actively in the day-to-day operations of the Company.
Certain of the institutions with which the scientific advisors are affiliated
may adopt new regulations or policies that limit the ability of the scientific
advisors to consult with the Company.
It is possible that any inventions or processes discovered by the scientific
advisors will remain the property of such persons or of such persons' employers.
In addition, the institutions with which the scientific advisors are affiliated
may make available the research services of their personnel, including the
scientific advisors, to competitors of the Company pursuant to sponsored
research agreements.
46
<PAGE>
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to the four most highly compensated executive officers other than the Chief
Executive Officer whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 1995 (collectively, the "named executive officers") for
services rendered during the fiscal years ended December 31, 1995, 1994 and
1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION NUMBER OF
------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION OPTIONS
- ---------------------------------------------------- --------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
James D. Isbister (2)............................... 1995 $ 225,239 $ 75,000 $ 3,516(3) 82,472
Chairman of the Board 1994 214,513 75,000 3,373(3) 0
President and Chief 1993 204,298 50,000 1,174(3) 85,696
Executive Officer
Dr. George W. Belendiuk (4)......................... 1995 $ 176,248 $ 41,964 $ 40,403(5) 37,201
Senior Vice President -- 1994 167,885 31,972 33,805(5) 4,167
Research & Development 1993 159,862 30,450 0 43,334
Dr. Krystyna Belendiuk.............................. 1995 $ 149,826 $ 28,538 0 37,201
Senior Vice President -- 1994 142,691 27,179 0 4,167
Business Development 1993 135,896 18,598 0 43,334
Dr. Edward M. Rudnic................................ 1995 $ 131,846 $ 25,114 0 23,021
Senior Vice President -- 1994 125,568 23,918 0 2,500
Pharmaceutical Operations 1993 119,589 16,366 0 19,000
James D. Russo...................................... 1995 $ 138,961 $ 30,000 0 18,113
Senior Vice President -- 1994 79,219 0 0 16,667
Chief Financial Officer (5) 1993 0 0 0 0
</TABLE>
- --------------
(1) Bonus in this chart represents the amount actually paid to the employee in
the year indicated, but earned in the preceding year.
(2) Effective July 1, 1996, Mr. Isbister resigned as President of the Company
with the appointment of Robert S. Cohen as President, but continues to serve
as Chairman of the Board and Chief Executive Officer.
(3) Compensation adjustment related to value of automobile provided to employee.
(4) Dr. George Belendiuk died on April 20, 1996.
(5) Relocation expense reimbursement.
(6) Mr. Russo's employment with the Company commenced in May 1994.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Drs.
Krystyna Belendiuk and Edward Rudnic and Mr. James Russo, each of which is
effective July 1, 1996, which provide for current annual base salaries of
$157,317, $153,000 and $153,000, respectively. The agreements renew for
successive one year periods unless terminated earlier by either party on 180
days' written notice. In the event any of the officers' employment agreements
are terminated without cause, such officer will be entitled to receive the
unpaid portion of the base salary payable through the date of termination of the
agreement, plus a payment equal to the lesser of (i) one year's base salary or
(ii) nine months' base salary or the base salary for the remaining term,
whichever is greater, payable in equal monthly installments for the applicable
period. The
47
<PAGE>
agreements also provide for the vesting and acceleration of the exercisability
of unvested stock options if the employee is terminated or his or her duties are
substantially reduced after certain corporate transactions involving a change in
control of the Company.
In May 1996, the Company paid $92,530 to the estate of Dr. George Belendiuk
pursuant to the terms of his employment agreement and awarded Dr. Belendiuk a
cash bonus of $20,000 upon acceptance by the FDA of the Company's NDA relating
to Carbatrol. Further, the Company modified the terms of all stock options
granted to Dr. Belendiuk to provide that stock options which were exercisable as
of May 14, 1996 or which will become exercisable on or before April 20, 1997
shall remain exercisable by his estate until twelve months from the closing of
this offering.
The Company has entered into a one-year employment agreement with James D.
Isbister effective December 12, 1995 providing for a base annual salary of
$236,500. The agreement contains severance provisions similar to those contained
in the Company's employment agreements with Drs. Krystyna Belendiuk and Edward
Rudnic and Mr. James Russo and further provides that Mr. Isbister will have the
right to terminate the agreement and for immediate vesting and acceleration of
the exercisability of unvested stock options in the event of death or
disability. Mr. Isbister plans to retire as Chief Executive Officer of the
Company no later than January 1, 1997. It is expected that Robert S. Cohen, the
Company's President and Chief Operating Officer effective July 1, 1996, will
succeed Mr. Isbister as Chief Executive Officer. The Company has entered into an
Agreement with Mr. Isbister under which he will continue to serve as Chairman of
the Company's Board of Directors through December 31, 1998 if he resigns as
Chief Executive Officer on or before December 31, 1998. Under that Agreement,
Mr. Isbister will receive $65,000 annually and certain other employment
benefits.
The Company entered into a three-year employment agreement with Robert S.
Cohen effective July 1, 1996 providing for Mr. Cohen to serve as President and
Chief Operating Officer for a base annual salary of $200,000. Mr. Cohen shall
also be eligible to receive an annual bonus of up to 33 1/3% of his base salary.
The agreement further provides for Mr. Cohen to be reimbursed for relocation
expenses not to exceed $100,000 in the aggregate. The agreement automatically
renews for successive one year periods unless terminated earlier by either party
on 180 days' prior written notice commencing 180 days prior to the third
anniversary of the effective date of the agreement. In the event the agreement
is terminated by the Company without cause, Mr. Cohen will be entitled to
receive the unpaid portion of his base salary payable through the date of
termination of the agreement plus a payment equal to the lesser of (i) one
year's base salary payable in 12 equal monthly installments or (ii) the base
salary for the then remaining term of the agreement, payable in the same
installments as the base salary under the agreement. The agreement also provides
for the vesting and acceleration of the exercisability of unvested stock options
if Mr. Cohen is terminated or his duties are substantially reduced after certain
corporate transactions involving a change in control of the Company. Mr. Cohen
was also granted options to purchase 225,000 shares of Common Stock. See
"--Stock Options."
Each of the named executive officers and Mr. Cohen have entered into
confidentiality, patent assignment and non-compete agreements with the Company.
STOCK OPTIONS
In July 1991, the Board of Directors of the Company adopted the 1991 Stock
Option Plan (the "Stock Option Plan"). Under the Stock Option Plan, as amended,
1,900,000 shares of Common Stock were reserved for issuance to officers,
employees, directors, consultants and advisors of the Company (subject to anti-
dilution and other adjustments). As of July 1, 1996, 625,151 shares were
available for future grant and options to acquire 1,202,608 shares remain
outstanding under the Stock Option Plan, exercisable at prices ranging from
$0.06 to $4.50, except that certain options to purchase shares are exercisable
at the greater of $4.50 or 85% of the initial public offering price per share in
this offering. The Stock Option Plan provides for the grant of incentive stock
options intended to qualify as such under Section 422 of the Internal Revenue
Code of 1986, as amended, and nonstatutory stock options which do not so
qualify.
The Stock Option Plan is administered by the Compensation Committee (the
"Committee") of the Board of Directors, which consists of Drs. Cavanaugh and
Link. Effective upon consummation of the
48
<PAGE>
offering, option grants to "officers" and "directors," as such terms are defined
for the purposes of Rule 16b-3 ("Rule 16b-3") promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), shall be administered by a committee
which consists of "disinterested" directors as defined in Rule 16b-3, but only
if at least two directors meet the criteria of "disinterested" directors as
defined in Rule 16b-3. The maximum number of shares for which options may be
granted to any participant under the Stock Option Plan during any fiscal year is
250,000 shares. Subject to the limitations set forth in the Stock Option Plan,
the Committee has the authority to determine to whom options will be granted,
the term during which options granted under the Stock Option Plan may be
exercised, the exercise price of options and the rate at which options may be
exercised and may vest. Nonstatutory stock options may be granted to officers,
employees, consultants and advisors of the Company. Incentive stock options may
be granted only to employees or officers of the Company. The maximum term of
each incentive stock option granted under the Stock Option Plan is ten years.
The exercise price of shares of Common Stock subject to options qualifying as
incentive stock options may not be less than the fair market value of the Common
Stock on the date of the grant. The exercise price of incentive options granted
under the Stock Option Plan to any participant who owns stock possessing more
than 10% of the total combined voting power of all classes of outstanding stock
of the Company must be at least equal to 110% of the fair market value on the
date of grant. Any incentive stock options granted to such participants must
also expire within five years from the date of grant. Under the Stock Option
Plan, the exercise price of both incentive stock options and nonstatutory stock
options is payable in cash or, at the discretion of the Committee, in Common
Stock or a combination of cash and Common Stock.
The Board may at any time modify and amend the Stock Option Plan in any
respect, PROVIDED that the approval of at least a majority of the outstanding
shares of stock of the Company entitled to vote is required for any amendment
which (i) changes the class of persons eligible for the grant of options, (ii)
increases the maximum number of shares subject to options granted under the
Stock Option Plan or (iii) materially increases the benefits accruing to
participants under the Stock Option Plan, within the meaning of Rule 16b-3 of
the Exchange Act. Except with respect to options then outstanding, the Stock
Option Plan expires on (i) the tenth anniversary of the date on which the Stock
Option Plan is adopted by the Board, (ii) the tenth anniversary of the date on
which the Stock Option Plan is approved by the stockholders of the Company, or
(iii) the date as of which the Board, in its sole discretion, determines that
the Stock Option Plan should terminate, whichever is the first to occur. Any
options outstanding as of the expiration date of the Stock Option Plan will
remain in effect until they have been exercised or have terminated or expired by
their respective terms.
The Committee, in its discretion, may in connection with the grant of any
option under the Stock Option Plan, grant to the optionee a stock appreciation
right (an "SAR"). Such SAR shall be granted by the Committee simultaneously with
the grant of the related option. An exercise of an SAR shall result in the
cancellation of the option as to the shares of Common Stock with respect to
which the optionee exercises such SAR. As soon as practicable following the
exercise of an SAR, the Company shall pay to the optionee in cash an amount
equal to the excess of the Fair Market Value (determined in accordance with the
provisions of the Stock Option Plan on the date of exercise) of the shares of
Common Stock with respect to which the option is canceled over the option price
of such shares. An SAR shall be exercisable to the same extent and under the
same conditions as, and shall terminate upon the termination of, the underlying
option. An SAR, however, shall be exercisable only at such time as the Fair
Market Value (determined in accordance with the provisions of the Stock Option
Plan) of the shares of Common Stock on the date of exercise exceeds the Fair
Market Value of the shares on the date of grant. No SAR shall be exercisable for
cash during the first year after the Company becomes subject to Rule 16b-3 of
the Exchange Act. Neither options nor SARS are assignable or otherwise
transferable by the optionee except by will or the laws of descent and
distribution.
The Company may accelerate the exercisability of the options, subject to
limitation to the extent necessary to prevent the options from being treated as
a parachute payment within the meaning of Section 280G of the Code. The
unexercised portion of the options automatically terminates upon the first to
occur of (a) the expiration of the option term; (b) the expiration of 12 months
from the date of termination of the optionee's employment due to death or
permanent disability; (c) immediately upon the termination of the
49
<PAGE>
optionee's employment for cause; and (d) the expiration of three months from the
date of termination of the optionee's employment by the Company for any reason
other than (b) or (c) above; PROVIDED that if the optionee dies during such
three-month period, the time of expiration of the options is extended for 12
months thereafter and PROVIDED, FURTHER that if the optionee is rehired during
the three-month period, such termination shall be deemed not to have occurred.
The provisions of the Stock Option Plan provide for the automatic grant of
non-qualified stock options to purchase shares of Common Stock ("Director
Options") to directors of the Company who are not employees or principal
stockholders of the Company ("Eligible Directors"). Eligible Directors of the
Company elected after consummation of this offering will be granted a Director
Option to purchase 5,333 shares of Common Stock on the date such person is first
elected or appointed a director (an "Initial Director Option"). Further,
commencing on the day immediately following the date of the annual meeting of
stockholders during the Company's fiscal year ending December 31, 1996, each
Eligible Director, other than directors who received an Initial Director Option
since the last annual meeting, will be granted a Director Option to purchase
1,333 shares of Common Stock on the day immediately following the date of each
annual meeting of stockholders, as long as such director is as member of the
Board of Directors. The exercise price for each share subject to a Director
Option shall be equal to the fair market value of the Common Stock on the date
of grant. Director Options are exercisable in five equal annual installments,
commencing on the date of grant or 90 days after the termination of the
directors' service on the Board of Directors.
The following table sets forth certain information with respect to
individual grants of stock options made during the fiscal year ended December
31, 1995 to each of the named executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR PER SHARE (1) DATE 5% 10%
- --------------------------------- ------------- ---------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James D. Isbister................ 16,667 6.5% $ 4.50 1/17/05(2) $ 47,167 $ 119,531
5,000 1.9 4.50 3/7/05(3) 14,150 35,859
54,138 21.1 4.50 5/22/05(4) 153,212 388,269
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
George W. Belendiuk.............. 5,000 1.9% $ 4.50 3/7/05(3) $ 14,150 $ 35,859
25,534 10.0 4.50 5/22/05(4) 72,258 183,116
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
Krystyna Belendiuk............... 5,000 1.9% $ 4.50 3/7/05(3) $ 14,150 $ 35,859
25,534 10.0 4.50 5/22/05(4) 72,258 183,116
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
Edward M. Rudnic................. 5,000 1.9% $ 4.50 3/7/05(3) $ 14,150 $ 35,859
11,354 4.4 4.50 5/22/05(4) 32,130 81,424
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
James D. Russo................... 5,000 1.9% $ 4.50 3/7/05(3) $ 14,150 $ 35,859
6,446 2.5 4.50 5/22/05(4) 18,242 46,230
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
</TABLE>
- --------------
(1) The Board of Directors determined that the fair market value of the
Company's Common Stock was $4.50 on the date of grant.
(2) These options are immediately exercisable.
(3) The options become exercisable as to twenty percent (20%) of the shares on
each of the first, second, third, fourth and fifth anniversaries of the date
of grant.
(4) These options are exercisable commencing May 1996 in annual installments
over either two or four years.
50
<PAGE>
On March 6, 1996, each of Messrs. Isbister and Russo and Drs. G. Belendiuk,
K. Belendiuk and Rudnic were granted options to purchase 69,029, 9,888, 34,084,
33,032 and 15,974 shares of Common Stock, respectively, at an exercise price of
the greater of $4.50 or 85% of the initial public offering price per share in
this offering and exercisable in three equal annual installments commencing
March 1997. On May 14, 1996, Mr. Isbister and Dr. Rudnic were granted options to
purchase 13,333 and 6,667 shares of Common Stock, respectively, at an exercise
price of the greater of $4.50 or 85% of the initial public offering price per
share in this offering and exercisable in five equal annual installments
commencing May 1997. On July 1, 1996, Messrs. Isbister and Russo and Dr. Rudnic
were granted options to purchase 40,000, 40,000 and 65,000 shares of Common
Stock, respectively, at an exercise price of the greater of $4.50 or 85% of the
initial public offering price in this offering and exercisable in five equal
installments commencing June 1997. In connection with his appointment as
President and Chief Operating Officer, Robert S. Cohen was granted options to
purchase 225,000 shares of Common Stock at an exercise price of the greater of
$4.50 or 85% of the initial public offering price per share in this offering and
exercisable in five equal annual installments commencing July 1, 1996.
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1995 by each
of the named executive officers and the number and value of unexercised options
held by such named executive officers as of December 31, 1995:
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS/SAR AT DECEMBER IN-THE-MONEY OPTIONS/SARS
SHARES 31, 1995 AT DECEMBER 31, 1995 (1)
ACQUIRED ON ----------------------- --------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ------------- ---------------- ----------------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
James D. Isbister........... 11,593 $ 51,473 67,612/117,223 $ 27,000 $ 0
George W. Belendiuk......... 5,000 $ 22,200 23,166/71,537 $ 8,100 $ 12,800
Krystyna Belendiuk.......... 20,000 $ 88,800 23,166/74,870 $ 8,100 $ 27,600
Edward M. Rudnic............ 5,000 $ 22,200 11,767/39,422 $ 10,640 $ 9,560
James D. Russo.............. 0 $ 0 3,333/31,447 $ 0 $ 0
</TABLE>
- --------------
(1) Based on the fair market value of the Company's Common Stock on December 31,
1995 of $4.50 per share, as determined by the Company's Board of Directors.
PENSION PLAN
The Company maintains no defined benefit pension plan but does maintain a
defined contribution pension plan. Effective July 1990, the Company adopted its
defined contribution pension plan (the "Pension Plan") intended to be qualified
under sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). All full-time employees of the Company are generally
eligible to participate in the Pension Plan, provided they have at least three
months service with the Company, on the first day of the January or July
following their date of hire. Participants may elect to defer a percentage of
their compensation on a pre-tax basis as a contribution to the Pension Plan,
subject to maximum annual contribution limits under the Code. Highly compensated
employees are subject to additional limitations on pre-tax contributions under
the Code. The Company may make contributions to the Pension Plan, although it
has not done so to date. The Company pays all costs associated with
administering the Pension Plan, which to date have not been material.
CERTAIN TRANSACTIONS
RELATED PARTIES
HCV II, HCV III and HCV IV are controlling stockholders of the Company. HCP
II, HCP III and HCP IV are limited partnerships which serve as the general
partner of each of HCV II, HCV III and
51
<PAGE>
HCV IV, respectively. Dr. Cavanaugh, a director of the Company, is a general
partner of HCP II, HCP III and HCP IV. See "Principal Stockholders." HIC is the
management company for each of HCV I, HCV II, HCV III and HCV IV. Dr. Cavanaugh
is an officer of HIC.
FINANCINGS
In January 1991, the Company entered into a convertible preferred stock and
warrant purchase agreement whereby the Company sold an aggregate of 2,000,000
shares of Preferred Stock to HCV II for aggregate gross proceeds of $2,000,000
and sold to HCV II, for a price of $.001 each, warrants to purchase 3,000,000
shares of Preferred Stock (the "Preferred Stock Warrants") at an exercise price
of $1.00 per share. In September 1991, HCV II transferred certain of the
Preferred Stock Warrants to certain investors and, upon exercise of 1,700,000 of
the Preferred Stock Warrants, the Company sold an additional 1,700,000 shares of
Preferred Stock, of which 1,200,000 were sold to HCV II and 500,000 were sold to
Everest Trust, for aggregate gross proceeds of $1,700,000, pursuant to the
exercise of a portion of the Preferred Stock Warrants. All Preferred Stock
Warrants held by HCV II and other investors were exercisable through January 30,
1994 at an exercise price of $1.00 per share and have expired. In April and May
1992, the Company sold an aggregate of 1,300,000 and 697,337 shares,
respectively, of Preferred Stock at a purchase price of $1.00 per share to a
group of stockholders including HCV II (876,300 and 413,379 shares,
respectively) and Everest Trust (323,700 and 173,637 shares respectively). In
June 1993, the Company entered into a convertible preferred stock purchase
agreement (the "Preferred Stock Agreement"), pursuant to which it sold an
aggregate of 5,025,000 shares of Preferred Stock at a purchase price of $1.00
per share, to a group of stockholders (the "Preferred Holders") including HCV
III, HCV IV, The State Treasurer of the State of Michigan ("The State of
Michigan"), The Aetna Casualty and Surety Company ("Aetna") and Everest Trust.
The Preferred Stock Agreement provided for the purchase of up to an additional
3,975,000 shares of Preferred Stock in three stages upon the same terms and
conditions prior to December 31, 1994, upon notification by the Company that its
cash and cash equivalents have decreased to less than $500,000. In September
1993, November 1993 and February 1994, an additional 1,325,001, 1,325,000 and
1,324,999 shares of Preferred Stock, respectively, were purchased by certain of
the Preferred Holders, including HCV III, HCV IV and The State of Michigan. In
March 1994, Everest Trust transferred 393,054 shares of Preferred Stock to
Hudson Trust.
The Company was initially funded by loans from HCV II aggregating $768,000,
bearing interest at the rate of 10% per annum on the unpaid principal, which
were repaid, together with accrued interest, out of the proceeds of the sale of
the Preferred Stock in January 1991. In August 1991, the Company borrowed
$150,000 from HCV II pursuant to a promissory note bearing interest at the rate
of 10% per annum on the unpaid principal, which note, together with accrued
interest, was repaid out of the proceeds of the exercise of the Preferred Stock
Warrants in September 1991. In August 1992, the Company borrowed an aggregate of
$1,500,000 for working capital pursuant to a credit agreement between the
Company and certain stockholders, including HCV II (the "August Credit
Agreement"). In December 1992, the Company entered into a $1,000,000 credit
agreement for working capital with a group of stockholders including HCV II (the
"December Credit Agreement"). In each of December 1992 and February 1993, the
Company borrowed $500,000 under the December Credit Agreement. Borrowings under
the August Credit Agreement and the December Credit Agreement bore interest at
the prime rate of interest plus 1% on the unpaid principal. In connection with
the August Credit Agreement and the December Credit Agreement, the Company
issued warrants to purchase an aggregate of 111,111 shares of Common Stock at an
exercise price of $.06 per share (the "Common Stock Warrants"), 107,960 of which
were issued to HCV II and the remainder of which were issued to other investors.
At the dates the Common Stock Warrants were issued, the Company's Board of
Directors had valued the Company's Common Stock at $2.88 per share. In December
1992, HCV II, Everest Trust and certain stockholders purchased 139,518, 22,422
and 4,729 shares of Common Stock, respectively. Pursuant to a credit agreement
in April 1993 (the "April Credit Agreement"), the Company borrowed an aggregate
of approximately $515,000 from a group of stockholders including HCV II. In
connection with the April Credit Agreement, the Company issued Preferred Stock
Warrants to purchase up to 41,667 shares of Preferred Stock at an exercise price
of $1.00 per share to HCV II and 1,686 Common Stock warrants to certain
shareholders of which 802 remain outstanding and 884 were converted. In May
1993, the Company
52
<PAGE>
borrowed $100,000, $150,200 and $49,800 from HCV II, HCV III and HCV IV,
respectively, pursuant to promissory notes bearing interest at the prime rate of
interest plus 1% on the unpaid principal. All of the foregoing notes and
borrowings were repaid in June 1993, together with accrued interest of $36,452,
out of the proceeds received by the Company from the sale of the Preferred
Stock.
In June 1993, the Company entered into a Third Amended and Restated
Stockholders Agreement with all holders of its Preferred Stock (the
"Stockholders Agreement") which grants certain demand and piggy-back
registration rights with respect to shares of Common Stock issuable upon
conversion of all outstanding shares of Preferred Stock. See "Description of
Capital Stock -- Registration Rights." The Stockholders Agreement also grants to
the holders of the Preferred Stock certain other rights with respect to voting,
pre-emptive rights with respect to the acquisition and sale of shares by the
Company and certain matters affecting corporate governance. The Stockholders
Agreement will be amended prior to the completion of this offering to eliminate
these rights (other than registration rights).
In May 1994, the Company entered into the 1994 Credit Agreement (the "1994
Credit Agreement") with certain stockholders, including HCV III, HCV IV, Aetna,
The State of Michigan, and Everest Trust (the "1994 Lenders") pursuant to which
the 1994 Lenders agreed to loan the Company up to $4,395,000 through May 1995.
Through May 1995, the Company borrowed $2,000,000 under this agreement and
issued $2,000,000 principal amount of promissory notes bearing interest at the
rate of 7 1/4% per annum (the "1994 Notes") convertible into Preferred Stock to
the 1994 Lenders. Also, in connection with the execution of the 1994 Credit
Agreement, the Company issued warrants to purchase up to an aggregate of 33,337
shares of Common Stock to the Lenders at an exercise price of $10.80 per share.
See "Description of Capital Stock."
In May 1995, the Company entered into a Conversion and Subscription
Agreement (the "Conversion Agreement"), as amended in October 1995, at the same
time it entered into the 1995 Credit Agreement with the 1994 Lenders. Pursuant
to the Conversion Agreement, the outstanding principal amount of $2,000,000 of
the 1994 Notes converted into Preferred Stock at a conversion price of $1.25 per
share, resulting in the issuance of 1,599,997 Preferred Stock Adjustment Shares
(the "Adjustment Shares") of the Company to the 1994 Lenders. In February 1996,
the conversion price of the 1994 Notes was further adjusted to $0.75 per share,
resulting in the issuance of an additional 1,066,663 shares of Preferred Stock
to the 1994 Lenders. As a result of this adjustment, there was a mandatory
adjustment to the conversion ratio of all Preferred Stock to one share of Common
Stock for each four and one-half shares of Preferred Stock (after giving effect
to a one-for-six reverse stock split of the Common Stock).
The 1995 Credit Agreement permitted the Company to borrow up to $8,000,000
through January 15, 1997 from certain stockholders and officers, including HCV
III, HCV IV, The State of Michigan, Everest Trust, James D. Russo, James D.
Isbister and George W. Belendiuk (the "1995 Lenders"). The Company borrowed an
aggregate of $8,000,000 under the 1995 Credit Agreement and issued an aggregate
of $8,000,000 in principal amount of notes (the "Convertible Notes"). The
Convertible Notes, which bore interest at the rate of 9% per annum, were
converted into 8,000,000 shares of Preferred Stock in March 1996. The 1995
Credit Agreement also provided for the issuance by the Company to the 1995
Lenders of 1,200,000 Preferred Stock Warrants at an exercise price of $0.96 per
share.
In October 1995, in connection with a commitment by HCV III and HCV IV to
loan up to $3,000,000 to the Company under certain circumstances, the Company
agreed to issue to such holders warrants to purchase an aggregate of 50,000
shares of Common Stock for a 10-year term at an exercise price equal to the
initial public offering price of the Common Stock.
In March 1996, the Company entered into two credit agreements with certain
stockholders (collectively the "1996 Credit Agreement"), including HCV II, HCV
III, HCV IV, Everest Trust, James D. Russo and Max Link (the "1996 Lenders")
pursuant to which the 1996 Lenders have agreed to loan the Company up to
$7,300,000 through the consummation of this offering at an interest rate of
8 1/2%. The terms of the two credit agreements are identical except that the
first agreement, which provides for borrowing of up to $4,300,000, must be fully
drawn before any borrowings may be made under the second agreement. The loans
are due May 31, 1997, and are convertible in the event of a merger or
acquisition of the Company into Preferred Stock at $1.25 per share, or in the
event of an initial public offering, at one-half of the initial public offering
price per share. In connection with the 1996 Credit Agreement, the Company
issued 730,000 warrants to purchase shares of Preferred Stock to the 1996
Lenders at an exercise price of $0.75 per share and is committed to issue up to
365,000 additional warrants based upon actual funding of loans at the rate of
one
53
<PAGE>
warrant for each $20.00 of actual borrowing. On each of March 8, 1996, April 25,
1996 and June 11, 1996, the Company borrowed $1,000,000, for an aggregate of
$3,000,000, under the 1996 Credit Agreement and issued an aggregate of 150,000
warrants to purchase Preferred Stock to the 1996 Lenders under the 1996 Credit
Agreement. All of the foregoing warrants expire in March 2006.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the capital stock of the Company as of July 1, 1996 by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
capital stock of the Company (ii) all Directors, (iii) each of the named
executive officers and (iv) all Directors and executive officers as a group,
prior to this offering and as adjusted to give effect to the sale of the
2,200,000 shares offered hereby.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
NUMBER OF SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED (2) OFFERING OFFERING
- ------------------------------------------------------------------------- ------------------ ----------- -----------
<S> <C> <C> <C>
HealthCare Ventures II, L.P.............................................. 1,431,528(3) 21.6% 16.2%
HealthCare Ventures III, L.P............................................. 2,539,454(3) 37.9% 28.5%
HealthCare Ventures IV, L.P.............................................. 745,754(3) 11.4% 8.5%
State Treasurer of The State of Michigan................................. 962,893(4) 14.7% 11.0%
Rho Management Trust II.................................................. 646,643(5) 9.8% 7.4%
Aetna Life Insurance Company............................................. 330,002(6) 5.1% 3.8%
James H. Cavanaugh, Ph.D................................................. 4,716,736(3)(7) 70.9% 53.3%
Joshua Ruch.............................................................. 646,643(8) 9.8% 7.4%
James D. Isbister........................................................ 167,389(9) 2.5% 1.9%
Krystyna Belendiuk, Ph.D................................................. 143,612(10) 2.2% 1.6%
Edward M. Rudnic, Ph.D................................................... 25,307(11) * *
James D. Russo........................................................... 67,057(12) 1.0% *
Max Link, Ph.D........................................................... 21,418(13) * *
Lawrence C. Hoff......................................................... 0 * *
All Directors and Officers as a group (9 persons)........................ 5,192,047(14) 72.1% 55.2%
</TABLE>
- --------------
* Less than 1%.
(1)Except as otherwise indicated, the address of each beneficial owner is c/o
the Company, 1550 East Gude Drive, Rockville, MD 20850.
(2)Except as otherwise indicated, each of the parties listed above has sole
voting and investment power over the shares owned.
(3)The address for HCV II, HCV III, HCV IV and Dr. Cavanaugh is Twin Towers at
Metro Park, 379 Thornall Street, Edison, New Jersey 08837. The shares
beneficially owned by HCV II include 153,189 shares subject to immediately
exercisable warrants. The shares beneficially owned by HCV III include
230,974 shares subject to immediately exercisable warrants. The shares
beneficially owned by HCV IV include 67,856 shares subject to immediately
exercisable warrants.
(4)As Custodian of the Michigan Public School Employees' Retirement System,
State Employees' Retirement System, Michigan State Police Retirement System
and Michigan Judges Retirement System. The address for The State Treasurer
of the State of Michigan is c/o Treasury Department, Venture Capital
Division, 430 West Allegan, Lansing, Michigan 48922. Includes 62,568 shares
subject to immediately exercisable warrants.
(5)Managed by Rho Management Company, Inc. with offices at 767 Fifth Avenue,
New York, New York 10153. The shares beneficially owned by the Trust include
104,258 shares subject to immediately exercisable warrants. Does not include
shares owned by HCV IV. Rho Management Trust II (formerly known as Everest
Trust) is a principal limited partner of HCV IV and Rho Management Company,
Inc. may be deemed to be the beneficial owner of shares owned by Everest
Trust.
(6)The address for Aetna Life Insurance Company is IG7F, 151 Farmington Avenue,
Hartford, Connecticut 06103. Includes 12,342 shares subject to immediately
exercisable warrants.
(7)Dr. Cavanaugh, a director of the Company, is one of the General Partners of
HCP II, HCP III and HCP IV, the General Partners of HCV II, HCV III and HCV
IV, respectively, and, accordingly, may be deemed to be the beneficial owner
of shares owned by HCV II, HCV III and HCV IV.
55
<PAGE>
(8)Mr. Ruch is the President, Chief Executive Officer and controlling
shareholder of Rho Management Company, Inc., the investment adviser to Rho
Management Trust II, and accordingly may be deemed to be the beneficial
owner of shares owned by Rho Management Trust II.
(9)Includes 2,507 shares subject to immediately exercisable warrants, and
90,197 shares issuable upon exercise of options to purchase Common Stock
within the next 60 days; also includes beneficial ownership of 3,148 shares
of Common Stock owned by K.D. Hammond, 3,148 shares of Common Stock owned by
J.M. Hammond and 3,148 shares of Common Stock owned by A.C. Kalavritinos,
his grandchildren and 2,223 owned by W.J. Kalavritinos, his daughter.
(10)Includes 42,196 shares issuable upon exercise of options to purchase Common
Stock within 60 days. Includes beneficial ownership of 16,712 shares of
Common Stock, 2,507 shares subject to immediately exercisable warrants and
38,863 shares of Common Stock issuable upon exercise of options exercisable
within 60 days in the Estate of George W. Belendiuk; also includes
beneficial ownership of 12,592 shares of Common Stock owned by A.P.
Belendiuk and 12,592 shares of Common Stock owned by K.A. Belendiuk, her
children.
(11)Includes 20,307 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(12)Includes 13,334 shares subject to immediately exercisable warrants, and
9,278 shares issuable upon exercise of options to purchase Common Stock
exercisable within 60 days.
(13)Includes 2,997 shares subject to immediately exercisable warrants, and 744
shares issuable upon exercise of options to purchase Common Stock
exercisable within 60 days.
(14)Includes 473,364 shares subject to immediately exercisable warrants and
252,112 shares subject to options exercisable within 60 days.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, par value $0.01 per
share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share.
COMMON STOCK
Upon consummation of this offering, there will be 8,672,332 shares of Common
Stock outstanding. Holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders.
Subject to preferences that may be applicable to any then outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding Preferred Stock. Holders of Common Stock have no preemptive
rights and no right to convert their Common Stock into any other securities.
PREFERRED STOCK
All outstanding shares of Preferred Stock will automatically convert into
shares of Common Stock upon consummation of this offering on the basis of one
share of Common Stock for each four and one-half shares of Preferred Stock. Such
shares will be retired and will not be available for reissuance. See Notes 5 and
11 of Notes to Financial Statements for a description of the currently
outstanding Preferred Stock and "Capitalization." Accordingly, following the
completion of this offering, no shares of Preferred Stock will be outstanding
and all Preferred Stock Warrants will be converted into warrants to purchase
Common Stock.
The Company's amended Certificate of Incorporation authorizes the issuance
of an additional 5,000,000 shares of preferred stock. The Board of Directors,
within the limitations and restrictions contained in the Certificate of
Incorporation and without further action by the Company's stockholders, will
have the authority to issue up to 5,000,000 additional shares of preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares
constituting any series or the designation of such series. The issuance of
preferred stock could adversely affect the voting power of holders of Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plan to issue any shares of
preferred stock.
56
<PAGE>
WARRANTS
Upon consummation of this offering, the Company will have outstanding
warrants to purchase an aggregate of 110,260 shares of Common Stock at $0.06 per
share, which warrants are exercisable through June 30, 2003 and March 15, 2003,
warrants to purchase up to an aggregate of 33,337 shares of Common Stock which
are exercisable through May 3, 2004 at $10.80 per share, warrants to purchase up
to 9,260 shares of Common Stock through April 6, 2003 at $4.50 per share,
warrants to purchase 266,670 shares of Common Stock which are exercisable
through May 22, 2005 at $4.32 per share, warrants to purchase 195,556 shares of
Common Stock which are exercisable through March 8, 2006 at $3.375 per share and
warrants to purchase 50,000 shares of Common Stock at an exercise price equal to
the initial public offering price per share which are exercisable through March
8, 2006. See "Certain Transactions."
REGISTRATION RIGHTS
Upon the closing of the offering, the holders of shares of 6,260,569 Common
Stock and warrants to purchase 665,084 shares of Common Stock will be entitled
to demand and "piggyback" registration rights with respect to such shares. Under
the Stockholders Agreement between the Company and these holders, the holders
may request that the Company file a registration statement under the Securities
Act, and, subject to certain conditions, the Company generally will be required
to use its best efforts to effect any such registration. The Company is not
generally required to effect more than two such registrations, although under
certain circumstances the holders will have the right to request additional
registrations. In addition, if the Company proposes to register any of its
securities, either for its own account or for the account of other stockholders,
the Company is required, with certain exceptions, to notify the holders
described above and, subject to certain limitations, to include in such
registration all of the shares of Common Stock requested to be included by such
holders. Each of the holders described above has waived its right to include
shares held thereby in the offering made hereby. The Company is generally
obligated to bear the expenses, other than underwriting discounts and sales
commissions, of all of these registrations.
Any exercise of such registration rights may hinder efforts by the Company
to arrange future financings of the Company and may have an adverse effect on
the market price of the Company's Common Stock.
TRANSFER AGENT
American Stock Transfer & Trust Company serves as Transfer Agent for the
shares of Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law (the "DGCL") prohibits
certain transactions between a Delaware corporation and an "interested
shareholder," which is defined as a person who, together with any affiliates
and/or associates of such person, beneficially owns, directly or indirectly, 15
percent or more of the outstanding voting shares of a Delaware corporation. This
provision prohibits certain business combinations (defined broadly to include
mergers, consolidations, sales or other dispositions of assets having an
aggregate value of 10 percent or more of the consolidated assets of the
corporation, and certain transactions that would increase the interested
shareholder's proportionate share ownership in the corporation) between an
interested shareholder and a corporation for a period of three years after the
date the interested shareholder acquired its stock, unless: (i) the business
combination is approved by the corporation's board of directors prior to the
date the interested shareholder acquired shares; (ii) the interested shareholder
acquired at least 85 percent of the voting stock of the corporation in the
transaction in which it became an interested shareholder or (iii) the business
combination is approved by a majority of the board of directors and by the
affirmative vote of two-thirds of the outstanding voting stock owned by
disinterested shareholders at an annual or special meeting. A Delaware
corporation, pursuant to a provision in its certificate of incorporation or
by-laws, may elect not to be governed by Section 203 of the DGCL. The Company
will not make such an election and, as a result, the Company will be subject to
the provisions of Section 203 of the DGCL upon consummation of the offering.
At this time, the Company will not seek to "elect out" of the statute and,
therefore, upon consummation of this offering and the registration of its shares
of Common Stock under the Securities Exchange Act of 1934, the restrictions
imposed by Section 203 of the DGCL will apply to the Company.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering the Company will have 8,672,332 shares of
Common Stock outstanding, assuming that the Underwriters' over-allotment option
and other outstanding options and warrants are not exercised. Of these shares,
the 2,200,000 shares offered hereby will be freely transferable without
restriction or further registration under the Securities Act, except that any
shares owned by affiliates of the Company will be subject to the limitations of
Rule 144 under the Securities Act. All remaining shares will be "restricted
securities" and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or other exemption from
registration. Of the shares of Common Stock outstanding, 3,507,582 of such
shares will be eligible for sale in the public market in reliance upon Rule 144
commencing 90 days after the date of this Prospectus. The Company's directors
and executive officers and certain stockholders, beneficially owning an
aggregate of 7,569,968 shares of Common Stock (including 3,752,114 shares
eligible for sale commencing 90 days after the date of this Prospectus), have
agreed with the Underwriters not to sell or otherwise dispose of any shares of
Common Stock or other capital stock of the Company, with certain limited
exceptions, without the prior written consent of Lehman Brothers Inc. on behalf
of the Representatives for a period of 180 days after the date of this
Prospectus. See "Underwriting."
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, is entitled to
sell within any three-month period a number of restricted shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 86,700 shares immediately after this offering, assuming no
exercise of the Underwriters' over-allotment option), or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale; provided that at least two years have elapsed since the later of the date
such securities were acquired from the Company or from an affiliate of the
Company. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not an affiliate and has beneficially
owned such shares for at least three years is entitled to sell such shares
without regard to the volume or other resale requirements; provided that at
least three years have elapsed since the later of the date the shares were
acquired from the Company or from an affiliate of the Company.
Rule 701 under the Securities Act provides an exemption from the
registration requirements of the Act for offers and sales of securities issued
pursuant to certain compensatory benefit plans, such as the Company's Stock
Option Plan, of a company not subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act. Securities issued pursuant to Rule 701 are
defined as restricted securities for purposes of Rule 144. However, 90 days
after the issuer becomes subject to the reporting provisions of the Exchange
Act, the Rule 144 resale restrictions, except for the broker's transaction
requirement, are inapplicable for non-affiliates. Affiliates are subject to all
Rule 144 restrictions after this 90-day period, except for the holding period.
If all the requirements of Rule 701 are met, an aggregate of 1,274,849 shares
issuable or issued on exercise of stock options which are outstanding may be
sold pursuant to such rule, although approximately 1,059,019 of these shares are
subject to the lock-up agreements described above.
The holders of 7,015,616 shares of Common Stock, including warrants to
purchase Common Stock and Preferred Stock have certain demand and "piggyback"
registration rights. These holders have waived their registration rights with
respect to this offering and have agreed not to exercise such rights during the
period commencing 180 days from the date hereof without the consent of Lehman
Brothers Inc. See "Description of Capital Stock -- Registration Rights."
Prior to this offering, there has been no public market for the Common
Stock, and there is no assurance that an active market will develop or be
sustained after this offering. No predictions can be made of the effect, if any,
that sales of Common Stock or the availability of Common Stock for sale will
have on the market price of such securities prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the Underwriters named below,
for whom Lehman Brothers Inc. and Volpe, Welty & Company are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Lehman Brothers Inc..............................................................
Volpe, Welty & Company...........................................................
----------
Total........................................................................ 2,200,000
----------
----------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page hereof, and to certain dealers at
such initial public offering price less a selling concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other Underwriters or to
certain other brokers or dealers. After the initial offering to the public, the
offering price and other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, including the condition that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending or threatened by the Securities and
Exchange Commission (the "Commission") and that there has been no material
adverse change or any development involving a prospective material adverse
change in the condition of the Company from that set forth in the Registration
Statement otherwise than as set forth or contemplated in this Prospectus, and
that certain certificates, opinions and letters have been received from the
Company and its counsel and independent auditors. The Underwriters are obligated
to take and pay for all of the above shares of Common Stock if any such shares
are taken.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 330,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the option is exercised, each
Underwriter will be committed to purchase a number of the additional shares of
Common Stock proportionate to such Underwriter's initial commitment as indicated
in the preceding table.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
Stockholders of the Company, including the directors and executive officers,
beneficially owning an aggregate of 7,569,968 shares of Common Stock (including
shares that will be issued upon conversion of the Preferred Stock and
Convertible Notes and shares that may be issued upon the exercise of outstanding
59
<PAGE>
options and warrants) have agreed not to, directly or indirectly, offer, sell or
otherwise dispose of shares of Common Stock or other capital stock of the
Company, or any securities convertible into, or exchangeable for or any rights
to acquire, Common Stock or other capital stock of the Company, with certain
limited exceptions, for a period of 180 days after the date of this offering
without the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives. Except for the Common Stock to be sold in the offering, the
Company has agreed not to offer, sell, contract to sell or otherwise issue any
shares of Common Stock (other than the shares being offered hereby and shares to
be issued upon conversion of the Preferred Stock and Convertible Notes) or other
capital stock or any securities convertible into or exchangeable for, or any
rights to acquire, Common Stock or other capital stock, with certain limited
exceptions, prior to the expiration of 180 days from the date of this Prospectus
without the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives.
Athena has been granted the right to purchase 220,000 shares of Common Stock
in this offering.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to the prevailing
market conditions, will be the Company's historical performance, capital
structure, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and consideration of the
above factors in relation to market values of the companies in related
businesses.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York and for the
Underwriters by Shearman & Sterling, New York, New York. The statements in this
Prospectus under the captions "Risk Factors -- Uncertain Ability to Protect
Proprietary Technology" and "Business -- Patents, Licenses and Proprietary
Rights" and other references herein to patent and licensing matters will be
passed upon by Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein,
Roseland, New Jersey, patent counsel to the Company. A member of Carella, Byrne,
Bain, Gilfillan, Cecchi, Stewart & Olstein holds a limited partnership interest
in each of HCV I, HCV II and HCV III. The statements in this Prospectus under
the captions "Risk Factors -- No Assurance of FDA Approval; Government
Regulation," "Risk Factors -- Possible Delay in Bringing to Market Reformulated
Drug Products" and "Business -- Government Regulation" and other references
herein to FDA regulatory matters will be passed upon by Olsson, Frank and Weeda,
P.C., regulatory counsel to the Company.
EXPERTS
The balance sheets as of December 31, 1994 and 1995 and the statements of
operations, stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 1995, and for the period February 16, 1990
(inception) to December 31, 1995 included in this Prospectus have been included
herein in reliance upon the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Commission in Washington, D.C. with respect to the
shares of Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Reports and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at the following
addresses: New York Regional Office, Seven World Trade Center, New York, New
York
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<PAGE>
10048; and Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements audited by its independent certified
public accountants and with quarterly reports for the first three quarters of
each fiscal year containing unaudited interim financial information.
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<PAGE>
GLOSSARY
AGONIST: A chemical substance or drug that is capable of combining with a
receptor on a cell and initiating a reaction or activity similar to that of
another chemical substance or drug.
ANDA: Abbreviated New Drug Application. An application submitted by generic
firms to gain marketing approval for a version of a marketed drug based on
bioequivalence studies.
ANTAGONIST: A chemical substance or drug that acts within the body to reduce
the physiological activity of another chemical substance.
ANTICONVULSANT: An agent preventing or arresting convulsions or seizures,
including seizures resulting from epilepsy.
APNEA: Transient cessation of respiration, whether normal or abnormal, as
caused by certain drugs.
BENZODIAZEPINE: Any of a group of aromatic lipophilic amines, such as diazepam
and chlordiazepoxide, used as tranquilizers.
BIOAVAILABILITY: An absolute term that indicates measurement of both the rate
and total amount (extent) of drug that reaches the general circulation from an
administered dosage form.
BIOEQUIVALENCE: A relative term that compares the bioavailability of one drug
product with another or with a set of standards.
BIOLOGIC: Any virus, therapeutic serum, toxin, antitoxin, vaccine, blood, blood
component or derivative, allergenic product or analogous product or arsphenamine
or its derivatives (or any other trivalent organic arsenic compound),
applicable to the prevention, treatment, or cure of disease, or injuries in
man.
BUCCAL: Pertaining to the cheek, or to the cavity between the upper gum and
lip.
DOPAMINE: A monoamine that is a decarboxylated form of dopa and occurs,
especially as a neurotransmitter, in the brain and as an intermediate in the
biosynthesis of epinephrine.
DOPAMINERGIC: Relating to, participating in, or activated by the
neurotransmitter activity of dopamine or related substances.
DOSAGE FORM: The administered version of a drug product, such as a tablet,
capsule, syrup, etc.
EMESIS: Vomiting.
EXCIPIENTS: Inactive ingredients that facilitate the preparation of a dosage
form.
FLUX ENHANCER: A chemical that improves the transport of a drug across a
biological barrier, such as skin.
HYDROPHOBIC: A substance that does not dissolve in or mix well with water, or a
substance that repels water in the extreme.
HYDROPHILIC: A substance that dissolves readily in, or mixes easily with water.
IDDM: Insulin-dependent diabetes mellitus.
IND: Investigational New Drug Exemption. The application to the FDA requesting
the shipment in interstate commerce of an experimental new drug for human
experimentation. The IND typically contains pre-clinical and some limited
clinical data and information and the protocol or plan for the human
clinical trial. The FDA has 30 days from receipt to review and approve or
deny the IND. An IND becomes effective 30 days after receipt by the FDA
unless the FDA notifes the sponsor not to proceed with human clinical
testing.
INJECTABLE: Denoting a fluid to be introduced into one of the cavities beneath
the skin, or into a blood vessel.
G-1
<PAGE>
MAO-B: Monoamine Oxidase, Type B. An enzyme that metabolizes a number of
chemicals including dopamine.
MICROEMULSION: A formulation consisting of a surfactant (and sometimes a
cosurfactant), an oily phase and an aqueous phase.
MIVACURIUM: A basic compound that acts similarly to curare and is used
intravenously, chiefly in the form of a hydrated chloride, as a muscle relaxant
in surgery.
NDA: New Drug Application. The application submitted and reviewed by the FDA,
of the data on the safety and efficacy of a chemical entity. Approval of an NDA
allows marketing of the product.
NIDDM: Non-insulin dependent diabetes mellitus.
PARENTERAL: Referring to the introduction of substances into an organism by
means other than through the gastrointestinal tract (e.g., intravenous,
intramuscular, subcutaneous).
PEPTIDE: A small protein consisting of fifty amino acids or less.
PERMEABLE: The ability of a substance to cross a barrier, such as a drug
crossing a biological membrane.
PLA: Product License Application. The equivalent of a "New Drug Application"
("NDA") for biologics.
PLASMA FRACTIONS: Components of plasma separated on the basis of differences in
physical or chemical properties.
SBIR GRANT: Small Business Innovation Research Grant. A mechanism to obtain
research grants from the federal government for small business.
SUCCINYLCHOLINE: A compound similar to curare that is administered
intravenously as a muscle relaxant during surgery.
TITRATION: The method or process used by physicians, of gradually adjusting the
dosage of a drug administered to achieve the desired clinical result while
seeking to minimize adverse side effects.
TRANSDERMAL: Transcutaneous, passing, entering or made by, penetration through
the skin.
TRANSMUCOSAL: Penetration through the mucous membranes of the mouth or buccal
cavity.
G-2
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Report of Independent Accountants.................................................................. F-2
Balance Sheets..................................................................................... F-3
Statements of Operations........................................................................... F-4
Statements of Stockholders' Deficit................................................................ F-5
Statements of Cash Flows........................................................................... F-6
Notes to Financial Statements...................................................................... F-7 to F-16
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Pharmavene, Inc.
We have audited the accompanying balance sheets of Pharmavene, Inc. (A
Development Stage Enterprise) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1995, and for the period February
16, 1990 (date of inception) to December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, and for the period
February 16, 1990 (date of inception) to December 31, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Rockville, Maryland
January 24, 1996
(except as to the information presented in Note 11,
for which the date is March 14, 1996)
F-2
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31, PRO FORMA
1996 MARCH 31,
------------- 1996
(UNAUDITED) -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,045,248 $ 408,166 $ 586,368 $ 2,589,794
Grant and other receivables............................... 19,557 721 734 734
Prepaid expenses.......................................... 54,594 171,266 863,256 152,656
------------- ------------- ------------- -------------
Total current assets.................................... 1,119,399 580,153 1,450,358 2,743,184
Property and equipment, net................................. 564,748 1,563,215 1,582,112 1,582,112
Other assets................................................ 53,004 469,158 769,964 576,164
------------- ------------- ------------- -------------
Total assets.......................................... $ 1,737,151 $ 2,612,526 $ 3,802,434 $ 4,901,460
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,114,474 $ 964,089 $ 1,215,832 $ 1,215,832
Accrued compensation...................................... 265,230 210,520 76,500 76,500
Obligation under capital leases........................... 209,710 360,277 383,441 383,441
Convertible notes payable to investors.................... 2,000,000 -- -- --
------------- ------------- ------------- -------------
Total current liabilities............................... 3,589,414 1,534,886 1,675,773 1,675,773
------------- ------------- ------------- -------------
Convertible notes payable to investors...................... -- 7,000,000 938,400 --
Obligation under capital leases, less current portion....... 166,579 748,443 783,960 783,960
------------- ------------- ------------- -------------
Total long-term liabilities............................. 166,579 7,748,443 1,722,360 783,960
------------- ------------- ------------- -------------
Commitments and contingencies
Mandatorily Redeemable Series A Convertible Preferred Stock,
$.01 par value; designated 14,739,004, 17,489,001 and
27,385,664 (Unaudited) shares at December 31, 1994 and 1995
and March 31, 1996; issued and outstanding 14,697,337,
16,297,334 and 25,363,997 (Unaudited) shares at December
31, 1994 and 1995 and March 31, 1996, (liquidation
preference of $21,000,000 and $30,600,000 (Unaudited) at
December 31, 1995 and March 31, 1996; redemption value of
original purchase price plus any declared but unpaid
dividends)................................................. 14,697,337 16,697,333 24,697,332 --
------------- ------------- ------------- -------------
Stockholders' (deficit) equity:
Preferred stock, $.01 par value; authorized 30,100,000
shares of which 14,739,004 17,489,001 and 27,385,664
(Unaudited) shares at December 31, 1994 and 1995 and
March 31, 1996, respectively, have been designated as
Series A Convertible Preferred Stock..................... -- -- -- --
Common stock, $0.01 par value; authorized 25,000,000
shares; issued and outstanding, 241,741, 288,980 and
289,514 (Unaudited) shares at December 31, 1994 and 1995
and March 31, 1996, respectively and 6,472,332 shares pro
forma at March 31, 1996 (Unaudited)...................... 2,418 2,890 2,895 64,724
Paid-in capital........................................... 811,096 837,885 5,200,280 35,071,209
Deficit accumulated during the development stage.......... (17,529,693) (24,208,911) (29,496,206) (32,694,206)
------------- ------------- ------------- -------------
Total stockholders' (deficit) equity.................... (16,716,179) (23,368,136) (24,293,031) 2,441,727
------------- ------------- ------------- -------------
Total liabilities and stockholders' (deficit)
equity............................................... $ 1,737,151 $ 2,612,526 $ 3,802,434 $ 4,901,460
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE FOR
THE PERIOD
FOR THE PERIOD FEBRUARY 16,
FEBRUARY 16, 1990 FOR THE 1990
FOR THE YEARS ENDED (DATE OF THREE MONTHS ENDED (DATE OF
DECEMBER 31, INCEPTION) MARCH 31, INCEPTION)
---------------------------------- TO DECEMBER 31, ---------------------- TO MARCH 31,
1993 1994 1995 1995 1995 1996 1996
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues:
Licensing revenue........ $ -- $2,000,000 $ -- $ 2,000,000 $ -- $ -- $ 2,000,000
Research and development
revenue................. -- -- 111,384 111,384 95,284 18,907 130,291
Research and development
grants.................. 268,891 193,860 -- 512,751 -- -- 512,751
Interest income.......... 19,596 45,983 34,410 190,611 4,502 9,638 200,249
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Total revenues......... 288,487 2,239,843 145,794 2,814,746 99,786 28,545 2,843,291
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Expenses:
Research and
development............. 3,932,133 4,935,641 4,986,538 19,131,095 1,230,045 1,266,187 20,397,282
General and
administrative.......... 1,413,258 1,317,280 1,392,409 6,298,930 368,829 477,908 6,776,838
Interest expense......... 425,867 131,904 446,065 1,593,632 58,047 3,571,745 5,165,377
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Total expenses......... 5,771,258 6,384,825 6,825,012 27,023,657 1,656,921 5,315,840 32,339,497
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Net loss................... $(5,482,771) $(4,144,982) $(6,679,218) $ (24,208,911) $(1,557,135) $(5,287,295) $(29,496,206)
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Net loss per common and
common share equivalent... $ (1.59) $ (1.20) $ (1.91) $ (7.19) $ (0.45) $ (1.51) $ (8.76)
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Weighted average common
shares and common share
equivalents outstanding... 3,455,473 3,457,896 3,495,333 3,365,949 3,466,028 3,507,700 3,365,962
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE
---------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
--------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net loss for the period February 16, 1990 (date of
inception) to December 31, 1990..................... -- $ -- $ -- $ (657,757) $ (657,757)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1990........................... -- -- -- (657,757) (657,757)
Initial sale of common stock, $0.06 per share........ 48,990 490 2,449 -- 2,939
Common stock options exercised....................... 11,595 116 580 -- 696
Sale of Series A Preferred warrants.................. -- -- 3,000 -- 3,000
Net loss............................................. -- -- -- (2,141,789) (2,141,789)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1991........................... 60,585 606 6,029 (2,799,546) (2,792,911)
Common stock options exercised, $0.06-$2.88 per
share............................................... 8,799 88 440 -- 528
Interest ascribed to common stock warrants in
connection with debt financing...................... -- -- 500,569 -- 500,569
Exercise of common stock warrants issued in
connection with debt financing, $0.06 per share..... 166,670 1,667 8,333 -- 10,000
Net loss............................................. -- -- -- (5,102,394) (5,102,394)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1992........................... 236,054 2,361 515,371 (7,901,940) (7,384,208)
Common stock options exercised, $0.06-$5.70 per
share............................................... 1,778 18 479 -- 497
Interest ascribed to common stock warrants in
connection with debt financing...................... -- -- 292,268 -- 292,268
Net loss............................................. -- -- -- (5,482,771) (5,482,771)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1993........................... 237,832 2,379 808,118 (13,384,711) (12,574,214)
Common stock options exercised, $0.06-$5.70 per
share............................................... 1,371 14 2,851 -- 2,865
Exercise of common stock warrants issued in
connection with debt financing, $0.06 per share..... 2,538 25 127 -- 152
Net loss............................................. -- -- -- (4,144,982) (4,144,982)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1994........................... 241,741 2,418 811,096 (17,529,693) (16,716,179)
Common stock options exercised, $0.06-$4.50 per
share............................................... 47,239 472 26,789 -- 27,261
Net loss............................................. -- -- -- (6,679,218) (6,679,218)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1995........................... 288,980 2,890 837,885 (24,208,911) (23,368,136)
Common stock options exercised, $4.50 per share
(Unaudited)......................................... 534 5 2,395 -- 2,400
Interest ascribed to common stock in connection with
debt conversion (Unaudited)......................... -- -- 3,325,000 -- 3,325,000
Interest ascribed to common stock warrants issued in
connection with debt financing, $0.75 per share
(Unaudited)......................................... -- -- 969,000 -- 969,000
Interest ascribed to common stock warrants issued in
connection with draw of $1 million of debt
financing, $0.75 per share (Unaudited).............. -- -- 66,000 -- 66,000
Net loss (Unaudited)................................. -- -- -- (5,287,295) (5,287,295)
--------- ----------- ---------- ------------ -----------
Balance, March 31, 1996 (Unaudited).................. 289,514 2,895 5,200,280 (29,496,206) (24,293,031)
Pro forma conversion of Mandatorily Redeemable Series
A Convertible Preferred Stock (Note 12)
(Unaudited)......................................... 5,636,452 56,365 24,640,968 -- 24,697,333
Pro forma conversion of convertible notes payable
drawn under the March 1996 credit agreement (Note
12) (Unaudited)..................................... 545,455 5,455 2,994,545 -- 3,000,000
Pro forma interest ascribed to common stock in
connection with debt conversion (Unaudited)......... -- -- 2,100,000 (2,100,000) --
Pro forma interest ascribed to common stock warrants
issued in connection with draw of $2 million of debt
financing, $0.75 per share (Unaudited).............. -- -- 132,000 (132,000) --
Pro forma common stock options exercised, $0.60-$4.50
per share (Note 12) (Unaudited)..................... 911 9 3,416 -- 3,425
Pro forma net loss, balance of interest ascribed to
common stock $904,400 and $61,600 amortized over the
term of the agreement (Unaudited)................... -- -- -- (966,000) (966,000)
--------- ----------- ---------- ------------ -----------
Pro forma Balance, March 31, 1996 (Note 12)
(Unaudited)......................................... 6,472,332 $ 64,724 $35,071,209 ($32,694,206) $ 2,441,727
--------- ----------- ---------- ------------ -----------
--------- ----------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE FOR THE
PERIOD PERIOD
FEBRUARY 16, FEBRUARY 16,
1990 (DATE 1990 (DATE
FOR THE OF FOR THE THREE MONTHS OF
YEARS ENDED DECEMBER 31, INCEPTION) ENDED MARCH 31, INCEPTION)
---------------------------------- TO DECEMBER ---------------------- TO MARCH 31,
1993 1994 1995 31, 1995 1995 1996 1996
---------- ---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net loss......................... $(5,482,771) $(4,144,982) $(6,679,218) ($24,208,911) $(1,557,135) $(5,287,295) ($29,496,206)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization.................. 211,329 282,220 416,190 1,075,635 78,841 135,980 1,211,615
Interest expense ascribed to
common stock warrants......... 292,268 -- -- 792,837 -- 3,394,000 4,186,837
Gain on sale of assets......... -- -- (85,081) (85,081) -- -- (85,081)
Increase (decrease) in cash due
to changes in assets and
liabilities:
Grant and other
receivables................. (111,582) 92,384 18,836 (721) 10,226 (13) (734)
Prepaid expenses............. 5,009 (5,316) (116,672) (171,266) (36,323) (691,990) (863,256)
Other assets................. (4,331) 649 (416,154) (469,158) (5,644) (300,806) (769,964)
Accounts payable and accrued
expenses.................... 173,868 493,289 (378,885) 735,589 (319,393) 226,243 961,832
Accrued compensation......... 93,952 55,230 (54,710) 210,520 (140,592) (134,020) 76,500
---------- ---------- ---------- ------------ ---------- ---------- ------------
Net cash used in operating
activities.................. (4,822,258) (3,226,526) (7,295,694) (22,120,556) (1,970,020) (2,657,901) (24,778,457)
---------- ---------- ---------- ------------ ---------- ---------- ------------
Cash flows from investing
activities:
Capital expenditures............. (61,762) (44,335) (417,421) (863,163) (21,574) (2,364) (865,527)
Proceeds from sale of
equipment....................... -- -- 139,845 140,807 -- -- 140,807
---------- ---------- ---------- ------------ ---------- ---------- ------------
Net cash used in investing
activities.................. (61,762) (44,335) (277,576) (722,356) (21,574) (2,364) (724,720)
---------- ---------- ---------- ------------ ---------- ---------- ------------
Cash flows from financing
activities:
Proceeds from sale of Series A
Convertible Preferred Stock..... 7,675,001 1,324,999 1,999,996 16,697,333 -- 7,999,999 24,697,332
Proceeds from sale of warrants... -- -- -- 3,000 -- -- 3,000
Proceeds from issuance of common
stock........................... 497 3,017 27,261 44,938 25,925 968,400 1,013,338
Proceeds from promissory notes... 1,315,164 2,000,000 8,900,000 15,133,165 1,215,000 1,938,400 17,071,565
Repayment of promissory notes.... (3,315,165) -- (3,900,000) (8,133,165) -- (8,000,000) (16,133,165)
Initial public offering costs
financed by accounts payable.... -- -- 228,500 228,500 -- 25,500 254,000
Principal payments under capital
lease obligations............... (134,257) (198,450) (319,569) (722,693) (56,025) (93,832) (816,525)
---------- ---------- ---------- ------------ ---------- ---------- ------------
Net cash provided by
financing activities........ 5,541,240 3,129,566 6,936,188 23,251,078 1,184,900 2,838,467 26,089,545
---------- ---------- ---------- ------------ ---------- ---------- ------------
Net increase (decrease) in cash and
cash equivalents.................. 657,220 (141,295) (637,082) 408,166 (806,694) 178,202 586,368
Cash and cash equivalents at the
beginning of the period........... 529,323 1,186,543 1,045,248 -- 1,045,249 408,166 --
---------- ---------- ---------- ------------ ---------- ---------- ------------
Cash and cash equivalents at the
end of the period................. $1,186,543 $1,045,248 $ 408,166 $ 408,166 $ 238,555 $ 586,368 $ 586,368
---------- ---------- ---------- ------------ ---------- ---------- ------------
---------- ---------- ---------- ------------ ---------- ---------- ------------
Supplemental disclosures of cash
flow information:
Cash paid during the period for
interest........................ $ 116,060 $ 131,903 $ 446,065 $ 800,796 $ 58,047 $ 177,745 $ 978,541
---------- ---------- ---------- ------------ ---------- ---------- ------------
---------- ---------- ---------- ------------ ---------- ---------- ------------
Noncash financing activities:
Capital lease obligations
incurred to acquire
equipment..................... $ 208,603 $ 187,746 $1,051,999 $1,831,413 $ 148,450 $ 152,513 $1,983,925
---------- ---------- ---------- ------------ ---------- ---------- ------------
---------- ---------- ---------- ------------ ---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND FINANCING
ORGANIZATION
Pharmavene, Inc. (the "Company") is a Delaware corporation which was
originally incorporated on December 22, 1989 as Substance Abuse Sciences, Inc.
On February 16, 1990, the Company amended its Certificate of Incorporation to
change its name to Pharmavene, Inc. The Company develops pharmaceutical products
utilizing advanced drug delivery systems.
The Company is considered to be a development stage enterprise as it has not
derived significant revenues from its planned principal operations.
FINANCING REQUIREMENTS
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue for the
foreseeable future. As of December 31, 1995, the Company is in a net working
capital deficit position. The Company's future capital requirements will depend
on many factors, including the progress of the Company's collaborative and
independent research and development programs, payments received under
collaborative agreements with other companies, if any, the results and costs of
preclinical and clinical testing for the Company's products, the costs
associated with and the timing of regulatory approvals, technological advances,
the status of competitive products and the commercial success of the Company's
products. The Company plans to continue to finance operations with a combination
of stock sales, borrowings, payments from future strategic partnerships and, in
the longer term, revenues from product sales and licensing and royalty
arrangements (see Notes 11 and 12). There can be no assurance that additional
funds will be available on a timely basis, on favorable terms or at all or that
such funds, if raised, would be sufficient to permit the Company to continue to
conduct its operations or that the Company's planned products will be
commercially successful.
SPLIT OF COMMON STOCK
In March 1996, the Board of Directors authorized: (i) a one-for-six reverse
split of the outstanding shares of the Company's common stock, and (ii) a change
in the number of authorized shares of common and preferred stock to 25,000,000
and 30,100,000, respectively. All references to common stock, options, warrants,
per share data and the conversion rates of Series A Convertible Preferred Stock
and Convertible Notes have been restated to give effect to the reverse split.
REGISTRATION STATEMENT
In October 1995, the Board of Directors authorized the filing of a
registration statement (the "Registration Statement") with the Securities and
Exchange Commission for the initial public offering (the "Offering") of shares
of the Company's common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company is complying with Statement of Financial Accounting Standards
No. 7, which prescribes reporting requirements for development stage
enterprises.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Equipment is recorded at cost. Depreciation of laboratory and computer
equipment is computed on the straight-line method based upon estimated useful
lives ranging from three to seven years. Equipment held under capital leases is
amortized using the straight-line method over the terms of the leases or their
estimated useful lives, whichever is shorter. Amortization of leasehold
improvements is computed on the straight-line method based on the shorter of the
estimated useful life of the improvement or the remaining term of the lease.
HISTORICAL NET LOSS PER SHARE
Historical net loss per common share is based on the weighted average number
of common shares outstanding during the periods presented. Pursuant to
Securities and Exchange Commission Staff Acounting Bulletin No. 83, all common
shares, Convertible Preferred Stock and Convertible Notes Payable issued and
stock options and warrants granted by the Company during the 12 months prior to
the date of the Registration Statement have been included in the calculation of
weighted average common shares and common share equivalents outstanding as if
they were outstanding for all periods presented. Convertible Preferred Stock and
Convertible Notes Payable issued and stock options and warrants granted by the
Company prior to the aforementioned 12-month period have not been included in
the calculation because such items were antidilutive.
REVENUE RECOGNITION
The Company has entered into a license agreement with Rhone-Poulenc Rorer,
Inc., as described in Note 3 below. Revenue from the license agreement is
recognized in accordance with the terms of the agreement. Non-refundable,
non-creditable fees or milestone payments are recognized when they are earned in
accordance with the performance requirements and contractual terms. Research and
development grant revenues are recognized over the period of performance under
the terms of the related agreements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents. The Company's policy regarding investments, pending their use, is
to ensure safety, liquidity and capital preservation while obtaining a
reasonable rate of return.
CONCENTRATION OF CREDIT RISK
The Company has invested its excess cash in a money market account and
certificates of deposit with two commercial banks. The Company has not
experienced any losses on its investments.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
PATENT COSTS
As a result of research and development efforts conducted by the Company, it
has received and applied for, and is in the process of applying for, a number of
patents to protect proprietary inventions. Costs incurred in connection with
patent applications have been expensed as incurred and are reflected as general
and administrative expenses.
F-8
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
The Company must adopt Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, commencing in fiscal year 1996. Management believes adoption of
this standard will not have a material impact on the Company's financial
statements.
The Company does not intend to adopt the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
as they pertain to financial statement recognition of compensation expense
attributable to option grants.
3. LICENSE AGREEMENT
In August 1994, the Company entered into a license agreement with
Rhone-Poulenc Rorer, Inc. ("RPR") under which the Company granted to RPR the
exclusive worldwide right to develop, manufacture and market products containing
the Company's proprietary Butyrylcholinesterase (BChE) technology, resulting
from know-how and patent rights owned by the Company.
Under the agreement, RPR paid the Company a non-refundable, non-creditable
license fee of $2,000,000 in August 1994, and is obligated to make milestone
payments and royalty payments on product sales over the longer of the life of an
issued patent or 15 years. Additionally, during the period of technology
transfer, RPR will reimburse the Company for certain costs incurred by the
Company in the furtherance of the development of the BChE technology and
preparation of filings with U.S. and foreign government regulatory agencies.
During 1995 the Company was reimbursed $111,384 by RPR under the agreement,
which amount is recorded as research and development revenue.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Laboratory and office equipment............................................. $ 875,402 $ 1,770,836
Leasehold improvements...................................................... 160,442 369,565
Computer equipment.......................................................... 188,350 328,702
------------ ------------
Total cost.............................................................. 1,224,194 2,469,103
Less accumulated depreciation and amortization.............................. (659,446) (905,888)
------------ ------------
$ 564,748 $ 1,563,215
------------ ------------
------------ ------------
</TABLE>
5. CAPITAL STRUCTURE
MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
Under the Convertible Preferred Stock and Warrant Purchase Agreement dated
as of January 31, 1991 (the "Purchase Agreement"), the Company was capitalized
in the amount of $2,000,000 through the sale of 2,000,000 shares of Series A
Convertible Preferred Stock to an investor (the "Investor"). In connection with
the Purchase Agreement, the Company also sold to the Investor warrants to
purchase up to 3,000,000 additional shares of Series A Convertible Preferred
Stock at $1.00 per share, subject to adjustment.
On September 18, 1991, the Investor transferred to two additional investors
(collectively the "Investors") warrants to purchase 550,000 shares of Series A
Convertible Preferred Stock. Contemporaneously with this transfer, the Investors
exercised warrants to purchase 1,700,000 shares of Series A Convertible
Preferred Stock. Warrants to purchase the remaining 1,300,000 shares of Series A
Convertible Preferred Stock lapsed in January 1994.
F-9
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
On April 8, 1992 and May 14, 1992, the Company sold 1,300,000 shares and
697,337 shares, respectively, of Series A Convertible Preferred Stock to certain
investors for $1.00 per share.
On June 1, 1993, the Company entered into the Convertible Preferred Stock
Purchase Agreement (the "June 1, 1993 Preferred Agreement") whereby the Company
sold to the Investors and certain other investors (collectively the "Preferred
Investors") 5,025,000 shares of Series A Convertible Preferred Stock for $1.00
per share. Of the proceeds, $3,351,616 was used to repay principal and accrued
interest thereon in connection with the credit agreements discussed in Note 7.
On September 10, 1993, November 24, 1993 and February 24, 1994, the Company sold
1,325,001, 1,325,000 and 1,324,999 shares, respectively, of the Series A
Convertible Preferred Stock for $1.00 per share to the Preferred Investors
pursuant to the terms of the Preferred Agreement.
Shares of the Series A Convertible Preferred Stock are convertible at the
option of the holder at any time into shares of common stock of the Company at a
conversion rate, subject to certain antidilutive adjustments, of four and
one-half shares of Series A Convertible Preferred Stock for one share of common
stock at December 31, 1995. The Series A Convertible Preferred Stock is
redeemable at the option of the holder at a redemption value of the original
purchase price plus any declared but unpaid dividends. No dividends have been
declared. In addition, the Series A Convertible Preferred Stock has a
liquidation preference equal to its original purchase price plus 10% per annum
for each share from its original issue date, plus any declared but unpaid
dividends.
Holders of Series A Convertible Preferred Stock (the "Preferred
Stockholders") vote together with the common stockholders on most matters. The
approval of a super majority of the Preferred Stockholders is required for
certain significant transactions. The Preferred Stockholders fully participate
in any dividends declared and have the exclusive right to elect all but one
member of the Company's Board of Directors. In addition, the Preferred
Stockholders have the right of first refusal in the event of sale of any equity
securities of the Company, except for certain excluded security transactions.
If the Company offers any of its securities to the public, the Preferred
Stockholders have the option to have their common stock received upon conversion
of their Series A Convertible Preferred Stock included in the offering. In
addition, the Preferred Stockholders have the right to demand that the Company
register the common stock received upon conversion of the Series A Convertible
Preferred Stock.
WARRANTS
In connection with a certain credit agreement executed in 1992 (see Note 7),
the Company issued to the lenders warrants to purchase a total of 277,778 shares
of common stock, exercisable at $.06 per share. Warrants to purchase a total of
168,320 shares have been exercised, and the remaining 109,458 warrants at
December 31, 1995 are exercisable through March 15, 2003.
In connection with a certain 1993 credit agreement (see Note 7), and as
amended and restated by the Preferred Agreement, the Company issued warrants to
one of the lenders to purchase 41,667 shares of Series A Convertible Preferred
Stock at $1.00 per share, all of which are outstanding and exercisable. Certain
of the lenders also received warrants to purchase 1,685 shares of the Company's
common stock at $.06 per share. Warrants to purchase 880 shares of common stock
were exercised and the remaining 805 warrants are outstanding. All outstanding
warrants issued in connection with the 1993 credit agreements are exercisable
through June 30, 2003.
At the dates the 1992 and 1993 warrants were issued, the Company's Board of
Directors had valued the Company's common stock at $2.88 and $5.70 per share,
respectively. Because the common stock warrants
F-10
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
were issued at an exercise price below their estimated fair market value, the
Company recognized non-cash charges of $500,569 and $292,268 as interest expense
and a corresponding increase to additional paid-in capital during 1992 and 1993,
respectively.
In connection with the May 3, 1994 credit agreement (see Note 7), the
Company issued to the lenders warrants to purchase 33,334 shares of the
Company's common stock, exercisable at $10.80 per share. The warrants contain
certain antidilutive provisions that adjust their exercise price should the
Company subsequently issue common shares or equivalents at a price per share
below $10.80. Warrants covered by this agreement expire May 3, 2004.
In connection with the May 22, 1995 Credit Agreement (see Note 7), the
Company issued to the lenders warrants to purchase 1,150,000 shares of the
Company's Series A Convertible Preferred Stock, exercisable at $0.96 per share.
Warrants covered by this agreement expire in May 2005.
In connection with the October 1995 financial commitment (see Note 7), the
Company agreed to issue warrants to purchase 50,000 shares of its common stock
exercisable at the initial public offering price per share. In the event an
initial public offering is not completed by April 30, 1996, the warrant price is
to be set at the fair value as determined by the Board of Directors. These
warrants are exercisable immediately and expire in October 2005.
The Company has reserved a sufficient number of shares of its common stock
to effect conversion of its convertible securities and the exercise of its
options and warrants outstanding and available for issuance.
6. COMMON STOCK OPTIONS
In 1991, the Board of Directors adopted the 1991 Stock Option Plan (the
"Plan"), which, as amended, provides for the granting of options to purchase up
to 1,400,000 shares of the Company's common stock to employees and consultants.
Common stock option activity under this plan is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Balance, December 31, 1992..................................... 108,451 $ .06 - $ 2.88
Granted...................................................... 253,909 $ 5.70
Exercised.................................................... (1,778) $ .06 - $ .60
Canceled..................................................... (4,000) $ .06 - $ 5.70
----------
Balance, December 31, 1993..................................... 356,582 $ .06 - $ 5.70
Granted...................................................... 53,333 $ 4.50 - $10.80
Exercised.................................................... (1,371) $ .30 - $ 5.70
Canceled..................................................... (38,555) $ .06 - $10.80
----------
Balance, December 31, 1994..................................... 369,989 $ .06 - $ 4.50
Granted...................................................... 256,522 $ 4.50
Exercised.................................................... (47,239) $ .06 - $ 4.50
Cancelled.................................................... (201) $ 4.50
----------
Balance, December 31, 1995..................................... 579,071 $ .06 - $ 4.50
----------
----------
</TABLE>
Common stock options normally vest over a two, four and five year period. At
December 31, 1995, 151,419 stock options were exercisable and 750,133 stock
options were available for grant. The stock option price is periodically set by
the Compensation Committee of the Board of Directors based upon an evaluation of
the fair market value of the Company's common stock. The Company has issued its
stock options at an exercise price commensurate with the fair market value of
the Company's common stock on the date of
F-11
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK OPTIONS (CONTINUED)
grant; accordingly, no compensation costs have been charged to the Statements of
Operations for these stock option grants. The Compensation Committee may, in
connection with the grant of any option under the Plan, grant to the optionee a
stock appreciation right. No such rights have been granted.
Common stock options covering 260,251 shares granted at $5.70 per share in
1993, and at $10.80 per share in 1994 were repriced at $4.50 per share by the
Board of Directors, based upon the evaluation of the market value of the
Company's common stock as of October 18, 1994.
7. CREDIT AGREEMENTS
1992 AND 1993 AGREEMENTS
The Company entered into credit agreements in 1992 and 1993 with certain of
the investors to finance short-term working capital requirements. All amounts
borrowed under the credit agreements, totaling $3,315,165, inclusive of
interest, were repaid from proceeds of the June 1, 1993 Preferred Agreement.
MAY 1994 AGREEMENT
The Company entered into a credit agreement dated May 3, 1994 with certain
of its investors which provided that the Company could borrow, under certain
conditions, up to $4,395,000 at an interest rate of 7 1/4%. The amount borrowed
under the credit agreement was due the earlier of one year from the date of the
first draw, or upon closing if the Company raises $10,000,000 or more through an
equity offering or is sold or merges. In connection with the execution of the
credit agreement, the Company agreed to issue warrants to purchase shares of
common stock at $10.80 per share, exercisable at one share of common stock for
every $60 of actual borrowings. The Company borrowed $1,000,000 on each of May
23, 1994 and August 4, 1994 under the terms of the credit agreement and in
connection therewith 33,334 common stock warrants were issued and are fully
exercisable at December 31, 1995. The warrants expire May 3, 2004. In May 1995,
investors under the May 3, 1994 Credit Agreement converted loans of $2,000,000
into Series A Preferred Stock at $1.25 per share, adjustable to $0.75 per share
in the event the Company does not complete a corporate equity financing or
licensing transaction of $15,000,000 or more or a merger or acquisition of the
Company before December 31, 1995, or an initial public offering of its
securities by February 28, 1996.
MAY 1995 AGREEMENT
The Company entered into a credit agreement dated May 22, 1995 with certain
of its investors which provides that the Company may borrow, under certain
conditions, up to $8,000,000 at an interest rate of 9%. The loan is due January
15, 1997, and is convertible in the event of a merger or acquisition of the
Company into Series A Preferred Stock at $1.25 per share, or in the event of an
initial public offering, into shares of the Company's common stock at the rate
of one-half of the price per share in an initial public offering. In connection
with the execution of the credit agreement and the funding of $7,000,000 loans
thereunder, as of December 31, 1995, the Company has issued 1,150,000 warrants
to the investors to purchase shares of Series A Preferred Stock, at an exercise
price of $0.96 per share, and is committed to issue 50,000 additional warrants
based upon actual funding of loans at the rate of one warrant for each $20.00 of
actual borrowing. The warrants expire in May 2005. See Note 11.
OCTOBER 1995 COMMITMENT
In October 1995, the Company entered into an agreement with two of its
investors to provide up to $3,000,000 on terms to be negotiated. This credit
commitment was replaced by the 1996 Credit Agreement (see Note 11).
Interest expense for the years ended December 31, 1993, 1994 and 1995, and
for the period February 16, 1990 (date of inception) to December 31, 1995, under
all borrowing arrangements was $73,523, $75,353, $353,338 and $540,766,
respectively.
F-12
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the Company's net deferred tax asset and the tax effects
of the primary temporary differences giving rise to the Company's deferred tax
asset are as follows at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Net operating loss carryforwards and credits.............. $ 5,387,000 $ 7,578,000
Capitalized start-up costs for tax purposes............... 1,847,000 2,347,000
Other..................................................... 59,000 17,000
------------- -------------
Deferred tax asset........................................ 7,293,000 9,942,000
Valuation allowance....................................... (7,293,000) (9,942,000)
------------- -------------
Net deferred tax asset.................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
As of December 31, 1995, the Company has the following net operating loss
carryforwards available for federal income tax purposes:
<TABLE>
<CAPTION>
EXPIRATION
- -------------------------------------------------------------------------------
<S> <C>
2005........................................................................... $ 313,000
2006........................................................................... 1,259,000
2007........................................................................... 3,818,000
2008........................................................................... 4,403,000
2009........................................................................... 2,834,000
2010........................................................................... 5,375,000
-------------
Total...................................................................... $ 18,002,000
-------------
-------------
</TABLE>
As a result of a greater-than-50% ownership change in 1993, utilization of
the net operating loss carryforwards will be limited due to the ownership change
limitations provided by the tax law.
9. PENSION PLAN
The Company offers a defined contribution 401(k) pension plan to all
eligible employees. The plan is administered by trustees. Employee contributions
are voluntary and are determined on an individual basis with a maximum annual
amount equal to the maximum allowable under federal tax regulations. Highly
compensated employees are subject to further limitations and all participants
are always fully vested. There have been no employer contributions under the
plan.
10. COMMITMENTS AND CONTINGENCIES
FACILITY LEASE
The Company previously leased administrative and laboratory space from
MedImmune, Inc., a related party, under a five year sublease arrangement which
was terminated by the Company in 1995. Total lease expense was $156,560,
$174,155, $131,016 and $660,179 for the years ended December 31, 1993, 1994 and
1995 and for the period February 16, 1990 (date of inception) to December 31,
1995, respectively.
In January 1995, the Company entered into a five year lease, commencing in
May 1995 for administrative and laboratory space in Rockville, Maryland. Under
the lease, the Company is required to pay base rent, which increases 3% per
year, and operating expenses.
F-13
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's future minimum lease payments under facility operating leases
at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1996............................................................................ $ 463,000
1997............................................................................ 631,000
1998............................................................................ 650,000
1999............................................................................ 670,000
2000............................................................................ 169,000
------------
Total Minimum Payments...................................................... $ 2,583,000
------------
------------
</TABLE>
CAPITAL LEASES
Included as assets in the balance sheets are the following amounts for
capitalized leases as of December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Laboratory and office equipment.................................... $ 779,414 $ 1,804,730
Less accumulated amortization...................................... (426,333) (709,008)
----------- ------------
$ 353,081 $ 1,095,722
----------- ------------
----------- ------------
</TABLE>
Future minimum lease payments required under capitalized leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1996............................................................................ $ 449,969
1997............................................................................ 400,472
1998............................................................................ 295,355
1999............................................................................ 207,841
2000............................................................................ 827
------------
Total minimum lease payments.................................................... 1,354,464
Less amounts representing interest at 10% to 18%................................ (245,744)
------------
Present value of net minimum lease payments..................................... $ 1,108,720
------------
------------
</TABLE>
11. SUBSEQUENT EVENTS
MAY 1994 AGREEMENT
On February 28, 1996, the $2,000,000 loan under the May 31, 1994 Credit
Agreement (see Note 7), which had previously been converted at $1.25 per share
into shares of Series A Convertible Preferred Stock, was adjusted to convert at
a $0.75 per share conversion price and 1,066,663 additional shares were issued.
As a result of the adjustment in the conversion price, the conversion ratio of
all Series A Convertible Preferred Stock was adjusted from one share of common
stock to four shares of preferred stock to one share of common stock to three
shares of preferred stock.
MAY 1995 AGREEMENT
On January 10, 1996, the Company borrowed $1,000,000 and issued 50,000
warrants to purchase shares of Series A Preferred Stock under the May 1995
Credit Agreement. On March 7, 1996, lenders converted all $8,000,000 covered by
the agreement into Series A Convertible Preferred Stock at a conversion price of
F-14
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS (CONTINUED)
$1.00 per share, which was $0.25 per share less than the originally negotiated
conversion price. The decrease in the conversion price was an inducement to the
lenders to exercise their conversion option and, as a result, the Company will
record a non-cash expense of $3,325,000 in the first quarter of 1996.
MARCH 1996 AGREEMENTS
The Company entered into two credit agreements, dated March 7, 1996
(collectively, the "1996 Credit Agreement") with certain of its investors which
provide that the Company may borrow when certain conditions are met up to
$7,300,000 at an interest rate of 8 1/2%. The loans are due May 31, 1997, and
are convertible in the event of a merger or acquisition of the Company into
Series A Convertible Preferred Stock at $1.25 per share, or in the event of an
initial public offering at one-half of the initial public offering price per
share. In connection with the 1996 Credit Agreement, the Company issued 730,000
warrants to the investors at an exercise price of $0.75 per share to purchase
shares of Series A Convertible Preferred Stock and is committed to issue 365,000
additional warrants based upon actual funding of loans at the rate of one
warrant for each $20.00 of actual borrowing. The warrants expire in March 2006.
On March 8, 1996, the Company borrowed $1,000,000 and issued 50,000 warrants
under the 1996 Credit Agreement.
In connection with the 1996 Credit Agreement, the Company ascribed an
estimated fair value of $969,000 to the warrants issued at the time the
agreement was executed, with a like amount recorded as debt issuance costs. In
addition, the proceeds of $1,000,000 from the initial draw under the 1996 Credit
Agreement was allocated between the debt of $934,000 and the estimated fair
value of the warrants of $66,000. The debt will be written up to its face value
of $1,000,000 using the effective interest method over the term of the debt. The
debt issuance costs will be amortized over the life of the agreement. At the
time of the closing of the Offering, the outstanding balance under the 1996
Credit Agreement will be converted into common stock and any remaining debt
discount and debt issuance costs will be expensed.
The $1,000,000 initial draw under the 1996 Credit Agreement is mandatorily
convertible into common stock upon closing of the Offering at a conversion price
of one-half of the Offering price. The Company will record a non-cash expense of
$700,000 upon closing of the offering to reflect this discount.
In connection with the 1996 Credit Agreement, employees of the Company were
issued 194,485 stock options to purchase shares of the Company's common stock at
the greater of $4.50 or 85% of the initial public offering price per share.
SPLIT OF COMMON STOCK
On March 14, 1996, the Board of Directors authorized a one-to-six reverse
split of the outstanding shares of the Company's Common Stock.
12. UNAUDITED INFORMATION
BASIS OF PRESENTATION
The unaudited interim financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. The unaudited interim financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial positions as of and at the end
of the periods presented. The unaudited interim financial information
F-15
<PAGE>
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. UNAUDITED INFORMATION (CONTINUED)
should be read in conjunction with the audited financial statements and related
notes thereto, appearing elsewhere herein. The results for the interim periods
presented are not necessarily indicative of results to be expected for the full
year.
MARCH 1996 AGREEMENTS
On April 25, 1996 and June 11, 1996 the Company borrowed a total of
$2,000,000 and issued 100,000 warrants under the 1996 Credit Agreement. The
proceeds from the two draws were allocated between the debt of $1,868,000 and
the estimated fair value of the warrants of $132,000. The debt will be written
up to its face value of $2,000,000 using the effective interest method over the
terms of the debt. The debt issuance costs will be amortized over the life of
the agreement. At the time of the closing of the Offering, the outstanding
balance under the 1996 Credit Agreement will be converted into common stock and
any remaining debt discount and debt issuance costs will be expensed.
The $3,000,000 total draws (including the $1,000,000 initial draw on March
8, 1996, see Note 11) under the 1996 Credit Agreement is mandatorily convertible
into common stock upon closing of the Offering at a conversion price of one-half
of the Offering price. The Company will record a non-cash expense of $2,100,000
upon closing of the offering to reflect this discount.
COMMON STOCK OPTIONS
In June 1996, the 1991 Stock Option Plan was amended to provide for the
granting of options to purchase up to 1,900,000 shares of the Company's common
stock. Stock options activity for the three months ended March 31, 1996 was as
follows:
<TABLE>
<CAPTION>
EXERCISE
PRICE
NUMBER OF SHARES PER SHARE
----------------- -------------
<S> <C> <C>
Balance, December 31, 1995................................................ 579,071 $ .06 - $4.50
Granted................................................................. 221,992 $ 4.50
Exercised............................................................... (534) $ 4.50
Cancelled............................................................... --
-----------------
Balance, March 31, 1996................................................... 800,529 $ .06 - $4.50
-----------------
-----------------
</TABLE>
Subsequent to March 31, 1996 the Company granted 435,651 options, options
covering 911 shares were exercised at prices ranging from $0.60 to $4.50 per
share and 32,661 options were cancelled. All options granted in 1996 were at
$4.50 or 85% of the Offering price per share if the Company completes the
Offering within six months from the date of grant.
ATHENA AGREEMENT
On July 1, 1996, the Company entered into an exclusive agreement with Athena
Neurosciences, Inc. ("Athena"), a wholly-owned subsidiary of Elan Corporation
plc ("Elan") for the worldwide marketing, sale and distribution of Carbatrol.
Carbatrol will be marketed in the United States by Athena and its affiliates or
sublicensees in the rest of the world. Under the agreement, Athena (i) will make
a $2.0 million payment within ten days of execution of the agreement, (ii) will
fund all future development costs associated with Carbatrol which are approved
by a steering committee, (iii) will make a milestone payment of up to $8.0
million, upon satisfaction of certain conditions, of which $5.0 million is
creditable against future royalty payments which may be earned on product sales,
and (iv) will make future royalty payments to the Company based on net sales of
Carbatrol. Athena has been granted the right to purchase 220,000 shares of
common stock in the Offering.
F-16
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 6
Use of Proceeds.......................... 15
Dividend Policy.......................... 15
Capitalization........................... 16
Dilution................................. 17
Selected Financial Data.................. 18
Management's Discussion and Analysis..... 20
Business................................. 24
Management............................... 43
Certain Transactions..................... 51
Principal Stockholders................... 55
Description of Capital Stock............. 56
Shares Eligible for Future Sale.......... 58
Underwriting............................. 59
Legal Matters............................ 60
Experts.................................. 60
Additional Information................... 60
Glossary................................. G-1
Index to Financial Statements............ F-1
</TABLE>
---------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,200,000 SHARES
[LOGO]
PHARMAVENE, INC.
COMMON STOCK
-------------------
PROSPECTUS
, 1996
---------------------
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC Registration Fee.............................................................. $ 10,469
NASD Filing Fee................................................................... 3,536
Nasdaq Listing Fee................................................................ 35,000
Printing and Engraving Expenses................................................... 250,000
Accounting Fees and Expenses...................................................... 180,000
Legal Fees and Expenses........................................................... 350,000
Blue Sky Fees and Expenses........................................................ 22,000
Transfer Agent's Fees and Expenses................................................ 3,500
Miscellaneous Expenses............................................................ 45,495
----------
Total......................................................................... $ 900,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-Laws of the Registrant provides that
the Company shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the "GCL"). Section 145 of the GCL, relating
to indemnification, is hereby incorporated herein by reference.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to Directors, officers or controlling persons of the Company pursuant
to the Company's By-laws and the Delaware General Corporation Law, the Company
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Company's Restated Certificate of Incorporation includes certain
provisions permitted pursuant to Delaware law whereby officers and Directors of
the Company are to be indemnified against certain liabilities. The Company's
Restated Certificate of Incorporation also limits, to the fullest extent
permitted by Delaware law, a director's liability for monetary damages for
breach of fiduciary duty, including gross negligence, except liability for (i)
breach of the director's duty of loyalty, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption and (iv) any transaction from which the director derives an improper
personal benefit. Delaware law does not eliminate a director's duty of care and
this provision has no effect on the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care. In
addition, the Company has obtained an insurance policy providing coverage for
certain liabilities of its officers and Directors.
In accordance with Section 102(a)(7) of the GCL, the Company's Certificate
of Incorporation eliminates the personal liability of directors to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director with certain limited exceptions set forth in Section 102(a)(7).
Reference is made to Section 10 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriters of the Company, its
officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued securities to a limited
number of persons, as described below. No underwriter or underwriting discounts
or commissions were involved. There was no public offering in any such
transaction and the Company believes that each transaction was exempt from the
registration requirements of the Securities Act of 1933 (the "Securities Act")
by reason of Sections 3(b) and
II-1
<PAGE>
4(2) thereof based on the private nature of the transactions and the
sophistication of the purchasers, all of whom had access to complete information
concerning the Company and acquired the securities for investment and not with a
view to the distribution thereof.
Since its inception to July 1, 1996, the Company has issued 72,241 shares of
Common Stock pursuant to exercise of employee stock options at exercise prices
per share ranging from $.06 to $5.70, and has granted options to purchase
1,357,560 shares of its Common Stock to employees, directors and consultants at
exercise prices ranging from $.06 to $10.80.
In June, September and November 1993, the Company sold an aggregate of
5,025,000, 1,325,001 and 1,325,000 shares of Series A Preferred Stock for a
purchase price of $1.00 per share to a group of investors including HCV III, HCV
IV, The State of Michigan, Aetna and Everest Trust. These shares are convertible
into an aggregate of 1,705,556 shares of Common Stock upon completion of this
offering. In February 1994, the Company sold an aggregate of 1,324,999 shares of
Series A Preferred Stock for a purchase price of $1.00 per share to a group of
investors. These shares are convertible into an aggregate of 294,445 shares of
Common Stock upon completion of this offering.
In April 1993, the Company sold to HCV II for a price of $.01 per share
Preferred Stock Warrants to purchase 41,667 shares of Series A Preferred Stock
at an exercise price of $1.00 per share and 1,686 Common Stock Warrants to
certain shareholders, of which 802 remain outstanding and 884 were exercised.
In August and December 1992, the Company sold to HCV II and others Common
Stock Warrants to purchase an aggregate of 111,111 shares of Common Stock for a
price of $.06 per share. These warrants are exercisable at a price of $.06 per
share. In December 1992, the Company sold 139,518 shares of Common Stock to HCV
II, 22,422 shares of Common Stock to Everest Trust and 4,729 shares of Common
Stock to other investors.
In May 1994, the Company issued an aggregate of $2,000,000 7 1/4%
Convertible Promissory Notes (the "1994 Notes") and warrants to purchase up to
an aggregate of 33,337 shares of Common Stock at an exercise price of $10.80 per
share to a group of stockholders including HCV III, HCV IV, The State of
Michigan, Aetna and Everest Trust (the "1994 Lenders"). In May 1995, the Company
issued 1,599,997 shares of Series A Preferred Stock to the 1994 Lenders pursuant
to an agreement to convert the 1994 Notes (the "Conversion Agreement"). In
February 1996, the Company issued 1,066,663 shares of Series A Preferred Stock
to the 1994 Lenders under the terms of the Conversion Agreement.
The Company issued an aggregate of $8,000,000 principal amount of 9%
promissory notes (the "1995 Notes") to certain stockholders and officers,
including HCV III, HCV IV, The State of Michigan, Everest Trust, James D. Russo,
James D. Isbister and George W. Belendiuk (the "1995 Lenders"). In March 1996,
the 1995 Notes were converted into an aggregate of 8,000,000 shares of Series A
Preferred Stock. The Company also issued warrants to purchase 1,200,000 shares
of Series A Preferred Stock at an exercise price of $.96 per share pursuant to
the 1995 Credit Agreement to the 1995 Lenders. In October 1995, the Company
agreed to issue ten-year warrants to purchase 50,000 shares of Common Stock at
an exercise price equal to the public offering price per share to HCV III and
HCV IV.
In March 1996, the Company entered into two credit agreements (collectively,
the "1996 Credit Agreement") with certain stockholders, including HCV III, HCV
IV and Everest Trust (the "1996 Lenders") and issued an aggregate of $3,000,000
principal amount of 8 1/2% promissory notes (the "1996 Notes") to the 1996
Lenders. In connection with the execution of the 1996 Credit Agreement, the
Company issued an aggregate of 730,000 ten-year warrants to purchase Series A
Preferred Stock to the 1996 Lenders at an exercise price of $.75 per share. In
connection with the issuance of the 1996 Notes, the Company issued an aggregate
of 150,000 ten-year warrants to purchase Series A Preferred Stock at an exercise
price of $.75 per share. The 1996 Notes are convertible into shares of Series A
Preferred Stock at a conversion price equal to one-half the initial public
offering price per share.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. The sale of securities was
II-2
<PAGE>
without the use of an underwriter, and the certificates evidencing the shares
bear a restrictive legend permitting the transfer thereof only upon registration
of the shares or an exemption under the Securities Act.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1.1. Form of Underwriting Agreement*
3.2 Fourth Restated Certificate of Incorporation*
3.2(a) Amendment to Fourth Restated Certificate of Incorporation*
3.2(b) Second Amendment to Fourth Restated Certificate of Incorporation*
3.2(c) Third Amendment to Fourth Restated Certificate of Incorporation*
3.3. By-laws, as amended*
4.1. Form of Common Stock Certificate*
5.1. Opinion of Bachner, Tally, Polevoy & Misher LLP regarding legality of
securities offered
10.1 Employment Agreement dated April 15, 1993 between the Registrant and
Edward M. Rudnic, Ph.D.*
10.1(a) Employment Agreement dated July 1, 1996 between the Registrant and Edward
M. Rudnic, Ph.D.
10.2 Employment Agreement dated July 1, 1996 between the Registrant and James
D. Russo
10.3 Employment Agreement dated as of January 1, 1993 between the Registrant
and George W. Belendiuk, M.D., Ph.D.*
10.4 Employment Agreement dated as of July 1, 1996 between the Registrant and
Krystyna Belendiuk, Ph.D.
10.5 Restricted Stock Purchase Agreement dated July 11, 1991 between the
Registrant and George W. Belendiuk*
10.6 Employment Agreement between the Registrant and James D. Isbister*
10.6(a) Restricted Stock Purchase Agreement dated July 29, 1991 between the
Registrant and James D. Isbister*
10.6(b) Continuing Services Agreement dated as of July 1, 1996 between the
Registrant and James D. Isbister
10.7 1991 Stock Option Plan, as amended*
10.8 Form of Stock Option Agreement*
10.9 Sublease Agreement dated March 29, 1995 between the Registrant and Corning
Clinical Laboratories, Inc.*
10.10 Sublease Agreement Amendment dated June 2, 1995 between the Registrant and
Corning Clinical Laboratories, Inc.*
10.11 Convertible Preferred Stock Purchase Agreement dated June 1, 1993*
10.12 Third Amended and Restated Stockholders' Agreement dated June 1, 1993, and
amendments.*
10.12(a) Fourth Amendment to the Third Amended and Restated Stockholders'
Agreement*
10.13 Credit Agreement dated as of May 3, 1994 between the Registrant and
certain stockholders, with form of Warrant and Convertible Promissory
Note attached.*
10.14 Form of Warrant to purchase shares of Common Stock dated May 3, 1994
issued to Everest Trust pursuant to Exhibit 10.13.*
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.15 Conversion and Subscription Agreement dated as of May 22, 1995 between the
Registrant and the signatories of the May 3, 1994 Credit Agreement.*
10.15(a) Form of Amendment No. 1 to Conversion and Subscription Agreement*
10.15(b) Form of Amendment No. 2 to Conversion and Subscription Agreement.
10.16 Credit Agreement dated as of May 22, 1995 between Registrant and certain
stockholders, with form of Convertible Promissory Note and Form of
Warrant to purchase shares of Series A Convertible Preferred Stock
attached.*
10.16(a) Form of Amendment No. 1 to Credit Agreement*
10.17+ License Agreement between the Registrant and Rhone-Poulenc Rorer, Inc.,
dated as of August 25, 1994.*
10.18+ Manufacturing Agreement dated as of September 30, 1993 between the
Registrant and Niro Inc.*
10.19 Form of Consent and Agreement to Amend between the Registrant and certain
stockholders dated as of November 30, 1995.
10.20 Form of warrant to purchase Common Stock issued to HCV III and HCV IV*
10.21 Credit Agreement for up to $4,300,000 dated March 7, 1996 between the
Registrant and certain stockholders, with form of Convertible Promissory
Note attached*
10.22 Credit Agreement for up to $3,000,000 dated March 7, 1996 between the
Registrant and certain stockholders, with form of Convertible Promissory
Note attached*
10.23 Form of warrant to purchase shares of Series A Convertible Preferred Stock
dated March 11, 1996 issued to HCV III pursuant to Exhibit 10.21*
10.24 Conversion and Subscription Agreement dated March 7, 1996 between the
Registrant and Certain Stockholders*
10.25+ Agreement dated as of May 28, 1996 between the Registrant and The P.F.
Laboratories, Inc.
10.26+ License Agreement dated as of July 1, 1996 between the Registrant and
Athena Neurosciences, Inc.
10.27 Employment Agreement dated as of June 25, 1996 between the Registrant and
Robert S. Cohen
11.1 Computation of Historical Loss Per Share
24.1 Consent of Bachner, Tally, Polevoy & Misher LLP (included in its opinion
filed as Exhibit 5.1 hereto)
24.2 Consent of Coopers & Lybrand L.L.P. -- Included on Page II-7
24.3 Consent of Carella, Byrne, Baine, Gilfillan, Cecchi, Stewart & Olstein*
24.4 Consent of Olsson, Frank and Weeda, P.C. -- included on Page II-8
25.1 Power of Attorney*
</TABLE>
- --------------
* Previously filed
+ Confidential treatment has been requested.
(b)Financial Statement Schedules
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
Undertakings Required by Regulation S-K, Item 512(g).
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Undertaking Required by Regulation S-K, Item 512(h).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Undertakings required by Regulation S-K, Item 512(i).
The undersigned registrant hereby undertakes that:
(1)For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2)For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
CONSENT OF COUNSEL
The consent of Bachner, Tally, Polevoy & Misher LLP is contained in its
opinion filed as Exhibit 5.1 to the Registration Statement.
II-6
<PAGE>
EXHIBIT 24.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to inclusion in this Registration Statement on Form S-1 (File No.
33-98706) of our report dated January 24, 1996 (except as to the information
presented in Note 11, for which the date is March 14, 1996), on our audits of
the financial statements as of December 31, 1993, 1994 and 1995, and for each of
the three years in the period ended December 31, 1995, and for the period
February 16, 1990 (date of inception) to December 31, 1995 of Pharmavene, Inc.
We also consent to the references to our firm under the captions "Experts" and
"Selected Financial Data" in the Prospectus.
COOPERS & LYBRAND L.L.P.
Rockville, Maryland
July 3, 1996
II-7
<PAGE>
EXHIBIT 24.4.
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name, and the statement with
respect to us appearing under the heading "Legal Matters" included in the
Registration Statement. We further consent to the incorporation by reference of
this consent pursuant to Rule 439(b) under the Securities Act of 1933, as
amended (the "Securities Act"), into any subsequent registration statement for
the same offering that may be filed pursuant to Rule 462(b) under the Securities
Act.
OLSSON, FRANK AND WEEDA, P.C.
Washington, D.C.
June 28, 1996
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rockville, State of
Maryland on the 3rd day of July, 1996.
PHARMAVENE, INC.
By: _______/s/_JAMES D. ISBISTER______
James D. Isbister
CHIEF EXECUTIVE OFFICER AND
DIRECTOR
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------- ----------------------------------------- -------------
<C> <S> <C>
/s/JAMES D. ISBISTER Chief Executive Officer and Director July 3, 1996
James D. Isbister (principal executive officer)
/s/KRYSTYNA BELENDIUK, PH.D. Senior Vice President -- Business July 3, 1996
Krystyna Belendiuk, Ph.D. Development and Director
Senior Vice President and Chief Financial
/s/JAMES D. RUSSO Officer (principal financial and July 3, 1996
James D. Russo accounting officer)
/s/JAMES H. CAVANAUGH, PH.D. Director July 3, 1996
James H. Cavanaugh, Ph.D.
/s/MAX LINK, PH.D. Director July 3, 1996
Max Link, Ph.D.
/s/LAWRENCE C. HOFF Director July 3, 1996
Lawrence C. Hoff
/s/JAMES D. ISBISTER
*James D. Isbister
(AS ATTORNEY-IN-FACT)
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
NO. PAGE
- ------------ ---------
<C> <S> <C>
1.1. Form of Underwriting Agreement*
3.2 Fourth Restated Certificate of Incorporation*
3.2 (a) Amendment to Fourth Restated Certificate of Incorporation*
3.2 (b) Second Amendment to Fourth Restated Certificate of Incorporation*
3.2 (c) Third Amendment to Fourth Restated Certificate of Incorporation*
3.3. By-laws, as amended*
4.1. Form of Common Stock Certificate*
5.1. Opinion of Bachner, Tally, Polevoy & Misher LLP regarding legality of securities
offered
10.1 Employment Agreement dated April 15, 1993 between the Registrant and Edward M.
Rudnic, Ph.D.*
10.1 (a) Employment Agreement dated July 1, 1996 between the Registrant and Edward M.
Rudnic, Ph.D.
10.2 Employment Agreement dated July 1, 1996 between the Registrant and James D. Russo
10.3 Employment Agreement dated as of January 1, 1993 between the Registrant and George
W. Belendiuk, M.D., Ph.D.*
10.4 Employment Agreement dated as of July 1, 1996 between the Registrant and Krystyna
Belendiuk, Ph.D.
10.5 Restricted Stock Purchase Agreement dated July 11, 1991 between the Registrant and
George W. Belendiuk*
10.6 Employment Agreement between the Registrant and James D. Isbister*
10.6 (a) Restricted Stock Purchase Agreement dated July 29, 1991 between the Registrant and
James D. Isbister*
10.6 (b) Continuing Services Agreement dated as of July 1, 1996 between the Registrant and
James D. Isbister
10.7 1991 Stock Option Plan, as amended*
10.8 Form of Stock Option Agreement*
10.9 Sublease Agreement dated March 29, 1995 between the Registrant and Corning Clinical
Laboratories, Inc.*
10.10 Sublease Agreement Amendment dated June 2, 1995 between the Registrant and Corning
Clinical Laboratories, Inc.*
10.11 Convertible Preferred Stock Purchase Agreement dated June 1, 1993*
10.12 Third Amended and Restated Stockholders' Agreement dated June 1, 1993, and
amendments.*
10.12 (a) Fourth Amendment to the Third Amended and Restated Stockholders' Agreement*
10.13 Credit Agreement dated as of May 3, 1994 between the Registrant and certain
stockholders, with form of Warrant and Convertible Promissory Note attached.*
10.14 Form of Warrant to purchase shares of Common Stock dated May 3, 1994 issued to
Everest Trust pursuant to Exhibit 10.13.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
NO. PAGE
- ------------ ---------
10.15 Conversion and Subscription Agreement dated as of May 22, 1995 between the
Registrant and the signatories of the May 3, 1994 Credit Agreement.*
<C> <S> <C>
10.15 (a) Form of Amendment No. 1 to Conversion and Subscription Agreement*
10.15 (b) Form of Amendment No. 2 to Conversion and Subscription Agreement.
10.16 Credit Agreement dated as of May 22, 1995 between Registrant and certain
stockholders, with form of Convertible Promissory Note and Form of Warrant to
purchase shares of Series A Convertible Preferred Stock attached.*
10.16 (a) Form of Amendment No. 1 to Credit Agreement*
10.17 + License Agreement between the Registrant and Rhone-Poulenc Rorer, Inc., dated as of
August 25, 1994.*
10.18 + Manufacturing Agreement dated as of September 30, 1993 between the Registrant and
Niro Inc.*
10.19 Form of Consent and Agreement to Amend between the Registrant and certain
stockholders dated as of November 30, 1995.
10.20 Form of warrant to purchase Common Stock issued to HCV III and HCV IV*
10.21 Credit Agreement for up to $4,300,000 dated March 7, 1996 between the Registrant
and certain stockholders, with form of Convertible Promissory Note attached*
10.22 Credit Agreement for up to $3,000,000 dated March 7, 1996 between the Registrant
and certain stockholders, with form of Convertible Promissory Note attached*
10.23 Form of warrant to purchase shares of Series A Convertible Preferred Stock dated
March 11, 1996 issued to HCV III pursuant to Exhibit 10.21*
10.24 Conversion and Subscription Agreement dated March 7, 1996 between the Registrant
and Certain Stockholders*
10.25 + Agreement dated as of May 28, 1996 between the Registrant and The P.F.
Laboratories, Inc.
10.26 + License Agreement dated as of July 1, 1996 between the Registrant and Athena
Neurosciences, Inc.
10.27 Employment Agreement dated as of June 25, 1996 between the Registrant and Robert S.
Cohen
11.1 Computation of Historical Loss Per Share
24.1 Consent of Bachner, Tally, Polevoy & Misher LLP (included in its opinion filed as
Exhibit 5.1 hereto)
24.2 Consent of Coopers & Lybrand L.L.P. -- Included on Page II-7
24.3 Consent of Carella, Byrne, Baine, Gilfillan, Cecchi, Stewart & Olstein*
24.4 Consent of Olsson, Frank and Weeda, P.C. -- included on Page II-8
25.1 Power of Attorney*
</TABLE>
- --------------
* Previously filed
+ Confidential treatment has been requested.
(b)Financial Statement Schedules
<PAGE>
July 3, 1996
Pharmavene, Inc.
1550 East Gude Drive
Rockville, MD 20850
Ladies & Gentlemen:
We have acted as counsel to Pharmavene, Inc. (the "Company") in connection
with its filing of a registration statement on Form S-1 (File No. 33-98706) (the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"Act") covering 2,530,000 shares (the "Shares") of Common Stock, $.01 par value
(the "Common Stock"), including 330,000 Shares subject to an over-allotment
option, all as more particularly described in the Registration Statement.
In our capacity as counsel to the Company, we have examined the Company's
Certificate of Incorporation, as amended and By-laws and the minutes and other
corporate proceedings of the Company. With respect to factual matters, we have
relied upon statements and certificates of officers of the Company. We have
also reviewed such other matters of law and examined and relied upon such other
documents, records and certificates as we have deemed relevant hereto. In all
such examinations we have assumed conformity with the original documents of all
documents submitted to us as originals and the genuineness of all signatures on
all documents submitted to us.
On the basis of the foregoing, it is our opinion that the Shares covered by
and included in the Registration Statement have been duly and validly authorized
and will, when sold, paid for and issued as contemplated by the Registration
Statement, be legally issued, fully paid and non-assessable.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to us under the caption "Legal
Matters" in the prospectus constituting part of the Registration Statement. In
giving this consent, we do not thereby concede that we come within the
categories of persons whose consent is required by the Act or the General Rules
and Regulations promulgated thereunder.
Very truly yours,
BACHNER, TALLY, POLEVOY & MISHER LLP
BTPM/TB/npm
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, dated as of July 1, 1996 is entered into by
and between PHARMAVENE, INC., a Delaware corporation (the "Company") and Edward
M. Rudnic, Ph.D. (the "Employee").
WHEREAS, the Company desires to employ the Employee as Senior Vice
President, Development and Technical Operations of the Company, and the Employee
desires to accept such employment by the Company, on the terms and subject to
the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Employee, and the
Employee hereby accepts employment by the Company, upon the terms and conditions
hereinafter set forth.
2. TERM. Subject to the provisions of SECTIONS 6, 7, 8, and 9 below,
the employment of the Employee hereunder will be for the two-year period
commencing on the date hereof (the "Commencement Date") and ending on the second
anniversary of such Commencement Date. Unless either party gives written notice
of determination not to renew at least one hundred eighty (180) days prior to
the second anniversary of the Commencement Date, this Agreement shall be renewed
for one (1) year from that anniversary. Thereafter, unless either party gives
written notice of determination not to renew at least one hundred eighty (180)
days prior to any succeeding anniversary of the Commencement Date, this
Agreement shall be renewed for one (1) year from each anniversary. The term
"Employment Period" shall mean the two-year period provided for in this
SECTION 2 and any extension thereof, or any shorter period resulting from any
termination of employment under SECTION 6, 7, 8, or 9 below.
3. DUTIES AND RESPONSIBILITIES. The Employee will be employed as
Senior Vice President, Development and Technical Operations of the Company. The
Employee will perform such duties and services, consistent with his position, as
may be assigned to him from time to time by the Board of Directors or the
President of the Company or the Board's or President's designee. In furtherance
of the foregoing, the Employee hereby agrees to perform well and faithfully such
duties and responsibilities and the other reasonable duties and responsibilities
assigned to him from time to time by the Board of Directors of the Company or
the President or the Board's or President's designee.
4. TIME TO BE DEVOTED TO EMPLOYMENT. Except for reasonable
vacations, absences due to temporary illness, and activities which have been
mutually agreed to by the parties, the Employee shall devote substantially all
of his time, attention and energies to the business of the Company during the
Employment Period. During the Employment Period, the Employee will not be
engaged in any other business activity which, in the reasonable judgment of the
Company, conflicts with the duties of the Employee hereunder, whether or not
such activity is pursued for gain, profit or other pecuniary advantage.
5. COMPENSATION; REIMBURSEMENT. (a) The Company (or, at the
Company's option, any subsidiary or affiliate thereof) will pay to the Employee
(i) an annual base salary (the "Base Salary") of not less than $153,000.00,
payable in such installments as is the policy of the Company with respect to
employees of the Company at substantially the same employment level as the
Employee.
<PAGE>
(b) During the Employment Period, the Employee will be entitled to the
fringe benefits that are made available from time to time to employees of the
Company at substantially the same employment level as the Employee, including
eligibility to participate in any Company stock option or bonus plans.
(c) The Company will reimburse the Employee, in accordance with the
practice of the Company from time to time, for all reasonable and necessary
travel expenses and other disbursements incurred by him for or on behalf of the
Company in the performance of his duties hereunder upon presentation by the
Employee to the Company of appropriate vouchers.
6. INVOLUNTARY TERMINATION. If the Employee dies, then the
Employee's employment shall be deemed to terminate on the date of the Employee's
death. If the Employee is incapacitated or disabled by accident, sickness or
otherwise so as to render him mentally or physically incapable of performing the
services required to be performed by him under this Agreement for a period of
ninety (90) consecutive days or longer, or for ninety (90) days during any six-
month period (such condition being herein referred to as "Disability"), then the
Company, at its option, may terminate the employment of the Employee under this
Agreement immediately upon giving him notice to that effect. In the case of a
Disability, until the Company shall have terminated the Employee's employment
hereunder in accordance with the foregoing, the Employee will be entitled to
receive compensation, at the rate and in the manner provided in SECTION 5 above,
notwithstanding any such Disability. Termination pursuant to this SECTION 6 is
hereinafter referred to as an "Involuntary Termination".
7. TERMINATION FOR CAUSE. Upon a vote of the majority of the Board
of Directors or in the discretion of the President of the Company, the Company
may terminate the employment of the Employee hereunder at any time during the
Employment Period for "cause" (such termination being hereinafter referred to as
a "Termination for Cause") by giving the Employee notice of such termination,
whereupon such termination shall take effect immediately. For the purpose of
this SECTION 7, "cause" will mean (a) the Employee's willful misconduct with
respect to the business and affairs of the Company or any subsidiary or
affiliate thereof, (b) the Employee's neglect of duties or failure to act which
can reasonably be expected to affect materially and adversely the business or
affairs of the Company or any subsidiary or affiliate thereof, (c) the
Employee's material breach of any of the agreements contained in SECTION 3 or 4
hereof, or the Employee's breach of the Proprietary Information and Invention
Agreement referred to in SECTION 11 below, (d) the commission by the Employee of
an act involving moral turpitude relating to the Company or fraud, or (e) the
Employee's conviction of any felony, or of any misdemeanor involving fraud,
theft, embezzlement, forgery or moral turpitude.
8. TERMINATION WITHOUT CAUSE. The Company may terminate the
employment of the Employee hereunder at any time during the Employment Period
without "cause" (such termination being hereinafter referred to as a
"Termination Without Cause") by giving the Employee written notice of such
termination. Upon the giving of such notice, termination of employment under
this SECTION 8 will take effect immediately.
9. VOLUNTARY TERMINATION. Any termination of the employment of the
Employee hereunder otherwise than as a result of an Involuntary Termination, a
Termination For Cause or a Termination Without Cause will be referred
hereinafter as a "Voluntary Termination." Following reasonable notice, a
Voluntary Termination will be deemed to be
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<PAGE>
effective upon the date specified in such notice or, in the absence of such
specification, upon the date of the giving of such notice.
10. EFFECT OF TERMINATION OF EMPLOYMENT. (a) Upon termination of the
Employee's employment hereunder pursuant to a Voluntary Termination or a
Termination For Cause, neither the Employee nor his beneficiary or estate will
have any further rights or claims against the Company under this Agreement
except to receive:
(i) the unpaid portion of the Base Salary provided for in
SECTION 5(a) above, computed on a PRO RATA basis to the date of such
termination; and
(ii) reimbursement for any expenses for which the Employee shall not
have theretofore been reimbursed as provided in SECTION 5(c) above.
(iii) retention in the Company's 401(k) Program and other Company
employee benefits (as required by law) and the opportunity to purchase health
benefits under the Company's health benefits program, as required by COBRA.
(b) Upon termination of the Employee's employment hereunder pursuant
to an Involuntary Termination, neither the Employee nor his beneficiary or
estate will have any further rights or claims against the Company under this
Agreement except to receive a termination payment equal to that provided for in
SECTION 10(a) above, plus an aggregate amount equal to six (6) months' Base
Salary, payable at the same rate and in the same manner as set forth in
SECTION 5 above.
(c) Upon termination of the Employee's employment hereunder pursuant
to a Termination Without Cause, neither the Employee nor his beneficiary or
estate will have any further rights or claims against the Company under this
Agreement except to receive a termination payment equal to that provided for in
SECTION 10(a) above, plus an aggregate amount equal to the lesser of (i) one (1)
year's Base Salary, payable in twelve (12) equal monthly installments or (ii)
nine (9) months' Base Salary or the Base Salary for the then remaining term of
the Employment Period, whichever is greater, in each case payable at the same
rate and in the same manner as set forth in SECTION 5 above.
11. PROPRIETARY INFORMATION AND INVENTION AGREEMENT. The Employee has
executed the Proprietary Information and Invention Agreement, a copy of which is
attached hereto as EXHIBIT A, and covenants that he will comply with the terms
of such Proprietary Information and Invention Agreement during the term thereof.
12. ENFORCEMENT. It is the desire and intent of the parties hereto
that the provisions of this Agreement will be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, to the extent that a restriction
contained in this Agreement is more restrictive than permitted by the laws of
any jurisdiction where this Agreement may be subject to review and
interpretation, the terms of such restriction, for the purpose only of the
operation of such restriction in such jurisdiction, will be the maximum
restriction allowed by the laws of such jurisdiction and such restriction will
be deemed to have been revised accordingly herein. A court having jurisdiction
over an action arising out of or seeking enforcement of any restriction
contained in this Agreement may modify the terms of such restriction in
accordance with this SECTION 12.
13. REMEDIES; SURVIVAL. (a) The Employee acknowledges and
understands that the provisions of this Agreement are of a special and unique
nature, the loss of which
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<PAGE>
cannot be accurately compensated for in damages by an action at law, and that
the breach or threatened breach of the provisions of this Agreement would cause
the Company irreparable harm. In the event of a breach or threatened breach by
the Employee of the provisions of SECTION 11 above, the Company will be entitled
to an injunction restraining him from such breach. Nothing herein contained
will be construed as prohibiting the Company from pursuing any other remedies
available at law for any breach or threatened breach of this Agreement.
(b) Notwithstanding anything contained in this Agreement to the
contrary, the provisions of SECTIONS 11, 12, 14, 15, 16, 20, 21 and this
SECTION 13, will survive the expiration or other termination of this Agreement
until, by their terms, such provisions are no longer operative.
14. STOCK OPTIONS. In the event the Employee is terminated from the
Company or a subsidiary within one (1) year of either of the events specified in
(i) or (ii) below, or the employee's responsibilities or duties are
substantially reduced within one (1) year of either of the events specified in
(i) or (ii) below, all outstanding Stock Options at that date of termination or
date of reduction of responsibilities or duties shall become immediately
exercisable for a period of three (3) months.
(i) as a result of or in connection with any tender offer,
exchange offer, merger or other business combination, sale of
assets or contested election, or combination of the
foregoing, the persons who were Directors of the Corporation
just prior to such event cease to constitute a majority of
the Corporation's Board of Directors; or
(ii) the stockholders of the Corporation approve an agreement
providing for a transaction in which the Corporation will
cease to be an independent publicly-owned corporation or a
sale or other disposition of all or substantially all of the
assets of the Corporation occurs.
15. NOTICES. All notices, demands and other communications which are
required to be given, served or sent pursuant to this Agreement will be in
writing and will be delivered personally or sent by air courier or first class
certified or registered mail, return receipt requested and postage prepaid,
addressed as follows:
If to the Employee:
Edward M. Rudnic, Ph.D.
15103 Gravenstein Way
North Potomac, Maryland 20878
If to the Company:
Pharmavene, Inc.
1550 East Gude Drive
Rockville, Maryland 20850
Attention: President
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement will be deemed to have been given on the
date of delivery if
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<PAGE>
personally delivered; on the business day after the date when sent if sent by
air courier; and on the third business day after the date when sent if sent by
mail, in each case addressed to such party as provided in this SECTION 14 or in
accordance with the latest unrevoked direction from such party.
16. BINDING AGREEMENT; BENEFIT. The provisions of this Agreement will
be binding upon and will inure to the benefit of, the respective heirs, legal
representatives and successors of the parties hereto.
17. GOVERNING LAW. This Agreement will be governed by, and construed
and enforced in accordance with, the laws of the State of Maryland (not
including the choice of law provisions thereof).
18. WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and will not
operate or be construed as a waiver of any subsequent breach by such other
party.
19. ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements or understanding among the parties with respect
thereto. This Agreement may be amended only by an agreement in writing signed
by the parties hereto.
20. HEADINGS. The Section headings contained in this Agreement are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
21. SEVERABILITY. Subject to the provisions of SECTION 12 above, any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction will, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction will
not invalidate or render unenforceable such provision in any other jurisdiction.
22. ASSIGNMENT. This Agreement is personal in its nature and the
parties hereto shall not, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; PROVIDED, HOWEVER, that
the provisions hereof will inure to the benefit of, and be binding upon, each
successor of the Company, whether by merger, consolidation, transfer of all or
substantially all assets or otherwise.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
PHARMAVENE, INC.
By: /s/ James D. Isbister
-----------------------------------
James D. Isbister, President
/s/ Edward M. Rudnic
-----------------------------------
Edward M. Rudnic, Ph.D.
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<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, dated as of July 1, 1996 is entered into by
and between PHARMAVENE, INC., a Delaware corporation (the "Company") and James
D. Russo (the "Employee").
WHEREAS, the Company desires to employ the Employee as Senior Vice
President, Chief Financial Officer of the Company, and the Employee desires to
accept such employment by the Company, on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Employee, and the
Employee hereby accepts employment by the Company, upon the terms and conditions
hereinafter set forth.
2. TERM. Subject to the provisions of SECTIONS 6, 7, 8, and 9 below,
the employment of the Employee hereunder will be for the two-year period
commencing on the date hereof (the "Commencement Date") and ending on the second
anniversary of such Commencement Date. Unless either party gives written notice
of determination not to renew at least one hundred eighty (180) days prior to
the second anniversary of the Commencement Date, this Agreement shall be renewed
for one (1) year from that anniversary. Thereafter, unless either party gives
written notice of determination not to renew at least one hundred eighty (180)
days prior to any succeeding anniversary of the Commencement Date, this
Agreement shall be renewed for one (1) year from each anniversary. The term
"Employment Period" shall mean the two-year period provided for in this
SECTION 2 and any extension thereof, or any shorter period resulting from any
termination of employment under SECTION 6, 7, 8, or 9 below.
3. DUTIES AND RESPONSIBILITIES. The Employee will be employed as
Senior Vice President, Chief Financial Officer of the Company. The Employee
will perform such duties and services, consistent with his position, as may be
assigned to him from time to time by the Board of Directors or the President of
the Company or the Board's or President's designee. In furtherance of the
foregoing, the Employee hereby agrees to perform well and faithfully such duties
and responsibilities and the other reasonable duties and responsibilities
assigned to him from time to time by the Board of Directors of the Company or
the President or the Board's or President's designee.
4. TIME TO BE DEVOTED TO EMPLOYMENT. Except for reasonable
vacations, absences due to temporary illness, and activities which have been
mutually agreed to by the parties, the Employee shall devote substantially all
of his time, attention and energies to the business of the Company during the
Employment Period. During the Employment Period, the Employee will not be
engaged in any other business activity which, in the reasonable judgment of the
Company, conflicts with the duties of the Employee hereunder, whether or not
such activity is pursued for gain, profit or other pecuniary advantage.
5. COMPENSATION; REIMBURSEMENT. (a) The Company (or, at the
Company's option, any subsidiary or affiliate thereof) will pay to the Employee
(i) an annual base salary (the "Base Salary") of not less than $153,000.00,
payable in such installments as is the policy of the Company with respect to
employees of the Company at substantially the same employment level as the
Employee.
<PAGE>
(b) During the Employment Period, the Employee will be entitled to the
fringe benefits that are made available from time to time to employees of the
Company at substantially the same employment level as the Employee, including
eligibility to participate in any Company stock option or bonus plans.
(c) The Company will reimburse the Employee, in accordance with the
practice of the Company from time to time, for all reasonable and necessary
travel expenses and other disbursements incurred by him for or on behalf of the
Company in the performance of his duties hereunder upon presentation by the
Employee to the Company of appropriate vouchers.
6. INVOLUNTARY TERMINATION. If the Employee dies, then the
Employee's employment shall be deemed to terminate on the date of the Employee's
death. If the Employee is incapacitated or disabled by accident, sickness or
otherwise so as to render him mentally or physically incapable of performing the
services required to be performed by him under this Agreement for a period of
ninety (90) consecutive days or longer, or for ninety (90) days during any six-
month period (such condition being herein referred to as "Disability"), then the
Company, at its option, may terminate the employment of the Employee under this
Agreement immediately upon giving him notice to that effect. In the case of a
Disability, until the Company shall have terminated the Employee's employment
hereunder in accordance with the foregoing, the Employee will be entitled to
receive compensation, at the rate and in the manner provided in SECTION 5 above,
notwithstanding any such Disability. Termination pursuant to this SECTION 6 is
hereinafter referred to as an "Involuntary Termination".
7. TERMINATION FOR CAUSE. Upon a vote of the majority of the Board
of Directors or in the discretion of the President of the Company, the Company
may terminate the employment of the Employee hereunder at any time during the
Employment Period for "cause" (such termination being hereinafter referred to as
a "Termination for Cause") by giving the Employee notice of such termination,
whereupon such termination shall take effect immediately. For the purpose of
this SECTION 7, "cause" will mean (a) the Employee's willful misconduct with
respect to the business and affairs of the Company or any subsidiary or
affiliate thereof, (b) the Employee's neglect of duties or failure to act which
can reasonably be expected to affect materially and adversely the business or
affairs of the Company or any subsidiary or affiliate thereof, (c) the
Employee's material breach of any of the agreements contained in SECTION 3 or 4
hereof, or the Employee's breach of the Proprietary Information and Invention
Agreement referred to in SECTION 11 below, (d) the commission by the Employee of
an act involving moral turpitude relating to the Company or fraud, or (e) the
Employee's conviction of any felony, or of any misdemeanor involving fraud,
theft, embezzlement, forgery or moral turpitude.
8. TERMINATION WITHOUT CAUSE. The Company may terminate the
employment of the Employee hereunder at any time during the Employment Period
without "cause" (such termination being hereinafter referred to as a
"Termination Without Cause") by giving the Employee written notice of such
termination. Upon the giving of such notice, termination of employment under
this SECTION 8 will take effect immediately.
9. VOLUNTARY TERMINATION. Any termination of the employment of the
Employee hereunder otherwise than as a result of an Involuntary Termination, a
Termination For Cause or a Termination Without Cause will be referred
hereinafter as a "Voluntary Termination." Following reasonable notice, a
Voluntary Termination will be deemed to be
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<PAGE>
effective upon the date specified in such notice or, in the absence of such
specification, upon the date of the giving of such notice.
10. EFFECT OF TERMINATION OF EMPLOYMENT. (a) Upon termination of the
Employee's employment hereunder pursuant to a Voluntary Termination or a
Termination For Cause, neither the Employee nor his beneficiary or estate will
have any further rights or claims against the Company under this Agreement
except to receive:
(i) the unpaid portion of the Base Salary provided for in
SECTION 5(a) above, computed on a PRO RATA basis to the date of such
termination; and
(ii) reimbursement for any expenses for which the Employee shall not
have theretofore been reimbursed as provided in SECTION 5(c) above.
(iii) retention in the Company's 401(k) Program and other Company
employee benefits (as required by law) and the opportunity to purchase health
benefits under the Company's health benefits program, as required by COBRA.
(b) Upon termination of the Employee's employment hereunder pursuant
to an Involuntary Termination, neither the Employee nor his beneficiary or
estate will have any further rights or claims against the Company under this
Agreement except to receive a termination payment equal to that provided for in
SECTION 10(a) above, plus an aggregate amount equal to six (6) months' Base
Salary, payable at the same rate and in the same manner as set forth in
SECTION 5 above.
(c) Upon termination of the Employee's employment hereunder pursuant
to a Termination Without Cause, neither the Employee nor his beneficiary or
estate will have any further rights or claims against the Company under this
Agreement except to receive a termination payment equal to that provided for in
SECTION 10(a) above, plus an aggregate amount equal to the lesser of (i) one (1)
year's Base Salary, payable in twelve (12) equal monthly installments or (ii)
nine (9) months' Base Salary or the Base Salary for the then remaining term of
the Employment Period, whichever is greater, in each case payable at the same
rate and in the same manner as set forth in SECTION 5 above.
11. PROPRIETARY INFORMATION AND INVENTION AGREEMENT. The Employee has
executed the Proprietary Information and Invention Agreement, a copy of which is
attached hereto as EXHIBIT A, and covenants that he will comply with the terms
of such Proprietary Information and Invention Agreement during the term thereof.
12. ENFORCEMENT. It is the desire and intent of the parties hereto
that the provisions of this Agreement will be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, to the extent that a restriction
contained in this Agreement is more restrictive than permitted by the laws of
any jurisdiction where this Agreement may be subject to review and
interpretation, the terms of such restriction, for the purpose only of the
operation of such restriction in such jurisdiction, will be the maximum
restriction allowed by the laws of such jurisdiction and such restriction will
be deemed to have been revised accordingly herein. A court having jurisdiction
over an action arising out of or seeking enforcement of any restriction
contained in this Agreement may modify the terms of such restriction in
accordance with this SECTION 12.
13. REMEDIES; SURVIVAL. (a) The Employee acknowledges and
understands that the provisions of this Agreement are of a special and unique
nature, the loss of which
-3-
<PAGE>
cannot be accurately compensated for in damages by an action at law, and that
the breach or threatened breach of the provisions of this Agreement would cause
the Company irreparable harm. In the event of a breach or threatened breach by
the Employee of the provisions of SECTION 11 above, the Company will be entitled
to an injunction restraining him from such breach. Nothing herein contained
will be construed as prohibiting the Company from pursuing any other remedies
available at law for any breach or threatened breach of this Agreement.
(b) Notwithstanding anything contained in this Agreement to the
contrary, the provisions of SECTIONS 11, 12, 14, 15, 16, 20, 21 and this
SECTION 13, will survive the expiration or other termination of this Agreement
until, by their terms, such provisions are no longer operative.
14. STOCK OPTIONS. In the event the Employee is terminated from the
Company or a subsidiary within one (1) year of either of the events specified in
(i) or (ii) below, or the employee's responsibilities or duties are
substantially reduced within one (1) year of either of the events specified in
(i) or (ii) below, all outstanding Stock Options at that date of termination or
date of reduction of responsibilities or duties shall become immediately
exercisable for a period of three (3) months.
(i) as a result of or in connection with any tender offer,
exchange offer, merger or other business combination, sale of
assets or contested election, or combination of the
foregoing, the persons who were Directors of the Corporation
just prior to such event cease to constitute a majority of
the Corporation's Board of Directors; or
(ii) the stockholders of the Corporation approve an agreement
providing for a transaction in which the Corporation will
cease to be an independent publicly-owned corporation or a
sale or other disposition of all or substantially all of the
assets of the Corporation occurs.
15. NOTICES. All notices, demands and other communications which are
required to be given, served or sent pursuant to this Agreement will be in
writing and will be delivered personally or sent by air courier or first class
certified or registered mail, return receipt requested and postage prepaid,
addressed as follows:
If to the Employee:
James D. Russo
11304 Taffrail Court
Reston, Virginia 22091
If to the Company:
Pharmavene, Inc.
1550 East Gude Drive
Rockville, Maryland 20850
Attention: President
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement will be deemed to have been given on the
date of delivery if
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<PAGE>
personally delivered; on the business day after the date when sent if sent by
air courier; and on the third business day after the date when sent if sent by
mail, in each case addressed to such party as provided in this SECTION 14 or in
accordance with the latest unrevoked direction from such party.
16. BINDING AGREEMENT; BENEFIT. The provisions of this Agreement will
be binding upon and will inure to the benefit of, the respective heirs, legal
representatives and successors of the parties hereto.
17. GOVERNING LAW. This Agreement will be governed by, and construed
and enforced in accordance with, the laws of the State of Maryland (not
including the choice of law provisions thereof).
18. WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and will not
operate or be construed as a waiver of any subsequent breach by such other
party.
19. ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements or understanding among the parties with respect
thereto. This Agreement may be amended only by an agreement in writing signed
by the parties hereto.
20. HEADINGS. The Section headings contained in this Agreement are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
21. SEVERABILITY. Subject to the provisions of SECTION 12 above, any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction will, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction will
not invalidate or render unenforceable such provision in any other jurisdiction.
22. ASSIGNMENT. This Agreement is personal in its nature and the
parties hereto shall not, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; PROVIDED, HOWEVER, that
the provisions hereof will inure to the benefit of, and be binding upon, each
successor of the Company, whether by merger, consolidation, transfer of all or
substantially all assets or otherwise.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
PHARMAVENE, INC.
By: /s/ James D. Isbister
-----------------------------------
James D. Isbister, President
/s/ James D. Russo
-----------------------------------
James D. Russo
-5-
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, dated as of July 1, 1996 is entered into by
and between PHARMAVENE, INC., a Delaware corporation (the "Company") and
Krystyna Belendiuk, Ph.D. (the "Employee").
WHEREAS, the Company desires to employ the Employee as Senior Vice
President, Business Development of the Company, and the Employee desires to
accept such employment by the Company, on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Employee, and the
Employee hereby accepts employment by the Company, upon the terms and conditions
hereinafter set forth.
2. TERM. Subject to the provisions of SECTIONS 6, 7, 8, and 9 below,
the employment of the Employee hereunder will be for the two-year period
commencing on the date hereof (the "Commencement Date") and ending on the second
anniversary of such Commencement Date. Unless either party gives written notice
of determination not to renew at least one hundred eighty (180) days prior to
the second anniversary of the Commencement Date, this Agreement shall be renewed
for one (1) year from that anniversary. Thereafter, unless either party gives
written notice of determination not to renew at least one hundred eighty (180)
days prior to any succeeding anniversary of the Commencement Date, this
Agreement shall be renewed for one (1) year from each anniversary. The term
"Employment Period" shall mean the two-year period provided for in this
SECTION 2 and any extension thereof, or any shorter period resulting from any
termination of employment under SECTION 6, 7, 8, or 9 below.
3. DUTIES AND RESPONSIBILITIES. The Employee will be employed as
Senior Vice President, Business Development of the Company. The Employee will
perform such duties and services, consistent with his position, as may be
assigned to him from time to time by the Board of Directors or the President of
the Company or the Board's or President's designee. In furtherance of the
foregoing, the Employee hereby agrees to perform well and faithfully such duties
and responsibilities and the other reasonable duties and responsibilities
assigned to him from time to time by the Board of Directors of the Company or
the President or the Board's or President's designee.
4. TIME TO BE DEVOTED TO EMPLOYMENT. Except for reasonable
vacations, absences due to temporary illness, and activities which have been
mutually agreed to by the parties, the Employee shall devote substantially all
of his time, attention and energies to the business of the Company during the
Employment Period. During the Employment Period, the Employee will not be
engaged in any other business activity which, in the reasonable judgment of the
Company, conflicts with the duties of the Employee hereunder, whether or not
such activity is pursued for gain, profit or other pecuniary advantage.
5. COMPENSATION; REIMBURSEMENT. (a) The Company (or, at the
Company's option, any subsidiary or affiliate thereof) will pay to the Employee
(i) an annual base salary (the "Base Salary") of not less than $157,317.00,
payable in such installments as is the policy of the Company with respect to
employees of the Company at substantially the same employment level as the
Employee.
<PAGE>
(b) During the Employment Period, the Employee will be entitled to the
fringe benefits that are made available from time to time to employees of the
Company at substantially the same employment level as the Employee, including
eligibility to participate in any Company stock option or bonus plans.
(c) The Company will reimburse the Employee, in accordance with the
practice of the Company from time to time, for all reasonable and necessary
travel expenses and other disbursements incurred by him for or on behalf of the
Company in the performance of his duties hereunder upon presentation by the
Employee to the Company of appropriate vouchers.
6. INVOLUNTARY TERMINATION. If the Employee dies, then the
Employee's employment shall be deemed to terminate on the date of the Employee's
death. If the Employee is incapacitated or disabled by accident, sickness or
otherwise so as to render him mentally or physically incapable of performing the
services required to be performed by him under this Agreement for a period of
ninety (90) consecutive days or longer, or for ninety (90) days during any six-
month period (such condition being herein referred to as "Disability"), then the
Company, at its option, may terminate the employment of the Employee under this
Agreement immediately upon giving him notice to that effect. In the case of a
Disability, until the Company shall have terminated the Employee's employment
hereunder in accordance with the foregoing, the Employee will be entitled to
receive compensation, at the rate and in the manner provided in SECTION 5 above,
notwithstanding any such Disability. Termination pursuant to this SECTION 6 is
hereinafter referred to as an "Involuntary Termination".
7. TERMINATION FOR CAUSE. Upon a vote of the majority of the Board
of Directors or in the discretion of the President of the Company, the Company
may terminate the employment of the Employee hereunder at any time during the
Employment Period for "cause" (such termination being hereinafter referred to as
a "Termination for Cause") by giving the Employee notice of such termination,
whereupon such termination shall take effect immediately. For the purpose of
this SECTION 7, "cause" will mean (a) the Employee's willful misconduct with
respect to the business and affairs of the Company or any subsidiary or
affiliate thereof, (b) the Employee's neglect of duties or failure to act which
can reasonably be expected to affect materially and adversely the business or
affairs of the Company or any subsidiary or affiliate thereof, (c) the
Employee's material breach of any of the agreements contained in SECTION 3 or 4
hereof, or the Employee's breach of the Proprietary Information and Invention
Agreement referred to in SECTION 11 below, (d) the commission by the Employee of
an act involving moral turpitude relating to the Company or fraud, or (e) the
Employee's conviction of any felony, or of any misdemeanor involving fraud,
theft, embezzlement, forgery or moral turpitude.
8. TERMINATION WITHOUT CAUSE. The Company may terminate the
employment of the Employee hereunder at any time during the Employment Period
without "cause" (such termination being hereinafter referred to as a
"Termination Without Cause") by giving the Employee written notice of such
termination. Upon the giving of such notice, termination of employment under
this SECTION 8 will take effect immediately.
9. VOLUNTARY TERMINATION. Any termination of the employment of the
Employee hereunder otherwise than as a result of an Involuntary Termination, a
Termination For Cause or a Termination Without Cause will be referred
hereinafter as a "Voluntary Termination." Following reasonable notice, a
Voluntary Termination will be deemed to be
-2-
<PAGE>
effective upon the date specified in such notice or, in the absence of such
specification, upon the date of the giving of such notice.
10. EFFECT OF TERMINATION OF EMPLOYMENT. (a) Upon termination of the
Employee's employment hereunder pursuant to a Voluntary Termination or a
Termination For Cause, neither the Employee nor his beneficiary or estate will
have any further rights or claims against the Company under this Agreement
except to receive:
(i) the unpaid portion of the Base Salary provided for in
SECTION 5(a) above, computed on a PRO RATA basis to the date of such
termination; and
(ii) reimbursement for any expenses for which the Employee shall not
have theretofore been reimbursed as provided in SECTION 5(c) above.
(iii) retention in the Company's 401(k) Program and other Company
employee benefits (as required by law) and the opportunity to purchase health
benefits under the Company's health benefits program, as required by COBRA.
(b) Upon termination of the Employee's employment hereunder pursuant
to an Involuntary Termination, neither the Employee nor his beneficiary or
estate will have any further rights or claims against the Company under this
Agreement except to receive a termination payment equal to that provided for in
SECTION 10(a) above, plus an aggregate amount equal to six (6) months' Base
Salary, payable at the same rate and in the same manner as set forth in
SECTION 5 above.
(c) Upon termination of the Employee's employment hereunder pursuant
to a Termination Without Cause, neither the Employee nor his beneficiary or
estate will have any further rights or claims against the Company under this
Agreement except to receive a termination payment equal to that provided for in
SECTION 10(a) above, plus an aggregate amount equal to the lesser of (i) one (1)
year's Base Salary, payable in twelve (12) equal monthly installments or (ii)
nine (9) months' Base Salary or the Base Salary for the then remaining term of
the Employment Period, whichever is greater, in each case payable at the same
rate and in the same manner as set forth in SECTION 5 above.
11. PROPRIETARY INFORMATION AND INVENTION AGREEMENT. The Employee has
executed the Proprietary Information and Invention Agreement, a copy of which is
attached hereto as EXHIBIT A, and covenants that he will comply with the terms
of such Proprietary Information and Invention Agreement during the term thereof.
12. ENFORCEMENT. It is the desire and intent of the parties hereto
that the provisions of this Agreement will be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, to the extent that a restriction
contained in this Agreement is more restrictive than permitted by the laws of
any jurisdiction where this Agreement may be subject to review and
interpretation, the terms of such restriction, for the purpose only of the
operation of such restriction in such jurisdiction, will be the maximum
restriction allowed by the laws of such jurisdiction and such restriction will
be deemed to have been revised accordingly herein. A court having jurisdiction
over an action arising out of or seeking enforcement of any restriction
contained in this Agreement may modify the terms of such restriction in
accordance with this SECTION 12.
13. REMEDIES; SURVIVAL. (a) The Employee acknowledges and
understands that the provisions of this Agreement are of a special and unique
nature, the loss of which
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<PAGE>
cannot be accurately compensated for in damages by an action at law, and that
the breach or threatened breach of the provisions of this Agreement would cause
the Company irreparable harm. In the event of a breach or threatened breach by
the Employee of the provisions of SECTION 11 above, the Company will be entitled
to an injunction restraining him from such breach. Nothing herein contained
will be construed as prohibiting the Company from pursuing any other remedies
available at law for any breach or threatened breach of this Agreement.
(b) Notwithstanding anything contained in this Agreement to the
contrary, the provisions of SECTIONS 11, 12, 14, 15, 16, 20, 21 and this
SECTION 13, will survive the expiration or other termination of this Agreement
until, by their terms, such provisions are no longer operative.
14. STOCK OPTIONS. In the event the Employee is terminated from the
Company or a subsidiary within one (1) year of either of the events specified in
(i) or (ii) below, or the employee's responsibilities or duties are
substantially reduced within one (1) year of either of the events specified in
(i) or (ii) below, all outstanding Stock Options at that date of termination or
date of reduction of responsibilities or duties shall become immediately
exercisable for a period of three (3) months.
(i) as a result of or in connection with any tender offer,
exchange offer, merger or other business combination, sale of
assets or contested election, or combination of the
foregoing, the persons who were Directors of the Corporation
just prior to such event cease to constitute a majority of
the Corporation's Board of Directors; or
(ii) the stockholders of the Corporation approve an agreement
providing for a transaction in which the Corporation will
cease to be an independent publicly-owned corporation or a
sale or other disposition of all or substantially all of the
assets of the Corporation occurs.
15. NOTICES. All notices, demands and other communications which are
required to be given, served or sent pursuant to this Agreement will be in
writing and will be delivered personally or sent by air courier or first class
certified or registered mail, return receipt requested and postage prepaid,
addressed as follows:
If to the Employee:
Krystyna Belendiuk, Ph.D.
11208 Tara Road
Potomac, Maryland 20854
If to the Company:
Pharmavene, Inc.
1550 East Gude Drive
Rockville, Maryland 20850
Attention: President
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement will be deemed to have been given on the
date of delivery if
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<PAGE>
personally delivered; on the business day after the date when sent if sent by
air courier; and on the third business day after the date when sent if sent by
mail, in each case addressed to such party as provided in this SECTION 14 or in
accordance with the latest unrevoked direction from such party.
16. BINDING AGREEMENT; BENEFIT. The provisions of this Agreement will
be binding upon and will inure to the benefit of, the respective heirs, legal
representatives and successors of the parties hereto.
17. GOVERNING LAW. This Agreement will be governed by, and construed
and enforced in accordance with, the laws of the State of Maryland (not
including the choice of law provisions thereof).
18. WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and will not
operate or be construed as a waiver of any subsequent breach by such other
party.
19. ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements or understanding among the parties with respect
thereto. This Agreement may be amended only by an agreement in writing signed
by the parties hereto.
20. HEADINGS. The Section headings contained in this Agreement are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
21. SEVERABILITY. Subject to the provisions of SECTION 12 above, any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction will, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction will
not invalidate or render unenforceable such provision in any other jurisdiction.
22. ASSIGNMENT. This Agreement is personal in its nature and the
parties hereto shall not, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; PROVIDED, HOWEVER, that
the provisions hereof will inure to the benefit of, and be binding upon, each
successor of the Company, whether by merger, consolidation, transfer of all or
substantially all assets or otherwise.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
PHARMAVENE, INC.
By: /s/ James D. Isbister
-----------------------------------
James D. Isbister, President
/s/ Krystyna Belendiuk
-----------------------------------
Krystyna Belendiuk, Ph.D.
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<PAGE>
CONTINUING SERVICES AGREEMENT
This CONTINUING SERVICES AGREEMENT is entered into as of this 1st
day of July, 1996 by and among Pharmavene, Inc., a Delaware corporation with
offices located at 1550 East Gude Drive, Rockville, Maryland 20850 (the
"Company"), and James D. Isbister, an individual residing at 9521 Accord Drive,
Potomac, Maryland 20854 (the "Employee").
WHEREAS, the Employee is a party to an Employment Agreement between
the Company and the Employee dated as of December 12, 1995 (the "Employment
Agreement") which provides for the Employee's employment as the President and
Chief Executive Officer of the Company;
WHEREAS, the Employee has resigned his position as President of the
Company effective July 1, 1996; and
WHEREAS, the Employee also serves as the Chairman of the Board of
Directors of the Company.
WHEREAS, the Company and the Employee wish to set forth in writing the
terms and conditions upon which the Employee will continue to provide certain
services to the Company in the event of his "Voluntary Termination" (as such
term is defined in the Employment Agreement) as Chief Executive Officer of the
Company.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and agreements contained herein, the Company and the Employee agree as
follows:
1. APPLICABILITY OF THE EMPLOYMENT AGREEMENT. The Employee will
continue to be employed as the Company's Chief Executive Officer pursuant to the
terms of the Employment Agreement until such time as his employment as Chief
Executive Officer is terminated in accordance with the terms and conditions
contained in the Employment Agreement. Until the Employee's employment as Chief
Executive Officer is terminated in accordance with the terms of the Employment
Agreement, the terms of the Employment Agreement shall remain in full force and
shall be applicable to the Employee, unless such Employment Agreement is amended
or modified after the date hereof by written agreement of the parties thereto.
2. TERMINATION OF EMPLOYMENT; CONTINUATION OF SERVICE AS CHAIRMAN OF
THE BOARD. In the event of the Employee's Voluntary Termination as Chief
Executive Officer of the Company on or before December 31, 1998 in accordance
with the terms of SECTION 9 of the Employment Agreement, the Employee shall
thereafter and through December 31, 1998 (or such later date as the Company and
the Employee may agree) remain in the employ of the Company as the Chairman of
the Board of Directors. For so long as the Employee continues to serve as
Chairman of the Board of Directors, he shall be deemed an "employee" of the
Company for all purposes. As Chairman of the Board of Directors, the Employee
shall perform such duties and services as are consistent with his position, and
agrees to perform well and faithfully such duties and responsibilities.
<PAGE>
3. COMPENSATION OF THE EMPLOYEE. In the event of the Employee's
Voluntary Termination as Chief Executive Officer on or before December 31, 1998,
the Company will pay to the Employee an annual base salary of $65,000,
commencing on the day following the Employee's resignation as Chief Executive
Officer, and payable in such installments as is the policy of the Company with
respect to employees of the Company at substantially the same employment level
as the Employee. In the event of the Employee's Voluntary Termination as Chief
Executive Officer on or before December 31, 1996, the Employee will be eligible
to receive a bonus in respect of the Company's fiscal year ended December 31,
1996, pro rated based on the number of full months in such year that the
Employee was employed as Chief Executive Officer. Such bonus shall be awarded
in accordance with the Company's regular policies and procedures for awarding
bonuses to employees.
4. OTHER BENEFITS. Upon the Employee's Voluntary Termination as
Chief Executive Officer, and for so long as the Employee remains in the employ
of the Company as Chairman of the Board of Directors, the Employee shall
continue to be eligible to receive health insurance coverage pursuant to the
Company's group health insurance plans or programs for its employees, on the
same terms as are made available to the senior executive officers of the
Company. In addition, for so long as the Employee remains in the employ of the
Company as Chairman of the Board of Directors, the Company will reimburse the
Employee, in accordance with the practice of the Company from time to time, for
all reasonable and necessary travel expenses and other disbursements incurred by
him for or on behalf of the Company in the performance of his duties hereunder
upon presentation by the Employee to the Company of appropriate vouchers.
5. STOCK OPTIONS. Upon the Employee's Voluntary Termination as
Chief Executive Officer, all options to purchase the Company's common stock
previously granted to the Employee shall remain outstanding and shall continue
to vest for so long as the Employee remains in the employ of the Company as
Chairman of the Board of Directors, in accordance with the terms and provisions
of the Company's Stock Option Plan and the stock option agreements entered into
between the Company and the Employee as if such Voluntary Termination had not
occurred. In addition, notwithstanding any provision to the contrary in the
Company's Stock Option Plan or any stock option agreement, all stock options
held by the Employee will vest and become exercisable immediately in the event
of the Employee's death or disability.
6. PROPRIETARY INFORMATION AND NONCOMPETITION AGREEMENT. The
Employee has executed a Proprietary Information and Noncompetition Agreement and
covenants that he will continue to comply with the terms of such agreement
during the term thereof.
7. SURVIVAL. Notwithstanding anything contained in this Agreement
to the contrary, the provisions of SECTIONS 5, 6, 8, 10, 14, 15 and this SECTION
7 will survive the expiration or other termination of this Agreement until, by
their terms, such provisions are no longer operative.
8. NOTICES. All notices, demands and other communications which are
required to be given, served or sent pursuant to this Agreement will be in
writing and will be
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<PAGE>
delivered personally or sent by air courier or first class certified or
registered mail, return receipt requested and postage prepaid, addressed as
follows:
If to the Employee:
James D. Isbister
9521 Accord Drive
Potomac, Maryland 20854
If to the Company:
Pharmavene, Inc.
1550 East Gude Drive
Rockville, Maryland 20850
Attention: Secretary
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement will be deemed to have been given on the
date of delivery if personally delivered; on the business day after the date
when sent if sent by air courier; and on the third business day after the date
when sent if sent by mail, in each case addressed to such party as provided in
this SECTION 8 or in accordance with the latest unrevoked direction from such
party.
9. BINDING AGREEMENT; BENEFIT. The provisions of this Agreement
will be binding upon and will inure to the benefit of, the respective heirs,
legal representatives and successors of the parties hereto.
10. GOVERNING LAW. This Agreement will be governed by, and construed
and enforced in accordance with, the laws of the State of Maryland (not
including the choice of law provisions thereof).
11. WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and will not
operate or be construed as a waiver of any subsequent breach by such other
party.
12. AMENDMENTS. This Agreement may be amended only by an agreement
in writing signed by the parties hereto.
13. HEADINGS. The section headings contained in this Agreement are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
14. SEVERABILITY. Subject to the provisions of SECTION 7 above, any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction will, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without
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<PAGE>
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction will not invalidate or render unenforceable
such provision in any other jurisdiction.
15. ASSIGNMENT. This Agreement is personal in its nature and the
parties hereto shall not, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; PROVIDED, HOWEVER, that
the provisions hereof will inure to the benefit of, and be binding upon, each
successor of the Company, whether by merger, consolidation, transfer of all or
substantially all assets or otherwise.
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Continuing Services Agreement as of the day and year first above written.
PHARMAVENE, INC.
By:
------------------------------------------
Name:
Title:
James D. Isbister
---------------------------------------------
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<PAGE>
AMENDMENT NO. 2 TO
CONVERSION AND SUBSCRIPTION AGREEMENT
THIS AMENDMENT NO. 2 (the "Amendment") to the CONVERSION AND
SUBSCRIPTION AGREEMENT (the "Agreement") is made and entered into as of
December ___, 1995, by and among Pharmavene, Inc., a Delaware corporation (the
"Borrower"), and the persons or entities listed on the signature pages hereof,
each of whom (each, a "Lender," and collectively, the "Lenders") is a party to
that certain credit agreement, dated May 3, 1994, by and among the Borrower and
the Lenders (the "Credit Agreement"). This Amendment No. 2 to the Credit
Agreement supersedes Amendment No. 1 to the Credit Agreement, which hereafter
shall have no force or effect. Capitalized terms used herein that are defined
in the Agreement and the Credit Agreement shall have the respective meanings set
forth in the Agreement and the Credit Agreement, as applicable, unless otherwise
defined herein.
WHEREAS, pursuant to the terms of Section 2 of the Agreement, the
Conversion Price shall be adjusted from $1.25 per share to $0.75 per share in
the event certain events have not occurred on or before December 31, 1995; and
WHEREAS, the parties hereto wish to amend the Agreement as among
such parties to extend the date by which an initial public offering of shares
of Borrower's common stock may occur, without causing an adjustment of the
Conversion Price, to February 28, 1996. NOW, THEREFORE, it is agreed by and
among each of the parties hereto as follows:
1. AMENDMENT OF SECTION 2. Section 2 of the Agreement is hereby
amended by deleting such section in its entirety and replacing it with the
following:
"2. CONVERSION PRICE ADJUSTMENT. If the Borrower has not
consummated: (i) on or before February 28, 1996, a public offering and sale of
equity securities of the Borrower with gross proceeds of at least ten million
dollars ($10,000,000), (ii) on or before December 31, 1995, the consolidation or
merger of the Borrower with or into another entity (other than a consolidation
or merger in which the Borrower is the surviving corporation) or the sale of
substantially all of the assets of the Borrower or (iii) on or before December
31, 1995, a strategic alliance, corporate partnering arrangement, or licensing,
co-promotion or other agreement pursuant to which the Borrower receives or is
guaranteed to receive at least fifteen million dollars ($15,000,000), then, on
February 28, 1996, the Conversion Price shall be adjusted from $1.25 per share
to seventy-five cents ($.75) per share, and each Lender shall be entitled to
receive from the Borrower on such date a number of Adjustment Shares equal to
the number of shares of Series A Stock such Lender would have received if the
Conversion Price had been $.75 per share on the Conversion Date, less the
Initial Shares issued to such Lender."
<PAGE>
2. MISCELLANEOUS.
2.01 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Maryland (excluding choice
of law provisions).
2.02 EFFECT ON AGREEMENT AND CREDIT AGREEMENT. This Amendment
amends the Agreement and the Credit Agreement and shall be deemed to supersede
any and all terms of the Credit Agreement that are inconsistent herewith.
2.03 ASSIGNMENT. This Amendment shall not be assignable by any
party to any person, other than a successor entity.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed on their behalf as of the date first above written.
PHARMAVENE, INC.
By:
-------------------------------------
Name: James D. Isbister
Title: President
HEALTHCARE VENTURES III, L.P.
By Healthcare Partners III, L.P., as
General Partner
By:
-------------------------------------
Name:
Title: General Partner
HEALTHCARE VENTURES IV, L.P.
By Healthcare Partners IV, L.P., as
General Partner
By:
-------------------------------------
Name:
Title: General Partner
<PAGE>
STATE TREASURER OF THE STATE OF
MICHIGAN
Custodian of the Michigan Public
School Employees' Retirement System,
State Employees' Retirement System,
Michigan State Police Retirement
System and Michigan Judges Retirement
System
By:
-------------------------------------
Name:
Title:
THE AETNA CASUALTY AND SURETY
COMPANY
By:
-------------------------------------
Name:
Title:
EVEREST TRUST
By:
-------------------------------------
Name:
Title:
HUDSON TRUST
By:
-------------------------------------
Name:
Title:
<PAGE>
CONSENT AND AGREEMENT TO AMEND
The undersigned, as holders (the "Holders") of shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") of Pharmavene, Inc., a
Delaware corporation (the "Corporation"), hereby agree with the Corporation as
follows:
WHEREAS, the Corporation and the Holders have entered into a Third Amended
and Restated Stockholders' Agreement, dated as of June 1, 1993 and amended on
September 29, 1993, January 31, 1994 and May 22, 1995 (the "Stockholders'
Agreement");
WHEREAS, the Corporation proposes to issue shares of its Common Stock, $.01
par value ("Common Stock") in an underwritten public offering (the "Initial
Public Offering") pursuant to a Registration Statement on Form S-1
("Registration Statement"); and
WHEREAS, the Holders have certain registration rights, rights of first
offer and other rights in the Stockholders' Agreement;
NOW, THEREFORE, the Corporation and the Holders agree as follows:
1. The Corporation and each of the Holders hereby agree that Section 1
DEFINITIONS of the Stockholders' Agreement be amended as follows:
(a) The definition of "Transfer" shall be amended in its entirety to
read as follows:
"TRANSFER shall include any disposition of any Restricted
Securities or of any interest therein which would either constitute a sale
within the meaning of the Securities Act or be exempt from the registration
requirements of the Securities Act."
(b) The following shall be added to as a new definition as follows:
"Initial Public Offering" shall mean the offer and sale of
Common Stock of the Corporation pursuant to the Registration Statement
filed with the Securities and Exchange Commission on October 27, 1995, as
amended from time to time."
2. In connection with the Initial Public Offering, each of the Holders
hereby waives, effective as of the date hereof, (i) the observance of the right
of first refusal specified in Section 2.3 RIGHT OF FIRST REFUSAL of the
Stockholders' Agreement with respect to the shares of Common Stock to be issued
in the Initial Public Offering, including the right to receive prior notice of
the Initial Public Offering pursuant to Section 2.3(b), (ii) the right to
receive notice of the filing of the Registration Statement specified in Section
4 of the Stockholders' Agreement, and (iii) the right to receive notice pursuant
to the provisions of Article III, Section A.6(c) of the Corporation's Fourth
Restated Certificate of Incorporation (the "Certificate") in connection with
<PAGE>
any required approval of the Initial Public Offering and in connection with the
issuance of 75,000 warrants to purchase the Corporation's Common Stock to
certain holders of Series A Preferred Stock in connection with a loan
commitment.
3. The Corporation and each of the Holders hereby agree that Section
2.4(b) STOCK AND OPTION AGREEMENTS of the Stockholders' Agreement be amended,
effective as of the date hereof, so that the maximum number of options issuable
by the Corporation pursuant to its 1991 Stock Option Plan (the "Stock Option
Plan") be increased 1,800,000 shares (after giving effect to a one-for-four
reverse stock split). Each of the Holders hereby further waives any notice
requirements contained in Article III, Section A.6(c) of the Certificate in
connection with the approval of the foregoing amendment to Section 3a. of the
Stock Option Plan.
4. The Corporation and each of the Holders hereby agree that the Section
3.4 REQUIRED REGISTRATION of the Stockholders' Agreement be amended to include
an additional Section 3.4(c) as follows:
"(c) Anything contained herein to the contrary notwithstanding, the
Corporation shall not be obligated to cause to become effective a
registration statement under the Securities Act pursuant to this Section
3.4 until a date no sooner than six months from the effective date of the
Registration Statement filed by the Corporation in connection with its
Initial Public Offering."
5. The Corporation and each of the Holders hereby agree that Section 3.5
PIGGYBACK REGISTRATION of the Stockholders' Agreement shall be amended to add a
new sentence as the last sentence of paragraph (a):
"The rights granted under this section, including the right to receive
notice pursuant hereto, shall not apply to the Initial Public Offering."
6. The Corporation and each of the Holders hereby agree that Section 7
DURATION OF THE AGREEMENT of the Stockholders' Agreement be amended in its
entirety to read as follows:
"7. DURATION OF AGREEMENT. The rights and obligations of the
Corporation and each Investor set forth in Section 2 hereof, other than the
rights and obligations set forth in Section 2.5 hereof, shall terminate
simultaneously with the closing of the Initial Public Offering. Otherwise,
the rights and obligations of the Corporation and each Investor set forth
herein survive indefinitely until, by their respective terms, they are no
longer applicable."
7. (a) Each of the Holders hereby agrees that upon the closing of the
Initial Public Offering, each warrant to purchase Series A Preferred Stock (the
"Series A Warrants") will represent the right to receive the number of shares of
Common Stock into which the shares of Series A Preferred Stock issuable upon
exercise of the Series A Warrant would have been
-2-
<PAGE>
converted if it had been exercised immediately prior to the closing of the
Initial Public Offering. Each Holder further agrees that promptly following the
closing of the Initial Public Offering, such Holder will deliver to the
Corporation any Series A Warrants which were issued to it in order to exchange
such Series A Warrants for a like number of warrants to purchase shares of the
Corporation's Common Stock.
(b) The obligations set forth in Section 7(a) hereunder shall bind
any assignee or transferee of any part of such Holder's right, title and
interest in and under the Series A Preferred Stock and the Series A Warrants,
and such Holder agrees to require any assignee or transferee, as a precondition
to such assignment or other transfer, to confirm in writing to the Corporation
that it will abide by the terms of Section 7 of this Agreement as if it were to
party hereto.
This Consent and Agreement to Amend (the"Agreement") may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Agreement
will be binding upon the Corporation and the Holders and their respective
successors, assigns, heirs and personal representatives.
Except as otherwise provided herein, this agreement shall be effective
immediately prior to the closing of the Initial Public Offering referred to
herein.
IN WITNESS HEREOF, the parties have executed this agreement as of November
30, 1995.
PHARMAVENE, INC.
By: ____________________________________
James D. Isbister
President
HOLDERS OF THE SERIES A PREFERRED STOCK:
NAME
HEALTHCARE VENTURES II, L.P.
By: ________________________________________
Name:
Title:
-3-
<PAGE>
HEALTHCARE VENTURES III, L.P.
By: _________________________________________
Name:
Title:
HEALTHCARE VENTURES IV, L.P.
By: __________________________________________
Name:
Title:
EVEREST TRUST
By: _________________________________________
Name:
Title:
HUDSON TRUST
By: __________________________________________
Name:
Title:
__________________________________________
Lawrence Abrams
ESTATE OF NORNA SAROFIM
By: __________________________________________
Name:
Title:
-4-
<PAGE>
CASTY CHILDREN'S TRUST
By: __________________________________________
Trustee
THE AETNA CASUALTY AND SURETY COMPANY
By: ___________________________________________
Name:
Title:
STATE TREASURER OF THE STATE OF MICHIGAN,
Custodian of the Michigan Public Schools
Employees' Retirement System, State Employees'
Retirement System, Michigan State Police
Retirement System, and Michigan Judges
Retirement System
By: ___________________________________________
Name:
Title:
-5-
<PAGE>
EXHIBIT 10.25
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [****], have been
separately filed with the Commission.
AGREEMENT
This agreement is made on the 28th day of May, 1996 between The P.F.
Laboratories, Inc. whose registered office is situated at 700 Union Blvd.,
Totowa, New Jersey (hereinafter called "P.F. Labs" of the one part) and
Pharmavene, Inc. whose registered office is situated at 1550 East Gude Drive,
Rockville, Maryland (hereinafter called "the Company") of the other part.
WHEREAS Company shall supply to P.F. Labs bulk carbamazepine in 3 different
forms [****], and WHEREAS P.F. Labs shall encapsulate, bottle and package the
carbamazepine.
NOW IT IS HEREBY AGREED AND DECLARED as follows:
1. DEFINITIONS
In this Agreement unless the context does not so permit the following words
and expressions shall have the following meanings:
"Affiliate" means any company controlling, controlled by or in
common control with the company in question (control
being the ownership interest of greater than 50% of the
voting shares or interest)
"Contract Year" means a consecutive period of twelve months commencing
with the date or anniversary of this Agreement
"Ingredients" means bulk carbamazepine supplied by the Company in any
one or more of 3 different forms, whether such forms
are separate or combined.
"Product
Specifications" means the labeling and packaging specifications for the
Products as set forth in Schedule 2 attached hereto and
<PAGE>
The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
made a part hereof and as amended from time to time by
mutual agreement of P.F. Labs and the Company in
writing
"Product(s)" means the capsule form of carbamazepine meeting Product
Specifications
"Calendar Quarter" means each three calendar month period commencing on
1st January, 1st April, 1st July and 1st October in
each year
"the Territory" means the United States of America, including its
commonwealths, territories and possessions
2. COMMENCEMENT AND DURATION
This Agreement shall commence on the date hereof and, unless sooner
terminated as set forth in this Agreement, shall continue [****]; provided that
the Company may terminate this Agreement upon [****] prior written notice to
P.F. Labs given at any time after the [****] anniversary of the date on which
P.F. Labs has begun, as set forth hereunder, to supply Products for market
introduction in the United States."
3. SUPPLY OF THE PRODUCT
Subject to the provisions of this Agreement and effective with the first
order placed by the Company following the initial estimate of commercial
requirements for Products provided by the Company under Section 4(a), the
Company shall purchase and P.F. Labs shall supply the Company's requirements for
Products for sale in the Territory in accordance with Schedule 1, attached and
made a part hereof.
2
<PAGE>
The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
4. FORECASTS
(a) Three (3) months prior to each Calendar Quarter Company will
provide P.F. Labs with a written forecast as follows:
(i) A fully binding estimate for quantities of Products to be
purchased by Company and supplied by P.F. Labs during said Calendar
Quarter, with anticipated delivery dates, sizes strengths and ultimate
destinations as well as other relevant manufacturing and delivery
information
(ii) An estimate of the quantities of Product, required during
the next Calendar Quarter, [****]; and
(iii) A non-binding estimate of Product required for the
third and fourth Calendar Quarters of such forecast.
(b) Each subsequent written forecast shall update the prior estimate
and include an estimate of requirements for the next additional Calendar
Quarter, so that estimates for a rolling one-year period are always
provided.
(c) On receipt of the Company's written estimate, unless otherwise
agreed in writing between the parties, P.F. Labs shall obtain all packaging
materials required for the manufacture and packaging of the quantity of the
Products stated in such written estimate. Ingredients and capsule shells
will be provided by the Company to P.F. Labs in sufficient time and
quantity to permit P.F. Labs to carry out its obligations under this
Agreement.
(d) P.F. Labs shall use all reasonable endeavors to supply the
Company's requirements but shall be under no obligation to supply
quantities of the Products which are [****] above the binding estimate for
that Calendar Quarter. Any greater amount shall be by mutual written
agreement.
3
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The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
5. ORDERS
(a) All orders placed by the Company in respect of the Products shall
be made in writing and sent to P.F. Labs at the aforestated address and
shall specify the delivery, date, strengths, quantities, and destination as
well as other relevant information.
(b) All orders placed by the Company for the Products shall be of the
minimum batch size of [****], packaged in bottles [****] or multiples
thereof for each strength of Product specified in Schedule 1 hereto.
(c) Unless otherwise agreed in writing between the parties, the
Company shall during the period of the Agreement purchase from P.F. Labs in
each Contract Year all of its requirements for the Products in the
Territory.
(d) The delivery date specified in a purchase order will allow a
minimum lead time of 60 days from the date of receipt by P.F. Labs of such
purchase order supplied in accordance with Clause 5(a) hereof and shall
take into consideration P.F. labs production rate of [****] or [****],
provided that nothing in this paragraph shall limit P.F. Labs obligation to
supply as set forth in Clause 3.
6. DELIVERY AND INVOICING
(a) Delivery of each order of the Products shall be ex P.F. Labs
manufacturing plant.
(b) Where P.F. Labs, at the request of the Company, arranges any
carriage or insurance of any consignment on the Company's behalf, the
Company shall pay to P.F. Labs the cost of such carriage and all insurance
premiums in the manner described in Clause 9 hereof and shall indemnify
P.F. Labs against all losses, expenses, claims, and liabilities arising
from such carriage except those caused by the negligence or willful
misconduct of P.F. Labs.
4
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The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
7. PASSING OF TITLE
Title and risk in the Product shall pass to the Company on delivery at P.F.
Labs' manufacturing plant of the Product to a common carrier selected by the
Company.
8. PRICE
(a) The initial price for the Products shall be that set out in the
column of Schedule 1 hereto.
(b) Notwithstanding Sub-clause 8(a) above, at the end of each full
Contract Year P.F. Labs may revise the price to be charged for the Product
to reflect reasonable changes in the cost of packaging and labeling
Product. P.F. Labs shall give three months notice and written
justification of any price increase. In no case shall the increase be
greater than the all Cities Consumer Price Index for that year. In the
event Company determines, in its sole discretion, that a new price is
uneconomical, the Company may terminate this Agreement on [****] written
notice.
(c) P.F. Labs may increase the price to be charged for the Products
at any time to cover any additional expenses incurred by P.F. Labs as a
result of material amendments by the Company to the Product Specifications.
(d) If the process for manufacture of the Product improves by the use
of more efficient machinery P.F. Labs will reduce the price charged to
reflect this improvement, but also taking into account the initial cost and
upkeep of such machinery.
9. PAYMENT
(a) The Company will pay each invoice received from P.F. Labs net 30
days following the receipt of the invoice. Payment for each invoice shall
be made to P.F. Labs by the Company in United States dollars.
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(b) If any payment remains outstanding 14 days after becoming due
interest shall be charged at the rate of 1% per annum above the prime rate
charged by Citibank of New York to its customers until payment is made in
full to P.F. Labs.
(c) If any payment remains outstanding after becoming due under this
Agreement P.F. Labs may suspend deliveries of any orders of Products made
pursuant to this Agreement until such time as such outstanding payment has
been made.
10. WARRANTIES
(a) P.F. Labs hereby warrants that the Products supplied hereunder
shall comply with the Product Specifications on delivery but P.F. Labs
liability for breach of this Warranty shall be limited, at the Company's
option, either to replacing the defective quantities in question or
refunding to the Company the price of the said defective quantities.
(b) P.F. Labs hereby warrants that Products supplied hereunder shall
be manufactured under current good manufacturing practice regulations and
applicable sections of the Federal Food, Drug and cosmetic Act and
regulations thereunder.
(c) SUBJECT TO THE PROVISION OF SUB-CLAUSES 10(a) AND 10(b) ABOVE,
ALL CONDITIONS AND WARRANTIES EXPRESSED OR IMPLIED, STATUTORY OR OTHERWISE,
AS TO THE QUALITY OR FITNESS OF THE PRODUCTS ARE HEREBY EXCLUDED. NEITHER
P.F. LABS NOR THE COMPANY SHALL HAVE ANY LIABILITY TO THE OTHER UNDER THIS
AGREEMENT FOR ANY PUNITIVE OR EXEMPLARY DAMAGES.
(d) The Company shall be entitled to reject any quantities of the
Products in an Order delivered to it which do not comply with the Product
Specifications provided that written notice of such rejection is received
by P.F. Labs within 30 days from delivery of the order to the Company or
its nominees; provided always that if such non-compliance in the Products
could not have been identified by reasonable examination of the Products
the Company shall be entitled to give such notice within 30 days of the
date when such non-compliance could first have been reasonably identified
by the Company but not greater
6
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The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
than [****] from delivery of the order to the Company or it nominees. If
no such notice is received by P.F. Labs within such period the Company
shall be deemed to have accepted the Products.
11. PACKAGING AND PRODUCT SPECIFICATIONS - WARRANTY
(a) The Company warrants that the Ingredients and the Product
Specifications, including the statements, declarations and printed
packaging materials to be affixed to or packaged with the Products, conform
in all material respects with all applicable government statutes and
regulations for the lawful and safe shipping, handling, storage and use of
the Ingredients and Products in the Territory.
(b) The Company warrants that the Product Specification is complete
and accurate and that the Ingredients and the Product Specifications are
sufficient to enable P.F. Labs to safely manufacture the Products, and that
both conform in all material respects with all applicable sections of the
Federal Food, Drug and Cosmetic Act and regulations thereunder.
12. INDEMNIFICATION
(a) P.F. Labs shall indemnify, defend and hold harmless the Company,
its officers, directors and employees against any and all proven claims,
losses, damages and liabilities (including reasonable legal costs) incurred
by the Company to third parties to the extent that any such claim, loss,
damage or liability solely and directly results from or arises out of any
act or omission of P.F. Labs, its employees, contractors or agents, which
is in violation of any law or regulation relative to this Agreement or in
violation of the terms of this Agreement; provided that P.F. Labs shall
have no liability for any Product that does not meet the Product
Specifications as a result of defects in materials supplied by Company or
Process Equipment at Niro Inc. or because the Product Specifications or
other information provided by the Company are proven to be inaccurate.
7
<PAGE>
The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
(b) The Company shall indemnify, defend and hold harmless P.F. Labs,
its officers, directors and employees against any and all proven claims,
losses, damages and liabilities (including reasonable legal costs) incurred
by P.F. Labs to third parties to the extent that any such claim, loss,
damage or liability directly results from or arises out of any act or
omission of the Company, its employees, contractors or agents, which is in
violation of any law or regulation relative to this Agreement, or in
violation of the terms of this Agreement.
(c) Each party shall promptly notify the other of any claims subject
to indemnification. The indemnifying party shall have complete control over
the direction, handling and resolution of any and all claims including but
not limited to the selection of Counsel; provided that no such claim shall
be settled by indemnifying party without the prior approval of the
indemnified party, such approval not to be unreasonably withheld or delayed
after a written request for the same. It is agreed that no settlement
shall be made without the written consent of the indemnifying party and any
settlement made without such consent shall not be entitled to
indemnification by the indemnifying party, which consent will not be
unreasonably withheld or delayed.
(d) This Clause shall survive termination of this Agreement.
13. THE P.F. LABS NAME EMBLEM OR SYMBOL
The Company shall not use or make reference to or authorize others to use
or make reference to the P.F. Labs name or any P.F. Labs emblem or symbol in
relation to the Products or in any other manner whatsoever except as shall have
been previously authorized in writing by P.F. Labs, unless required by law or
regulation.
14. CONFIDENTIALITY
(a) Subject to the following provisions of this clause neither party
shall (whether during the term of this Agreement or for a period of [****]
thereafter) without
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the prior written consent of the other disclose to any person firm or
company any information supplied by the other under or in contemplation of
this Agreement or use any such information except as contemplated or
provided hereunder.
(b) Each party shall inform any of its employees to whom any of the
said information is disclosed of the provision of this clause and shall
ensure that each such employee shall observe such provisions.
(c) The obligation of each party under this clause shall not apply to
any information which
(i) is known to the recipient at the time of disclosure, or is
in or subsequently enter the public domain, or which is subsequently
disclosed to the recipient by a third party which has a lawful right
to make such disclosure, or is required by law to be disclosed in
which case P.F. Labs shall give prompt notice to Company prior to
disclosure.
15. INTELLECTUAL PROPERTY RIGHTS
As between P.F. Labs and the Company, P.F. Labs acknowledges that the
Company and/or its Affiliates is the owner of all the know-how and other
Intellectual Property Rights disclosed to PF Labs in relation to the Product and
of the goodwill attaching to the Product and that P.F. Labs only right in
respect of the same is to use them for the purposes and during the subsistence
of this Agreement in accordance with its terms. If P.F. Labs shall make, or
acquire rights in any improvement in the process for the manufacture of the
Product which utilizes Company information subject to Clause 14, it shall
promptly notify the Company and grant the Company a world wide non-exclusive
royalty free license to such improvement.
16. FORCE MAJEURE
(a) Neither party should be under any liability whatsoever to the
other for failure or delay in the performance of its obligations under this
Agreement where such performance becomes impracticable by reasons of Force
Majeure.
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<PAGE>
The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
(b) The party whose performance is not so affected by reason of Force
Majeure shall be entitled to terminate this Agreement forthwith by giving
written notice to the other party if the performance by the other party of
its obligations under this Agreement becomes or remains impracticable by
reason of Force Majeure for a period in excess of [****].
(c) In this clause the expression "Force Majeure" means war, labor
disputes, accidents shortages of materials, acts of government (or other
competent authorities) or any other matters (whether or not of the same
nature as the foregoing) which are beyond the reasonable control of the
party affected.
17. TERMINATION PROVISIONS
(a) Either party may forthwith upon giving written notice terminate
this Agreement in any of the following events:
(i) If the other party should be in breach of any of the terms,
conditions or provisions of this Agreement and such breach (if capable
of remedy) shall continue 30 days after notice in writing specifying
the breach and requiring the same to be remedied has been given.
(ii) If a resolution is passed or adopted for the winding up of
the other party (otherwise than for the purposes of and followed by an
amalgamation or reconstruction previously approved in writing) or if a
petition is presented for the appointment of an administrator or
liquidation (and is not discharged within 14 days) or if a receiver or
administrative receiver is appointed or an encumbrancer takes
possession of the whole or any part of its undertaking or assets or it
the other party becomes insolvent or if any analogous event shall
occur in any territory to whose jurisdiction the other party is
subject.
(iii) If the other party makes or seeks to make any composition
or arrangement with its creditors or proposes any voluntary
arrangement or is unable
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<PAGE>
to pay its debts as they fall due or if any distress or execution is
levied on any of its assets (and is not discharged within 14 days) or
if any judgment for a monetary sum be given against it and is not paid
out with 14 days or if any analogous event shall occur is any
territory to whose jurisdiction the other party is subject.
(iv) If the other party ceases or threatens to cease to carry on
the whole or any relevant part of its business or trade.
(v) If the other party not being a body corporate becomes
insolvent or commits any act of bankruptcy or if any petition or
receiving order in bankruptcy is presented or made or if any analogous
event shall occur in any territory to whose jurisdiction the other
party is subject.
(b) Termination for whatever cause of this Agreement shall be without
prejudice to the rights of either party arising hereunder or as a result of
any default or breach of obligation hereunder which shall have occurred
prior to the date of such termination.
(c) Upon termination of this Agreement the Company shall pay to P.F.
Labs all charges and expenses (if any) incurred by P.F. Labs prior to such
termination in respect of any products ordered by Company which have been
manufactured or are in the process of being manufactured by P.F. Labs, or
in respect of any packaging materials P.F. Labs purchased for the purpose
of supplying the quantities of Products identified in the Company's written
estimate in respect of which P.F. Labs has not at the time of termination
been reimbursed.
(d) Notwithstanding termination of this Agreement the provisions of
Clauses 11, 12, 14 and 19(a) shall continue in full force and effect.
18. ASSIGNMENT
(a) Neither party may assign any of its rights or obligations
hereunder to any of its Affiliates without the consent of the other,
provided either party may assign without prior written consent in case of a
merger or acquisition or transfer of all or substantially all of a party's
interest in the portion of its business to which this Agreement is
applicable.
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(b) This Agreement shall be binding on the permitted assignees and
successors of the parties hereto.
19. APPLICABLE LAW LANGUAGE AND SERVICE OF PROCESS
(a) The construction interpretation meaning validity and performance
of this Agreement shall be governed by the laws of New Jersey which is
agreed to be the proper law of this Agreement.
(b) The definitive text of this Agreement is in the English language.
In the event of any dispute concerned the construction, interpretation or
meaning of this Agreement reference shall be made to the Agreement written
in English and not to any translation into any other language.
(c) The addresses of the parties for service of any process or
documents required to be served by reason of law (or any rule code or
regulation having the force of law) in the United States are as follows:
(i) In the case of P.F. Labs, the address first set out in this
Agreement is: Attn: Mr. James Sullivan, P.F. Laboratories, 700 Union
Blvd., Totowa, New Jersey 07512.
(ii) In the case of the Company, the address is: Attn: Dr.
Edward M. Rudnic Pharmavene, Inc. 1550 East Gude Drive, Rockville,
Maryland 20850.
(d) The parties hereto submit to the non-exclusive jurisdictions of
the States of Delaware and New Jersey of the United States of America.
20. ADVERSE INFORMATION
Each party agrees to notify the other immediately by telephone (with
written follow-up) in the event it learns of any inquiry, contact or
communication received from any government regulatory agency or other official
body which adversely impacts upon regulatory approval of the Products or any of
its components or ingredients, and will, to the extent readily available,
promptly furnish the other party with copies of all written reports, comments
and communications relating thereto as well as copies of all communications
directed to a regulatory agency which
12
<PAGE>
concern the Products, its components or ingredients. In addition, each party
will promptly notify the other in writing, of any information which it may
obtain or learn of concerning possible adverse experiences with a Product, its
components or ingredients, including those related to safety, indications or
efficacy.
21. NOTICE
Any notice request or other communication given under this Agreement shall
be in writing and may be hand-delivered or sent by pre-paid certified mail (with
return receipt requested) or sent by telecopy to the recipient at the address
first set out in this Agreement (or such other address as either party may
specify by prior written notice to the other for this purpose).
22. ENTIRE AGREEMENT AND AMENDMENTS
(a) This Agreement (together with any documents referred to herein)
supersedes any preliminary or previous correspondence, negotiations,
arrangements, or agreements between the parties in relation to the matters
specifically dealt with herein and represents the entire understanding of
the parties in relation to the matters specifically dealt with herein.
(b) No amendment to or alteration of this Agreement shall be
effective unless made in writing agreed and signed on behalf of each of the
parties hereto.
23. WAIVER
(a) No relaxation, forbearance, delay, or indulgence by either party
in exercising its rights under this Agreement or any granting of time by
such party shall prejudice or affect its rights hereunder.
(b) No waiver of any default or breach under this Agreement or
failure to enforce any rights by either party shall constitute a waiver or
any subsequent or continuing default or breach.
(c) No waiver shall be effective unless made in writing agreed and
signed on behalf of the party so granting the waiver.
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<PAGE>
24. HEADINGS
The headings in this Agreement are solely for convenience and reference and
shall not be taken into account.
25. SCHEDULES, ETC.
The schedules hereto and recitals hereof shall form an integral part of
this Agreement.
26. EXPENSES
Each party shall pay its own costs and expenses incidental to or incurred
in relation to or in connection with the preparation, negotiation, execution,
and carrying into effect of this Agreement.
27. RELATIONSHIP
Each party shall be responsible for its own obligation arising under or
consequent upon this Agreement, no activities of the parties shall result in the
creation of a partnership or other relationship whereby either party shall be
held in any way responsible for the acts of omissions of the other.
28. INVALIDITY AND SEVERABILITY
If a provision, clause, or application of this Agreement shall be held
unlawful, invalid, or unenforceable, in whole or in part, by any court or other
competent authority, such provision, clause, or application shall be deemed
severable and this Agreement shall continue to be valid as to all other
provisions, clauses, or applications and the parties shall meet and negotiate in
good faith a valid and enforceable replacement for the severed provision,
clause, or application, which replacement shall be designed to achieve as nearly
as possible the same commercial objective as the original.
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<PAGE>
This Agreement has been duly executed on the date(s) indicated below
PHARMAVENE, INC. THE P.F. LABORATORIES, INC.
By: /S/ JAMES D. ISBISTER By: /S/ JAMES M. SULLIVAN
----------------------- -------------------------------
Name: James D. Isbister Name: James M. Sullivan
--------------------- -----------------------------
Title: President & CEO Title: Vice President of Logistics
--------------------- -----------------------------
Date: June 5, 1996 Date: May 28, 1996
--------------------- -----------------------------
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The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
SCHEDULE 1
[****]
16
<PAGE>
The information marked by [****] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
SCHEDULE 2
[****]
17
<PAGE>
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [****], have been
separately filed with the Commission.
AGREEMENT
THIS AGREEMENT, dated as of July 1, 1996 (the "Agreement"), is entered into
between PHARMAVENE, INC., a Delaware corporation ("Pharmavene"), having its
principal place of business at 1550 East Gude Drive, Rockville, MD 20850, and
Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation plc
("Athena"), having its principal place of business at 800 Gateway Boulevard,
South San Francisco, CA 94080.
RECITALS
A. Pharmavene is the owner or exclusive licensee of certain Patent Rights
and Trademark Rights (each as defined in Exhibit A attached) and Know-How
relating to extended release dosage forms of carbamazepine based on such Patent
Rights and/or Know-How (hereinafter defined as "Product"), a compound which may
have utility in the treatment of human diseases, including epilepsy. "Know-How"
shall mean all data, formulas, process information or other information relating
to extended release dosage forms of carbamazepine owned by Pharmavene on the
date of this Agreement or to which Pharmavene has a transferable right on such
date. Pharmavene intends to pursue approval for marketing of Product by the U.S.
Food and Drug Administration ("FDA"), under Section 505(b)(2) New Drug
Application ("NDA") for Product.
B. Athena, an Affiliate of Elan Corporation plc, is a pharmaceutical
company with expertise in biopharmaceutics, and wishes to obtain for itself and
its Affiliates, as hereinafter defined, the exclusive manufacturing, marketing,
sales and distribution rights to Product worldwide (the "Territory").
<PAGE>
C. Athena and Pharmavene each desire to enter into this exclusive
arrangement for the commercial manufacture, marketing and distribution of
Product upon the terms and conditions set out below.
D. The foregoing recitals are hereby included in and made a part of the
Agreement which follows.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
set forth below, the parties hereby agree as follows:
1. REGULATORY APPROVAL. (a) Pursuant to the development plan and budget
approved by the Committee (defined below), Pharmavene shall use its commercially
reasonable efforts to continue the development and seek and pursue FDA approval
of Product as soon as is reasonably possible. Pharmavene will provide such
information to Athena, at the Committee and Project Review Meetings (each as
defined below), as it may reasonably require in order to plan, monitor and
approve such further development and the strategy for obtaining regulatory
approval. In addition, Pharmavene shall provide Athena with reasonable access
to Pharmavene's records with respect to Product at reasonable times and on
reasonable notice.
(b) Upon the earlier of Approval (as hereinafter defined) of Product by
the FDA or the date on which Athena assumes full and direct responsibility for
the supply of Product, but in no event later than the expiration of the
Contracts (as hereinafter defined in Section 4) Pharmavene will transfer to
Athena the NDA. Until that transfer occurs, Pharmavene, and thereafter, Athena,
will be responsible for compliance with all statutory and regulatory obligations
applicable to the holder of an NDA.
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The information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
2. PHARMAVENE FUTURE DEVELOPMENT COST RECOVERY:
(a) From the date of this Agreement, Athena shall provide (either alone,
or with partners or other collaborators) all further funding necessary to carry
out the development efforts approved by the Committee, as defined below,
including work (if any) to be performed at Pharmavene. Athena hereby approves
in advance an amount not to exceed [****] to cover the agreed upon cost of
funding Pharmavene's development efforts for the first four (4) months of this
Agreement.
(b) STEERING COMMITTEE. The progress of the U.S. regulatory approval of
Product shall be monitored by a steering committee (the "Committee") as follows:
(i) The Committee shall consist of four (4) individuals, two of whom
shall be appointed (and replaced, as necessary) by each party. Meetings of the
Committee shall be held periodically at a mutually acceptable location. The
Committee shall dissolve upon the final Approval by the FDA of Product for
marketing in the United States or at such later date as agreed upon by the
parties. Athena shall pay the reasonable out-of-pocket expenses of all
Committee members in attending Committee meetings. Before each meeting of the
Committee, each party shall provide to the Committee a confidential written
report summarizing its best current estimates of its expenditures and work
performed in connection with the collaboration during the period. The Committee
shall exercise reasonable business judgment in the pursuit of its activities,
and may take action only upon the affirmative vote of at least three of its
members. The duties of the Committee shall include approving and amending, as
needed, a development plan and budget for obtaining FDA approval of Product (the
"Plan"). The Plan shall include scientific, regulatory and business milestones,
an internal and external budget and other resources to be devoted to the
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<PAGE>
approval effort. At least thirty (30) days in advance of the end of the initial
budget period set forth in Section 2(a) budgets shall be approved for six (6)
month periods and updated quarterly. In the event of a disagreement the matter
shall be referred to the President of each party for resolution.
(c) Funding for work (if any) performed at Pharmavene after the date of
this Agreement shall include all direct costs and a reasonable allocation of
Pharmavene's overhead. Pharmavene will allocate overhead to all projects in a
percentage equal to a particular project's labor divided by the total labor of
all projects multiplied by the total for all laboratory overhead and general and
administrative expenses. Any such charges will be billed monthly and will be
payable within thirty (30) days of receipt of Pharmavene's invoice by Athena.
Prior to and following FDA approval, Athena shall also use its commercially
reasonable efforts to develop and seek regulatory approvals to enable Product to
be commercialized in countries in the Territory outside the United States, as
provided in Section 8 below.
(d) The Committee will not be required to review or approve issues of
manufacturing process optimization or other development issues, except to the
extent the Approval of the NDA would be affected; provided however, the parties
will establish a rolling six (6) month budget with respect to such work (if any)
to be performed by Pharmavene and funded by Athena.
3. GRANTS.
(a) Subject to Section 4, Pharmavene hereby grants to Athena and Athena
hereby accepts from Pharmavene a sole and exclusive royalty-bearing right and
license under Patent Rights, and related Know-How to make, have made, use and
sell or have sold on its behalf Product in the Territory, including the right to
sublicense third parties (except in the United States), with the approval of
Pharmavene, which approval shall not be unreasonably withheld.
4
<PAGE>
Athena shall have the right to extend such license to its Affiliates who shall
be bound by the terms and conditions of this Agreement. The term "Affiliate" as
applied to Athena shall mean any company or other legal entity other than
Athena, in whatever country organized, controlling or controlled by Athena or
under common control with Athena. The term "control" means possession of the
power to direct or cause the direction of the management and policies whether
through the ownership of voting securities, by contract or otherwise.
Affiliates shall not be deemed sublicensees and Athena shall guarantee the
performance of its Affiliates hereunder.
(b) Athena agrees to forward to Pharmavene a copy of any and all fully
executed sublicense agreements for Product. In the event of a sublicense, the
sublicensee shall be bound by all applicable terms and conditions of this
Agreement and Athena shall use reasonable efforts to enforce all such
obligations, including payments and reports due from such sublicensee.
(c) If either party's tests, experiments and evaluation under this
Agreement result in an invention, discovery, improvement or other technology
necessary or useful to make, use or sell Product, whether patentable or not, and
including without limitation additional formulations or dosage strengths of
Product (an "Improvement"), ownership of such Improvement shall be determined
according to applicable patent law. If Pharmavene owns any rights in an
Improvement, it shall license its interest to Athena as additional Patent Rights
or Know-How, without additional cost or royalty beyond that provided herein.
This provision shall survive termination of this Agreement. Each party shall
promptly disclose to the other all Improvements.
(d) Athena shall have ninety (90) days from the date of this Agreement, in
its sole discretion, to determine whether it wishes to use the Trademark Rights
in its launch of the Product, in which case Pharmavene shall license such
Trademark Rights to Athena and Athena shall use such Trademark Rights with
Product. Such license shall be perpetual, exclusive, and
5
<PAGE>
paid-up. In the event Athena elects not to use the Trademark Rights, such rights
shall remain with Pharmavene and shall not be licensed hereunder.
4. MANUFACTURING. Upon Approval of the Product, Pharmavene shall, for
the duration of its current agreements with its suppliers (the "Contracts")
provide or arrange for the supply of Athena's requirements for Product in the
Territory. After the contracts expire or are terminated Athena will manufacture
or arrange for the manufacture of Product. The price Athena shall pay for
Product under the Contracts shall be the prices set forth in the Contracts
(including, but not limited to contracts for raw materials, processing,
encapsulation and packaging) and Pharmavene's direct manufacturing costs (if
any) and a reasonable allocation of Pharmavene's overhead as described in
Paragraph 2(c). At Athena's cost, approved in advance under Section 2(d) above,
(with such approval not to be unreasonably withheld) Pharmavene will continue to
provide quality assurance/quality control under the Contracts. Any such charges
described herein will be billed monthly and will be payable within thirty (30)
days of receipt of Pharmavene's invoice by Athena. Thereafter (or earlier, if
termination of one or more of the Contracts can be accomplished by Athena, in
its sole discretion, but with no out-of-pocket cost to Pharmavene), Athena shall
have the exclusive right and obligation to manufacture or cause to be
manufactured the Product in one or more cGMP facilities, in compliance with the
approved NDA and all applicable laws and regulations, including, without
limitation, then current FDA regulations as are in effect from time to time.
Athena also shall have the right, at any time, subject to compliance with
applicable laws and regulations and subject to termination, assumption or
renegotiation of any of the Contracts, to have the manufacture of Product
transferred to one or more facilities of Athena and Pharmavene shall provide
reasonable cooperation, subject to Athena paying Pharmavene's reasonable out-of-
pocket expenses actually incurred at Athena's request.
6
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The information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
5. MARKETING AND DISTRIBUTION. Subject to Section 8, Athena shall use
its commercially reasonable efforts to market, sell and distribute, or cause to
be marketed, sold and distributed Product in each country of the Territory in
which regulatory approval is obtained. All marketing, sale and distribution of
Product in any country shall comply with applicable laws, rules and regulations,
including but not limited to those pertaining to the packaging, labeling and
distribution of pharmaceutical products which are applicable to Product.
6. COMPENSATION. As compensation to Pharmavene under this Agreement, the
following payments shall be made:
(a) Within ten (10) days of the execution of this Agreement, Athena
shall pay to Pharmavene Two Million Dollars ($2,000,000) which payment shall
neither be refundable nor creditable.
(b) For the purposes of this Agreement, "Approval" shall mean both
(i) the final approval of the NDA by the FDA for immediate marketing of the
Product in the U.S., and (ii) the absence of any finding, ruling, order,
injunction or judgment granting exclusivity for Tegretol XR pursuant to the
regulations of FDA, or actual or threatened proceeding or claim seeking the
same. Within [***] of the Approval of the NDA for Product, Athena shall pay
Pharmavene the following amounts unless an action or proceeding is pending or
threatened against the FDA for its denial of exclusivity for Tegretol XR or
against Athena or Pharmavene asserting the exclusivity of Tegretol XR; provided
however, in that event the milestone payment will be due within fourteen (14)
days of the entry of a final, nonappealable court order affirming FDA's denial
of exclusivity for Tegretol XR:
[****]
7
<PAGE>
The information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
[****] of any such payment shall be creditable against all royalties payable
under this Agreement including royalties paid to Pharmavene on Net Revenues
received by Athena from Sublicensees as follows: Following the third full
calendar year after first commercial sale of a Product, a maximum of [****] per
year, including carryover from a prior year, may be credited against such
royalties payable in each of the next five (5) calendar years, with any carry-
forward remaining to be deducted from royalties payable in the sixth calendar
year or calendar years thereafter until the full Remaining Payment has been
credited.
(c) Athena shall pay to Pharmavene a royalty on the Net Sales of
Products and on the Net Sales of any other oral, coated bead/pellet, twice daily
extended release dosage form of carbamazapine hereafter acquired or developed by
Athena or any Affiliate of Athena ("Other Products") which are sold by Athena
and its Affiliates as follows: During the first [****] following first
commercial sale, the royalty shall be [****]. During each twelve-month period
thereafter the royalty shall be [****] of Net Sales. In addition, Athena shall
pay to Pharmavene a royalty of [****] Net Revenues received from sublicenses.
Notwithstanding termination of this Agreement in a country(ies), royalties on
Net Sales of Product [****] shall be paid at the operative rate for Net Sales of
Product in each country of the world for so long as this Agreement remains in
effect in any country of the world. Neither Affiliates nor distributors shall
be deemed sublicensees under this Agreement. "Net Revenues" shall mean all
sublicense fees and milestone, royalty or other payments (other than amounts
representing the fair market value of any equity investments, or research or
development funding) actually received by Athena from any third party to
commercially market Products [****] in any country. [****]
8
<PAGE>
All such payments shall be accompanied by a written report in reasonable
detail, showing the calculation by which the payment amounts were determined.
"Net Sales" shall mean all amounts actually received from the sale of Product
or Other Products by Athena or its Affiliates, whether marketed as CARBATROL
- -TM- or under another trademark or trade name, less actual credits,
discounts, rebates and allowances allowed and taken, freight and insurance
costs incurred in transporting the Product; and sales, use, excise, value
added and similar taxes (but not including income, gross receipts or similar
taxes), customs duties, tariffs and any other governmental charges incurred;
provided, however, that a sale or transfer to any Affiliate for resale shall
not be considered a sale for purposes of this provision, but the resale by
such Affiliate shall be a sale for these purposes.
(d) In each year the amount of royalty due shall be calculated
quarterly as of March 31, June 30, September 30 and December 31 (each as being
the last day of an "Accounting Period") and shall be paid quarterly within the
sixty (60) days next following such date, every such payment shall be supported
by a written accounting and shall be made in United States currency. Whenever
for the purpose of calculating royalties conversion from any foreign currency
shall be required, such conversion shall be at the rate of exchange thereafter
published in the Wall Street Journal for the last business day of the applicable
Accounting Period.
(e) If the transfer of or the conversion into the United States
Dollar equivalent of any remittance due hereunder is not lawful or possible in
any country, such remittance shall be made by the deposit thereof in the
currency of the country to the credit and account of Pharmavene or its nominee
in any commercial bank or trust company located in that country, prompt notice
of which shall be given to Pharmavene. Pharmavene shall be advised in writing
in advance by Athena and provide to Athena a nominee, if so desired.
9
<PAGE>
(f) Any tax required to be withheld by Athena under the laws of any
foreign country for the account of Pharmavene shall be promptly paid by Athena
for and on behalf of Pharmavene to the appropriate governmental authority, and
Athena shall furnish Pharmavene with proof of payment of such tax. Any such tax
actually paid on Pharmavene's behalf shall be deducted from royalty payments due
Pharmavene.
(g) Only one royalty shall be due and payable for the manufacture,
use and sale of a Product irrespective of the number of patents or claims
thereof which cover the manufacture, use and sale of such Product.
(h) Athena or its designated Affiliate shall have the right to
purchase the lesser of (i) ten percent (10%) of the common stock of Pharmavene
offered in Pharmavene's Initial Public Offering ("IPO") or (ii) three million
dollars ($3,000,000) of such stock at the IPO price.
7. PROJECT REVIEW MEETINGS: (a) The progress of the development and
regulatory approval of Product, after Approval of the NDA, shall be monitored by
the parties through regular meetings between them ("Project Review Meetings").
Such meetings will take place semi-annually or at such other times as may be
mutually agreed upon. The purposes of the Project Review Meetings are for the
parties to exchange information and review Athena's marketing efforts. The
Project Review Meetings shall continue for one year after Approval of Product
to, among other things, facilitate communication between the parties.
(b) Following one year after Approval of Product in the United
States, Athena shall provide Pharmavene with detailed semi-annual reports of its
development, manufacturing, marketing and distribution activities under this
Agreement, including, but not limited to, plans in those countries where it is
not yet marketing Product. Athena shall also provide such other
10
<PAGE>
The information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
written and oral summary reports as Pharmavene shall reasonably request and
shall meet with Pharmavene, if requested, to review and discuss these reports.
8. DUE DILIGENCE. Athena shall use its commercially reasonable efforts
to have approved, manufacture, market, distribute and sell Product in the
Territory.
[****]
(b) The grant-back of rights to Pharmavene hereunder will include transfer
of the registration (NDA equivalent), any associated clinical data and any Know-
How originally transferred to Athena by Pharmavene. Improvements made by Athena
on any Product will not be granted back to Pharmavene.
(c) Subject to Section 9(b) below, in the event Athena fails to meet its
obligations hereunder in a country with reasonable commercial potential outside
of the Major Markets or the other European Union countries, or notifies
Pharmavene that it does not intend to market in any such country, Pharmavene
shall have the option to terminate the licenses and rights in this Agreement to
the extent applicable to such country; provided that prior to exercising this
option Pharmavene will notify Athena and provide Athena with a reasonable
opportunity to discuss the matter with Pharmavene. Pharmavene shall be notified
promptly if Athena does not intend to market in any such country. In the event
of termination all rights and licenses shall revert to Pharmavene, in the
Territory or in a country, as the case may be, including any NDA-equivalent
registrations for Product.
9. TERM AND TERMINATION; DEFAULT. [****] Thereafter, Athena shall have a
fully paid up, perpetual, non-exclusive license in such country.
11
<PAGE>
The information marked by [***] has been omitted pursuant to a request for
confidential treament. The omitted portion has been separately filed with the
Commission.
(a) Athena may terminate this Agreement for any country in all or any
part of the Territory at any time (except the United States where Athena may
only terminate under this paragraph on or after [****] in its sole discretion,
upon ninety (90) days' prior written notice to Pharmavene. Such termination
shall not affect any rights or obligations accrued as of the date of such
termination, or any other country in the Territory. In the event of termination
by Athena under this subparagraph, all rights and licenses, and the license and
right to manufacture, market, sell and distribute Product in that country only
shall revert to and be owned exclusively by Pharmavene and Pharmavene shall be
licensed all as set forth in Section 8, except that Athena shall be entitled to
market and distribute any inventory then on hand or committed for manufacture;
and shall make any payments based on Net Sales and Net Revenue as calculated
above. In addition, if it has undertaken sole manufacture as of the date of
such termination, Athena will use commercially reasonable efforts to continue to
supply Product to Pharmavene for a transition period of up to [****] months at
Athena's fully allocated cost for Product, including a reasonable allocation of
overhead. Pharmavene will use its commercially reasonable efforts to establish
an alternate source of supply as soon as possible.
(b) Except as specifically provided in Section 8 above, with respect
to due diligence, either party may terminate this Agreement upon the breach of
any material provision of this Agreement by the other, if the defaulting party
has not cured such breach within ninety (90) days after written notice thereof
by the non-defaulting party. In the event of termination by Pharmavene under
this subparagraph, Athena shall be entitled to market and distribute any
inventory then on hand or committed for manufacture; and shall make any payments
based on Net Sales or Net Revenues as calculated above.
12
<PAGE>
10. CONTROL OF PATENTS AND TRADEMARKS. During the term of this Agreement,
Pharmavene shall have responsibility for and shall control and use commercially
reasonable efforts to pursue, and Athena shall be responsible for payment of
reasonable expenses of, the preparation, filing, prosecution and maintenance of
all its patents, trademarks and related rights pertaining to Product Patent
Rights, and shall consult with and consider the reasonable requests of Athena in
connection therewith. With respect to any Patent Rights, each patent
application (including continuations, continuations-in-part, and divisionals),
office action, response to office action, request for terminal disclaimer, and
request for reissue or reexamination of any patent issuing from such application
shall be provided to Athena sufficiently prior to the filing of such
application, response or request to allow for review and comment by Athena.
Pharmavene shall have the right to take any action that in its judgment is
necessary to preserve such Patent Rights.
(a) If Athena does not elect to use the trademark CARBATROL -TM- with
Product as set forth in Section 3(d), Athena will adopt a new trademark for
Product and such trademark will belong exclusively to Athena. Pharmavene
will have no rights under any circumstances in such trademark. To the extent
Athena is licensed under Trademark Rights, Athena will seek registration of
the CARBATROL -TM- trademark used for Product in the Territory where not
registered, and in such case shall own and control all right, title and
interest in any such trademark. Such ownership and control of any trademark
owned by Athena shall survive full or partial termination of this Agreement
for any reason, at which time neither party shall have any right, title or
interest, express or implied, in the other's trademarks.
(b) If Athena or Pharmavene has actual notice of infringement or
possible infringement of the Patent Rights, the parties shall notify each other
and confer to determine in
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<PAGE>
good faith an appropriate course of action to enforce the Patent Rights or
otherwise abate the infringement thereof.
Athena, at its sole expense shall initially have the right to (i)
determine and take or refrain from taking appropriate action to enforce the
Patent Rights, (ii) initiate and control any litigation or other enforcement
action, and (iii) enter into, or permit, the settlement of any such litigation
or other enforcement action regarding the Patent Rights, and shall consider, in
good faith, the interests of Pharmavene in so doing; provided that no settlement
which adversely affects Patent Rights shall be entered into without Pharmavene's
consent (not to be unreasonably withheld). Pharmavene shall have the right to
join such suit, and shall pay its own fees and costs if it chooses to do so.
Pharmavene shall join as a necessary party in any such suit if required to do so
by applicable law. If Pharmavene is joined as a necessary party without its
consent, Athena will pay reasonable fees and costs actually incurred by
Pharmavene upon the presentation of detailed invoices. Athena will keep
Pharmavene reasonably apprised of the status and progress of any such
litigation.
If Athena does not, within one hundred twenty (120) days of recept of
written request to do so from Pharmavene, abate the infringement or file suit to
enforce the Patent Rights against at least one infringing party, Pharmavene
shall have the right to take or refrain from taking the same actions in such
enforcement action regarding the Patent Rights as Athena has under the previous
paragraph and retain any recovery, and Pharmavene shall consider, in good faith,
the interests of Athena in so doing. Pharmavene will keep Athena reasonably
apprised of the status and progress of any such litigation. At any time after
receipt of notice of Pharmavene's intent to file any such suit under this
Section, Athena shall have the right to join in such suit and shall pay its own
fees and costs if it chooses to do so.
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<PAGE>
Athena shall have the right to credit fifty percent (50%) of its
expenses (including reasonable attorneys' fees and costs) incurred by Athena and
its Affiliates in the filing and prosecution, defense or settlement of any suit
or other enforcement action, against any royalties or Net Revenues owing to
Pharmavene under this Agreement, until such time as Athena has taken a credit
equal to the aggregate amount of such expenses; provided that royalties due
Pharmavene hereunder may not be reduced in any Accounting Period to less than
fifty percent (50%) of royalties otherwise payable hereunder. This paragraph
shall apply to the defense of any infringement action brought by a third party
as well as to any suit or claim initiated by Athena or Pharmavene.
All amounts recovered upon the final judgment or settlement of any
such suit or other enforcement action by Athena regarding the Patent Rights
shall be shared as follows: first, to Pharmavene and Athena, pro rata, for
reimbursement of expenses (including deductions of Pharmavene royalties taken by
Athena) actually incurred by each of them in accordance with this Agreement in
the infringement proceeding to which the settlement or recovery relates (to the
extent not already recovered by Athena by credits, as provided in the above
paragraph); and thereafter, shared equally by the parties.
Pharmavene and Athena shall fully cooperate with each other in the
planning, filing and prosecution of any suit or other enforcement action
hereunder and shall execute all such documents as may be reasonably requested by
the other.
11. CONFIDENTIAL INFORMATION. Except as otherwise provided in this
Section, each party shall maintain in confidence all information of the other
party (including samples) disclosed by the other party under this Agreement (the
"Confidential Information"), and shall not use, disclose or grant the use of the
Confidential Information of the other party, except on a need-to-know basis
15
<PAGE>
to its and its Affiliates' directors, officers, employees, permitted assignees,
agents, consultants and contractors, to the extent such disclosure is reasonably
necessary in connection with such party's activities as expressly authorized by
the Agreement. To the extent that disclosure is authorized by the Agreement,
prior to disclosure, each party hereto shall obtain agreement of any such person
or entity to hold in confidence and not make use of the Confidential Information
for any purpose other than those permitted by the Agreement. Each party shall
notify the other promptly of any unauthorized use or disclosure of the other
party's Confidential Information. The obligations of this Section shall survive
any expiration or termination of this Agreement.
(a) The confidentiality obligations contained above shall not apply
to the extent that (i) the receiving party (the "Recipient") is required to
disclose Confidential Information by law, order or regulation of a governmental
agency or a court of competent jurisdiction, provided that the Recipient shall
provide to the disclosing party written notice and sufficient opportunity to
object to such disclosure or to request confidential treatment thereof; or (ii)
the Recipient can demonstrate that (x) the Confidential Information was public
knowledge at the time of such disclosure by the Recipient, or thereafter became
public knowledge, other than as a result of actions of the Recipient, its
affiliates or licensees in violation hereof; (y) the Confidential Information
was rightfully known to or independently developed by the Recipient, its
affiliates or licensees (as shown by its written records) prior to the date of
disclosure to the Recipient by the other party hereunder; or (z) the
Confidential Information was received by the Recipient, its affiliates or
licensees on an unrestricted basis from a source unrelated to any party to the
Agreement and not under a duty of confidentiality to the other party.
Notwithstanding any other provision of this Agreement, during its term Athena or
Pharmavene may disclose Confidential Information of the other necessary or
useful to carry out and perform its obligations hereunder to
16
<PAGE>
any person or entity with whom Athena or Pharmavene, as the case may be, has
entered or will enter into a confidentiality agreement solely for that purpose.
12. TERMS OF THE AGREEMENT AND USE OF NAME. Except as set forth in
Section 11 above, Pharmavene and Athena shall not disclose any terms or
conditions of the Agreement to any third party without the prior consent of the
other party (including without limitation press releases) with consent not to be
unreasonably withheld, unless required by law; provided that such disclosure may
be made with advance notice but without consent in connection with a public or
private financing.
13. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) Pharmavene represents and warrants that it has the full right and
authority, and has taken all necessary corporate action, to enter into and
perform this Agreement, and that doing so will not conflict with or create a
default under any agreement or obligation binding on Pharmavene or any of the
assets or property which are the subject of this Agreement. Pharmavene further
warrants that it is the sole owner of the Patent Rights and the Trademark Rights
listed in the attached Exhibit A. Exhibit A contains a complete and accurate
listing, with dates of filing and date of issuance of the Patent Rights and the
Trademark Rights, and such Patent Rights and the Trademark Rights as of the date
of this Agreement are unencumbered by any lien, charge, claim or encumbrance.
In addition as of the date of this Agreement, Pharmavene is not aware of any
assertion by a third party that such third party's patents or trademarks will be
infringed by the manufacture, use or sale of Product which is the subject of the
NDA or the use of the Trademark but Pharmavene has not made any special
investigation in this respect.
(b) Athena represents and warrants that it has the full right and
authority, and has taken all necessary corporate action, to enter into and
perform this Agreement, and that doing
17
<PAGE>
so will not conflict with or create a default under any agreement or obligation
binding on Athena or any of its assets or property.
14. INDEMNITIES. Athena shall indemnify and hold Pharmavene (including
its employees, officers, and directors) harmless from any third party claims,
liabilities, costs or damages caused by any manufacturing, labeling, packaging,
handling, storage, sale or distribution of Product by Athena or its Affiliates,
or by any material breach of this Agreement, or gross negligence or willful
misconduct by Athena. Pharmavene shall indemnify and hold Athena (including its
employees, officers and directors) harmless for any third party claims,
liabilities, costs, and damages resulting from Pharmavenes development work
with respect to Product; or resulting from the manufacturing, labeling,
packaging, handling, or storage by Pharmavene or its Affiliates, or by any
material breach of this Agreement, or gross negligence or willful misconduct by
Pharmavene. Each party agrees to notify the other promptly in writing of any
event for which it claims indemnity under this section, and to cooperate
reasonably in the defense of any such claim. Neither party shall settle any
claim for which it claims indemnity hereunder without the prior written consent
of the other, which shall not be unreasonably withheld.
15. MISCELLANEOUS.
(a) FURTHER ASSURANCES. Athena and Pharmavene will take all further
actions as are reasonably necessary in order to carry out the intent of this
Agreement, including without limitation entering into further documents and, in
Pharmavenes case, making available its technology, Know-How, information and
data, if necessary for such purposes. Pharmavene will not take any action,
including without limitation the withdrawal or amendment of any NDA, or the
equivalent in any country of the Territory, which would affect the ability of
Athena hereunder to manufacture, market, sell or distribute Product.
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(b) BOOKS AND RECORDS. Upon the advance written request of
Pharmavene, Athena shall permit Pharmavene or its representative to have access
during normal business hours to such of the records of Athena as may be
reasonably necessary to verify the accuracy of the payment reports hereunder for
any year ending not more than three years prior to the date of such request. If
such an inspection shows that payments are inaccurate by more than five percent
(5%), Athena shall pay the costs of such inspection.
(c) NOTICES. Any consent, notice or report required or permitted to
be given or made under the Agreement by one of the parties hereto to the other
party shall be in writing, delivered personally or by facsimile (and promptly
confirmed by personal delivery, U.S. first class mail or courier), U.S. first
class mail or courier, postage prepaid (where applicable), addressed to such
other party at its address indicated below, or to such other address as either
party may notify the other in accordance with this Section, and (unless
otherwise provided in this Agreement) shall be effective upon receipt by the
addressee.
If to Athena: Athena Neurosciences, Inc.
800 Gateway Boulevard
South San Francisco, California 94080
Attention: General Counsel
Facsimile: (415) 875-3620
If to Pharmavene: Pharmavene, Inc.
1550 East Gude Drive
Rockville, Maryland 20850
Attention: CEO
Facsimile: (301) 838-2501
cc: Carella, Byrne, Bain, Gilfillan,
Cecchi, Stewart & Olstein
6 Becker Farm Road
Roseland, NJ 07068
Attn: Elliot M. Olstein, Esq.
Facsimile: (201) 597-0250
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(d) GOVERNING LAW. The Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to the
conflicts of law principles thereof. If any part of this Agreement shall be
found unenforceable by a court of competent jurisdiction, the remainder of the
Agreement shall survive in full force and effect, and the unenforceable portion
conformed to the parties' intent, to the greatest extent legally permitted.
(e) ASSIGNMENT. Except as expressly provided herein, neither party
shall assign its rights or obligations under this Agreement, including to an
Affiliate, without the prior written consent of the other party hereto;
PROVIDED, HOWEVER, that either party may, without such consent, assign the
Agreement and its rights and obligations hereunder in connection with the
transfer or sale of all or substantially all of its assets or business, or in
the event of its merger or consolidation or change of control or similar
transaction. In the event Athena desires to assign to an Affiliate, Pharmavene
will consider, in good faith, such request.
(f) WAIVERS AND AMENDMENTS. No change, modification, extension,
termination or waiver of this Agreement shall be valid unless made in writing
and signed by duly authorized representatives of the parties.
(g) ENTIRE AGREEMENT. Except for a Confidentiality Agreement between
the parties dated as of April 27, 1995, which remains in full force and effect
according to its terms, this Agreement, together with the exhibits hereto,
embodies the entire understanding between the parties and supersedes any prior
understanding and agreements between and among them respecting the subject
matter. Except for that Confidentiality Agreement, there are no
representations, agreements, arrangements or understandings, oral or written,
between the parties relating to the subject matter of the Agreement which are
not fully expressed herein.
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(h) COUNTERPARTS. The Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(i) INDEPENDENT CONTRACTOR. Athena and Pharmavene are independent
contractors in the performance of their obligations under this Agreement, which
shall not be interpreted or construed to create a partnership, joint venture,
agency or other relationship between Pharmavene and Athena.
(j) ARBITRATION. All disputes arising under the Agreement shall first
be referred to the Presidents of each party, for good faith efforts at
resolution. If such efforts are unavailing, any such dispute (other than with
respect to the validity of intellectual property) shall be finally settled by
arbitration under the Commercial Rules of the American Arbitration Association
in effect at the time, by one or more arbitrator(s) appointed in accordance with
such Rules. The award or judgment of the arbitrator(s) shall be final, binding
and enforceable in a court of competent jurisdiction. The prevailing party in
any arbitration or legal proceeding shall be entitled to recover its costs,
including reasonable attorneys fees, from the other party as a part of any
award or judgment.
(k) FORCE MAJEURE. Neither party shall be held liable or responsible to
the other party nor be deemed to have defaulted under or breached this Agreement
for failure or delay in fulfilling or performing any term of this Agreement when
such failure or delay is caused by or results from causes beyond the reasonable
control of the affected party including but not limited to fire, floods,
earthquakes, embargoes, war, acts of war (whether war is declared or not),
insurrections, riots, civil commotions, strikes, lockouts or other labor
disturbances, acts of God or acts, omissions or
21
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delays in acting by any governmental authority or the other party; provided that
this provision shall not be applicable to events which extend beyond six (6)
months.
IN WITNESS WHEREOF, the parties have duly executed and delivered the
Agreement as of the date first written above.
PHARMAVENE, INC. ATHENA NEUROSCIENCES,
INC.
By:___________________________ By:___________________________
Name:_________________________ Name:_________________________
Title:________________________ Title:________________________
Date:_________________________ Date:_________________________
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The information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.
EXHIBIT A
PATENT RIGHTS "Patent Rights" as used herein shall mean (a) the patent
applications listed below, together with all corresponding foreign patent
applications heretofore or hereafter filed or having legal force in any country;
and (b) all patents that have issued or in the future issue from such
applications, including utility, model and design patents and certificates of
invention; and all divisionals, continuations, continuations-in-part, reissues,
renewals, supplementary protection certificates, extensions or additions to any
such patents.
U.S. Patent No. 5,326,570, issued July 5, 1994.
[****]
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EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, dated as of June 25, 1996 is entered into by
and between PHARMAVENE, INC., a Delaware corporation (the "Company") and Robert
S. Cohen (the "Employee").
WHEREAS, the Company desires to employ the Employee as President and
Chief Operating Officer of the Company, and the Employee desires to accept such
employment by the Company, on the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Employee, and the
Employee hereby accepts employment by the Company, upon the terms and conditions
hereinafter set forth.
2. TERM. Subject to the provisions of SECTIONS 6, 7, 8, and 9 below,
the employment of the Employee hereunder will be for the three-year period
commencing July 1, 1996 (the "Commencement Date") and ending on the first
anniversary of such Commencement Date. Unless either party gives written notice
of determination not to renew at least one hundred eighty (180) days prior to
the third anniversary of the Commencement Date, this Agreement shall be renewed
for one (1) year from that anniversary. Thereafter, unless either party gives
written notice of determination not to renew at least one hundred eighty (180)
days prior to any succeeding anniversary of the Commencement Date, this
Agreement shall be renewed for one (1) year from each anniversary. The term
"Employment Period" shall mean the one-year period provided for in this
SECTION 2 and any extension thereof, or any shorter period resulting from any
termination of employment under SECTION 6, 7, 8, or 9 below.
3. DUTIES AND RESPONSIBILITIES. The Employee will be employed as
President and Chief Operating Officer of the Company. The Employee will perform
such duties and services, consistent with his position, as may be assigned to
him from time to time by the Board of Directors or the Chief Executive Officer.
In furtherance of the foregoing, the Employee hereby agrees to perform well and
faithfully such duties and responsibilities and the other reasonable duties and
responsibilities assigned to him from time to time by the Board of Directors of
the Company or the Chief Executive Officer.
4. TIME TO BE DEVOTED TO EMPLOYMENT. Except for reasonable
vacations, absences due to temporary illness, and activities which have been
mutually agreed to by the parties, the Employee shall devote substantially all
of his time, attention and energies to the business of the Company during the
Employment Period. During the Employment Period, the Employee will not be
engaged in any other business activity which, in the reasonable judgment of the
Company, conflicts with the duties of the Employee hereunder, whether or not
such activity is pursued for gain, profit or other pecuniary advantage. It is
understood, however, that the Employee will serve as a Director of and will be
employed as a Consultant by Trophix Pharmaceuticals, Inc. ("Trophix") for up to
180 days after the Commencement Date. It is further understood that the
employee will work no more than 8 days per month as a Consultant to Trophix and
that the Employee will be on a leave without pay status from the Company during
the time(s) he works as a consultant for Trophix Pharmaceuticals.
<PAGE>
5. COMPENSATION; REIMBURSEMENT. (a) The Company (or, at the
Company's option, any subsidiary or affiliate thereof) will pay to the Employee
an annual base salary (the "Base Salary") of not less than $200,000, payable in
such installments as is the policy of the Company with respect to employees of
the Company at substantially the same employment level as the Employee. The
employee shall be eligible to receive an annual bonus of up to 33 1/3 of the
Employee's base salary based upon the Employee's performance.
(b) During the Employment Period, the Employee will be entitled to the
fringe benefits that are made available from time to time to employees of the
Company at substantially the same employment level as the Employee, including
eligibility to participate in any Company stock option or bonus plans.
(c) The Company will reimburse the Employee, in accordance with the
practice of the Company from time to time, for all reasonable and necessary
travel expenses and other disbursements incurred by him for or on behalf of the
Company in the performance of his duties hereunder upon presentation by the
Employee to the Company of appropriate vouchers.
6. INVOLUNTARY TERMINATION. If the Employee dies, then the
Employee's employment shall be deemed to terminate on the date of the Employee's
death. If the Employee is incapacitated or disabled by accident, sickness or
otherwise so as to render him mentally or physically incapable of performing the
services required to be performed by him under this Agreement for a period of
ninety (90) consecutive days or longer, or for ninety (90) days during any six-
month period (such condition being herein referred to as "Disability"), then the
Company, at its option, may terminate the employment of the Employee under this
Agreement immediately upon giving him notice to that effect. In the case of a
Disability, until the Company shall have terminated the Employee's employment
hereunder in accordance with the foregoing, the Employee will be entitled to
receive compensation, at the rate and in the manner provided in SECTION 5 above,
notwithstanding any such Disability. Termination pursuant to this SECTION 6 is
hereinafter referred to as an "Involuntary Termination".
7. TERMINATION FOR CAUSE. Upon a vote of the majority of the Board
of Directors, the Company may terminate the employment of the Employee hereunder
at any time during the Employment Period for "cause" (such termination being
hereinafter referred to as a "Termination for Cause") by giving the Employee
notice of such termination, whereupon such termination shall take effect
immediately. For the purpose of this SECTION 7, "cause" will mean (a) the
Employee's willful misconduct with respect to the business and affairs of the
Company or any subsidiary or affiliate thereof, (b) the Employee's neglect of
duties or failure to act which can reasonably be expected to affect materially
and adversely the business or affairs of the Company or any subsidiary or
affiliate thereof, (c) the Employee's material breach of any of the agreements
contained in SECTION 3 or 4 hereof, or the Employee's breach of the Proprietary
Information and Invention Agreement referred to in SECTION 11 below, (d) the
commission by the Employee of an act involving moral turpitude relating to the
Company or fraud, or (e) the Employee's conviction of any felony, or of any
misdemeanor involving fraud, theft, embezzlement, forgery or moral turpitude.
8. TERMINATION WITHOUT CAUSE. The Company may terminate the
employment of the Employee hereunder at any time during the Employment Period
without "cause" (such termination being hereinafter referred to as a
"Termination Without Cause") by giving the Employee written notice of such
termination. Upon the giving of such notice, termination of employment under
this SECTION 8 will take effect in ninety (90) days.
-2-
<PAGE>
9. VOLUNTARY TERMINATION. Any termination of the employment of the
Employee hereunder otherwise than as a result of an Involuntary Termination, a
Termination For Cause or a Termination Without Cause will be referred
hereinafter as a "Voluntary Termination." Following reasonable notice, a
Voluntary Termination will be deemed to be effective upon the date specified in
such notice or, in the absence of such specification, upon the date of the
giving of such notice.
10. EFFECT OF TERMINATION OF EMPLOYMENT. (a) Upon termination of the
Employee's employment hereunder pursuant to a Voluntary Termination or a
Termination For Cause, neither the Employee nor his beneficiary or estate will
have any further rights or claims against the Company under this Agreement
except to receive:
(i) the unpaid portion of the Base Salary provided for in SECTION 5(a)
above, computed on a PRO RATA basis to the date of such termination; and
(ii) reimbursement for any expenses for which the Employee shall
not have theretofore been reimbursed as provided in SECTION 5(c) above.
(iii) retention in the Company's 401(k) Program and other Company
employee benefits (as required by law) and the opportunity to purchase health
benefits under the Company's health benefits program, as required by COBRA.
(b) Upon termination of the Employee's employment hereunder pursuant
to an Involuntary Termination, neither the Employee nor his beneficiary or
estate will have any further rights or claims against the Company under this
Agreement except to receive a termination payment equal to that provided for in
SECTION 10(a) above, plus an aggregate amount equal to six (6) months' Base
Salary, payable at the same rate and in the same manner as set forth in
SECTION 5 above.
(c) Upon termination of the Employee's employment hereunder pursuant
to a Termination Without Cause, neither the Employee nor his beneficiary or
estate will have any further rights or claims against the Company under this
Agreement except to receive a termination payment equal to that provided for in
SECTION 10(a) above, plus an aggregate amount equal to the lesser of (i) one (1)
year's Base Salary, payable in twelve (12) equal monthly installments or (ii)
the Base Salary for the then remaining term of the Employment Period, whichever
is smaller, in each case payable at the same rate and in the same manner as set
forth in SECTION 5 above.
11. PROPRIETARY INFORMATION AND INVENTION AGREEMENT. The Employee has
executed the Proprietary Information and Invention Agreement, a copy of which is
attached hereto as EXHIBIT A, and covenants that he will comply with the terms
of such Proprietary Information and Invention Agreement during the term thereof.
12. ENFORCEMENT. It is the desire and intent of the parties hereto
that the provisions of this Agreement will be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, to the extent that a restriction
contained in this Agreement is more restrictive than permitted by the laws of
any jurisdiction where this Agreement may be subject to review and
interpretation, the terms of such restriction, for the purpose only of the
operation of such restriction in such jurisdiction, will be the maximum
restriction allowed by the laws of such jurisdiction and such restriction will
be deemed to have been revised accordingly herein. A court having jurisdiction
over an action arising out of or seeking enforcement of any restriction
contained in this Agreement may modify the terms of such restriction in
accordance with this SECTION 12.
-3-
<PAGE>
13. REMEDIES; SURVIVAL. (a) The Employee acknowledges and
understands that the provisions of this Agreement are of a special and unique
nature, the loss of which cannot be accurately compensated for in damages by an
action at law, and that the breach or threatened breach of the provisions of
this Agreement would cause the Company irreparable harm. In the event of a
breach or threatened breach by the Employee of the provisions of SECTION 11
above, the Company will be entitled to an injunction restraining him from such
breach. Nothing herein contained will be construed as prohibiting the Company
from pursuing any other remedies available at law for any breach or threatened
breach of this Agreement.
(b) Notwithstanding anything contained in this Agreement to the
contrary, the provisions of SECTIONS 11, 12, 14, 15, 16, 17, 18, 22, 23, and
this SECTION 13, will survive the expiration or other termination of this
Agreement until, by their terms, such provisions are no longer operative.
14. STOCK OPTIONS. On the Commencement Date the Employee will be
granted options to purchase 225,000 shares of Common Stock which will vest over
five (5) years (20% annually). The options will be granted as Incentive Stock
Options (ISO) to the maximum allowed by law and regulation. Non Qualified Stock
Options will be granted to make up any difference between the option grants
described in this Section 14 and the amount of allowable ISO grants, if any.
The exercise price of such stock options will be equal to the fair market value
of the Company's Common Stock on the date of grant (but in no event less than
85% of the price per share of Common Stock received by the Company from an
initial public offering consummated by the Company within 180 days after the
date hereof). The options will be subject to the terms and conditions of the
Company's Stock Option Plan, which is attached hereto as Exhibit B. The
Employee will be eligible to receive additional stock options annually based on
performance. In the event an optionee is terminated as an employee of the
Company or a subsidiary within one (1) year of either of the events specified in
(i) or (ii) below, or the employee's responsibilities or duties are
substantially reduced within one (1) year of either of the events specified in
(i) or (ii) below, all outstanding Stock Options at that date of termination or
date of reduction of responsibilities or duties shall become immediately
exercisable for a period of three (3) months.
(i) as a result of or in connection with any tender offer,
exchange offer, merger or other business combination, sale of
assets or contested election, or combination of the
foregoing, the persons who were Directors of the Company just
prior to such event cease to constitute a majority of the
Company's Board of Directors; or
(ii) the stockholders of the Company approve an agreement
providing for a transaction in which the Company will cease
to be an independent publicly-owned corporation or a sale or
other disposition of all or substantially all of the assets
of the Company occurs.
15. RELOCATION. The Company shall reimburse the Employee for
reasonable expenses, not to exceed an aggregate of $100,000.00, associated with
household packing and moving, realtor's fees and other closing costs, as well as
temporary housing not to exceed one hundred twenty (120) days, relating to the
Employee's relocation to the Rockville, Maryland area.
16. NOTICES. All notices, demands and other communications which are
required to be given, served or sent pursuant to this Agreement will be in
writing and will be delivered personally or sent by air courier or first class
certified or registered mail, return receipt requested and postage prepaid,
addressed as follows:
-4-
<PAGE>
If to the Employee:
Robert S. Cohen
17 Kenneth Road
Upper Montclair, New Jersey 07043
with a copy to:
Ira A. Rosenberg, Esq.
Sills Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A.
One Riverfront Plaza
Newark, New Jersey 07102-5400
If to the Company:
Pharmavene, Inc.
1550 East Gude Drive
Rockville, Maryland 20850
Attention: Secretary
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement will be deemed to have been given on the
date of delivery if personally delivered; on the business day after the date
when sent if sent by air courier; and on the third business day after the date
when sent if sent by mail, in each case addressed to such party as provided in
this SECTION 14 or in accordance with the latest unrevoked direction from such
party.
17. BINDING AGREEMENT; BENEFIT. The provisions of this Agreement will
be binding upon and will inure to the benefit of, the respective heirs, legal
representatives and successors of the parties hereto.
18. GOVERNING LAW. This Agreement will be governed by, and construed
and enforced in accordance with, the laws of the State of Maryland (not
including the choice of law provisions thereof).
19. WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and will not
operate or be construed as a waiver of any subsequent breach by such other
party.
20. ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements or understanding among the parties with respect
thereto. This Agreement may be amended only by an agreement in writing signed
by the parties hereto.
21. HEADINGS. The Section headings contained in this Agreement are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
22. SEVERABILITY. Subject to the provisions of SECTION 12 above, any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction will, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction will
not invalidate or render unenforceable such provision in any other jurisdiction.
-5-
<PAGE>
23. ASSIGNMENT. This Agreement is personal in its nature and the
parties hereto shall not, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; PROVIDED, HOWEVER, that
the provisions hereof will inure to the benefit of, and be binding upon, each
successor of the Company, whether by merger, consolidation, transfer of all or
substantially all assets or otherwise.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
PHARMAVENE, INC.
By: /s/ James D. Isbister
-----------------------------------------------
James D. Isbister, Chairman, Board of Directors
and CEO
/s/ Robert S. Cohen
----------------------------------------------
Robert S. Cohen
-6-
<PAGE>
EXHIBIT 11.1
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
COMPUTATION OF HISTORICAL NET LOSS PER SHARE
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
FOR THE PERIOD FOR THE PERIOD
FEBRUARY 16, 1990 FEBRUARY 16, 1990
(DATE OF FOR THE THREE MONTHS (DATE OF
FOR THE YEARS ENDED DECEMBER 31, INCEPTION) ENDED MARCH 31 INCEPTION)
---------------------------------- TO ---------------------- TO
1993 1994 1995 DECEMBER 31, 1995 1995 1996 MARCH 31, 1996
---------- ---------- ---------- ----------------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss............... $(5,482,771) $(4,144,982) $(6,679,218) $(24,208,911) $(1,557,135) $(5,287,295) $(29,496,206)
---------- ---------- ---------- ----------------- ---------- ---------- -----------------
---------- ---------- ---------- ----------------- ---------- ---------- -----------------
Weighted average common
shares outstanding.... 237,057 239,480 276,917 147,533 247,612 289,284 147,546
Net common shares
issuable upon the
exercise of
outstanding options
and warrants issued
within one year of
initial public
offering.............. 1,021,784 1,021,784 1,021,784 1,021,784 1,021,784 1,021,784 1,021,784
Net common shares
issuable upon
conversion of
convertible notes
payable to investors
issued within one year
of initial public
offering.............. 2,196,632 2,196,632 2,196,632 2,196,632 2,196,632 2,196,632 2,196,632
---------- ---------- ---------- ----------------- ---------- ---------- -----------------
Weighted average common
shares outstanding.... 3,455,473 3,457,896 3,495,333 3,365,949 3,466,028 3,507,700 3,365,962
---------- ---------- ---------- ----------------- ---------- ---------- -----------------
---------- ---------- ---------- ----------------- ---------- ---------- -----------------
Net loss per common and
common share
equivalent............ $(1.59) $(1.20) $(1.91) $(7.19) $(0.45) $(1.51) $(8.76)
---------- ---------- ---------- ----------------- ---------- ---------- -----------------
---------- ---------- ---------- ----------------- ---------- ---------- -----------------
</TABLE>
<PAGE>
REGISTRATION NO. 33-98706
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHARMAVENE, INC.
(Exact name of Registrant as specified in its charter)
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