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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-19193
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CAMBRIDGE NEUROSCIENCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3319074
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE KENDALL SQUARE, BUILDING 700, CAMBRIDGE, MA 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 225-0600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non affiliates of the
Registrant as of February 28, 1998, was $19,371,939. At February 28, 1998, there
were issued and outstanding 17,900,300 shares of Common Stock, par value $.001
per share.
A list of all Exhibits to this Form 10-K begins on page 36.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Cambridge NeuroScience is a neuroscience company engaged in the development
of proprietary pharmaceuticals to treat severe disorders of, or injuries to, the
nervous system. The Company's product candidates and programs include (i)
ion-channel blockers for the treatment and prevention of brain damage resulting
from traumatic brain injury ("TBI"), stroke and surgery, as well as for the
treatment of certain forms of neuropathic pain, and (ii) growth factors for the
treatment of multiple sclerosis ("MS") and peripheral neuropathies.
The Company's lead product candidate is CERESTAT (1), an ion-channel
blocker under development for the treatment of stroke and TBI. The Company
commenced Phase III clinical trials for CERESTAT in TBI in March 1996 and in
stroke in July 1996. These trials are being managed by the Company and its
collaborative partner, Boehringer Ingelheim International GmbH ("BI"). In June
1997, the Company and BI suspended patient enrollment into the stroke trial
after a planned interim analysis of the data raised concerns over the benefit to
risk ratio of drug treatment. In September 1997, the Company announced the
discontinuation of the TBI trial because a planned interim analysis of the data
showed insufficient evidence of positive clinical impact. In December 1997,
following an expanded analysis on all patients enrolled in the stroke trial as
of June 1997, the partners announced that enrollment into the stroke trial would
not resume. At that time, the Company announced its plan to further evaluate the
data before making any decisions about the future development of CERESTAT.
In March 1998, the Company reported that further analysis of the Phase III
data indicated that: (i) CERESTAT has an attractive safety profile in the TBI
patient population, and (ii) CERESTAT had a potential therapeutic benefit in a
subset of the stroke patient population which the Company and BI were continuing
to investigate. The Company and BI are expending additional efforts to further
evaluate the stroke findings and to determine if additional clinical studies in
the stroke indication will be pursued, either together or by the Company
independently. There can be no assurance that the results of the analysis will
lead the Company to go forward with additional development of CERESTAT.
Additionally, if the Company elects to continue development, there can be no
assurance that BI will concur with that decision. If the Company were to elect
to go forward with additional clinical trials of CERESTAT and BI elected not to
go forward, the Company would retain all commercial rights to CERESTAT but would
likely not have sufficient funds available to complete development of the drug.
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount from 60 to 30 staff members. The one-time cost
associated with this reduction in staff, consisting primarily of severance and
related benefits, is estimated to be approximately $800,000, which will be
expensed in the first quarter of 1998. Following this reduction in headcount,
the Company intends to sub-lease approximately half of its existing laboratory
and office facilities space. The Company is continuing to evaluate alternatives
for maximizing shareholder value, which may include the sale of some or all of
the Company's technology assets. On March 9, 1998, the Company's Board of
Directors declared a dividend in the amount of $1.00 per share, payable on April
14, 1998 to shareholders of record on April 2, 1998. The total dividend payable
is expected to be approximately $18 million, based upon the number of common
shares outstanding at February 28, 1998. Although the Company believes that it
has adequate resources to pursue the development of CERESTAT with BI, if
warranted, this reduction in headcount and dividend payment will result in fewer
resources being devoted to the Company's other research and development
programs.
(1) CERESTAT is a registered trademark of Boehringer Ingelheim International,
GmbH.
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BACKGROUND
The central nervous system, composed of the brain and spinal cord, controls
cognitive functions, interprets incoming sensory information and organizes body
movements. The peripheral nervous system, composed of nerve fibers leading to
and from the central nervous system, carries encoded information from body
sensory receptors and commands to muscles and glands. Two main cell types are
found throughout the nervous system: nerve cells, which generate and transmit
signals, and glial cells, which provide nutrition and support functions to nerve
cells.
Acute central nervous system disorders, such as stroke and traumatic
injuries to the head and spine, often cause a reduction in blood flow (ischemia)
to, and the premature death of, nerve cells, resulting in permanent disorders of
the central nervous system. Nerve cell death following an ischemic event in the
brain is triggered by the excessive release of the excitatory neurotransmitter,
glutamate, from damaged nerve terminals, which in turn stimulates the massive
entry of calcium into nerve cells through activated ion channels. Overloading
nerve cells with calcium ions activates a number of processes that ultimately
result in cell death.
In the ischemic brain, glutamate predominantly activates an ion channel
known as the N-methyl D-aspartate ("NMDA") ion channel. In animal models of
stroke and TBI, NMDA antagonists have been shown to limit the extent of brain
damage when administered after the onset of cerebral ischemia.
Chronic disorders of the nervous system, such as multiple sclerosis,
peripheral neuropathies and other degenerative disorders, are known to result
from the death of nerve or glial cells. In the development of the nervous
system, the proliferation, differentiation and survival of nerve and glial cells
are controlled by a variety of protein growth factors. These growth factors are
produced by cells of the nervous system and by their target cells. Growth
factors also play important roles during the normal regeneration of the nervous
system following damage. Animal studies suggest that one attractive therapeutic
approach to replacing damaged nerve and glial cells is to re-initiate the
processes of early development in the nervous system through the introduction of
protein growth factors. Therefore, protein growth factors offer significant
potential as treatments for a variety of neurological disorders.
CORE TECHNOLOGIES
Cambridge NeuroScience has concentrated its drug discovery and development
efforts in two main programs: ion-channel blockers to modify nerve cell
signaling or to prevent nerve cell death; and protein growth factors to prevent
degeneration of, or to regenerate, nerve and glial cells. To pursue these two
programs, the Company uses its expertise in medicinal and analytical chemistry,
molecular biology, protein chemistry and in vitro and in vivo pharmacology.
ION-CHANNEL BLOCKERS
The Company has focused on the synthesis of small organic molecules, known
as ion-channel blockers, that directly block passage of ions through certain ion
channels which control the activity of nerve cells. In cerebral ischemia,
over-stimulation of the glutamate-activated NMDA ion channel is primarily
responsible for flooding nerve cells with calcium ions, which results in cell
death. The Company is developing ion-channel blockers to selectively block the
NMDA ion channel and limit nerve cell death during acute cerebral ischemia as a
treatment for TBI and stroke.
CERESTAT, the Company's most advanced NMDA ion-channel blocker, has been
the subject of Phase III clinical trials in both TBI and stroke. These Phase III
clinical trials are being managed by the Company and its collaborative partner,
BI. Enrollment of new patients into both the TBI and stroke trials has been
stopped and the companies are collecting and analyzing the data before making a
decision regarding the future development of CERESTAT, if any. See "-- Product
Candidates -- Ion-Channel Blockers -- CERESTAT: Background and Clinical Trial
Status."
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The Company is developing CNS 5161, a compound from its NMDA ion-channel
blockers program, as a potential treatment to reduce neuropathic pain and may
consider development to limit the neurological deficits which sometimes result
from major cardiac surgeries.
In 1997 two Phase I trials in volunteers were concluded. In the second one,
a dose of 0.5 mg i.v. of CNS 5161 produced a significant reduction in perceived
pain compared to either placebo or morphine in a cold-induced model of centrally
mediated pain.
The Company has applied its expertise in discovering and developing NMDA
ion-channel blockers to the synthesis and testing of compounds that selectively
block other ion channels, such as sodium and potassium ion channels, which can
contribute to abnormal nerve cell electrical activity. The Company believes that
such ion-channel blockers may have therapeutic utility in a number of acute and
chronic neurological disorders, including spinal cord injury, migraine and
epilepsy.
The Company's ion-channel blocker product candidates for the treatment of
acute and chronic neurological disorders are being designed with the following
characteristics:
Rapid Brain Penetration. In animal models of cerebral ischemia, the more
rapidly that drugs intended to prevent nerve cell death can reach the area of
the brain at risk, the greater the degree of protection. Because of their
physical characteristics, the Company's small molecule ion-channel blockers
readily penetrate the blood-brain barrier in animals. The Company believes that
effective brain concentrations of ion-channel blockers can be rapidly achieved
in patients.
Early Intervention in Nerve Cell Death. The massive influx of lethal levels
of calcium into the cell is one of the earliest in a sequence of events leading
to nerve cell death. The Company believes that its ion-channel blockers, by
acting at an early stage in this process, can effectively shut down all
subsequent biochemical processes in this pathway that lead to nerve cell death.
High Potency. Ion-channel blockers can shut down operations of activated
ion channels, regardless of the strength of the naturally occurring stimulus.
Potential products that inhibit the function of an ion channel by other
mechanisms often can be overwhelmed by an increase in the activating stimulus.
PROTEIN GROWTH FACTORS
Growth factors are known to play an important role in the growth,
differentiation and distribution of nerve cells. They also are crucial to
maintaining the health and function of neurons. The Company has made significant
progress in the development of growth factor proteins as treatments for
disorders of the nervous system.
The Company's most advanced growth factor product candidate is recombinant
human Glial Growth Factor 2 ("rhGGF2"), a potential treatment for degenerative
diseases of the nervous system, including multiple sclerosis and peripheral
neuropathies. Over the past five years, the Company has isolated, cloned,
expressed and produced rhGGF2 and is currently focusing its investigation on the
potential use of rhGGF2 as a therapeutic intervention in the pathological
processes involved in MS.
The Company is also conducting research on two other novel protein growth
factors: Growth/Differentiation Factor-1 ("GDF-1"), a nervous-system-specific
member of the Transforming Growth Factor-(beta) ("TGF-(beta)") family, and
F-Spondin, a protein that mediates nerve growth during spinal cord development.
The Company also has an option to license technology related to Cerebellum
Derived Growth Factor from Harvard University.
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PRODUCT CANDIDATES
The following table summarizes the primary indications, development status
and holder of commercial rights for each of the Company's ("CNSI") product
candidates. This table is qualified in its entirety by reference to the more
detailed descriptions appearing elsewhere in this document.
<TABLE>
<CAPTION>
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DEVELOPMENT COMMERCIAL
PRODUCT CANDIDATE INDICATIONS STATUS(1) RIGHTS
----------------- ----------- --------- ------
ION-CHANNEL BLOCKERS
<S> <C> <C> <C>
CERESTAT TBI (2) CNSI/BI(3)
Stroke (2) CNSI/BI(3)
CNS 5161 Neuropathic pain Phase I (4) CNSI
Neurological deficits from cardiac Pre-IND CNSI(5)
surgery
NMDA, sodium, potassium Cerebral ischemia; spinal cord Preclinical CNSI
and injury; pain; migraine; epilepsy
combination ion-channel
blockers Glaucoma and other ophthalmic Preclinical CNSI/
disorders Allergan (6)
PROTEIN GROWTH FACTORS
rhGGF2 Multiple sclerosis Pre-IND CNSI
Chemotherapy-induced neuropathy; Preclinical CNSI
diabetic neuropathy
GDF-1 Multiple sclerosis; neurodegeneration Research CNSI
F-Spondin Spinal cord injuries; nerve Research CNSI
regeneration
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</TABLE>
(1) "Pre-IND" refers to toxicology and other regulatory studies for a
designated compound in anticipation of human clinical trials. "Preclinical"
refers to safety and efficacy studies conducted in animals. "Research"
refers to scientific activities to identify a specific molecule or to
select a specific clinical indication. See "Government Regulation."
(2) Enrollment in both Phase III trials has been stopped. See "--Ion-Channel
Blockers -- CERESTAT: Background and Clinical Trial Status."
(3) The Company has certain co-promotion rights for CERESTAT in the United
States, and BI has exclusive marketing rights elsewhere in the world. See
"Strategic Alliances."
(4) The Company has completed two Phase I trials of 5161. The second trial
involved volunteers who were exposed to placebo, morphine and two doses of
5161 in a pain model.
(5) BI has the right to negotiate a development and marketing agreement for CNS
5161 for this indication. See "Strategic Alliances."
(6) Allergan has the right to develop certain NMDA ion-channel blockers, sodium
ion-channel blockers and combination ion-channel blockers for the treatment
of ophthalmic disorders, including glaucoma. See "Strategic Alliances."
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ION-CHANNEL BLOCKERS
CERESTAT: Background and Clinical Trial Status
CERESTAT, the Company's most advanced product candidate, has been the
subject of Phase III clinical trials for both TBI and stroke. Enrollment in both
of these Phase III trials was stopped prior to completion, based on the results
of interim analyses of the data in each trial. The development of CERESTAT is
being managed by the Company and its collaborative partner, BI. A coordinated
series of Phase I and Phase II clinical trials was undertaken to ascertain the
safety of CERESTAT in over 400 volunteers and patients. These clinical trials
were conducted to determine the safe and tolerable doses and dosing regimens
that result in a plasma level of the compound equivalent to, or higher than, the
minimum plasma level of the compound ("target plasma level") that is associated
with the limitation of brain damage in animal models of cerebral ischemia. Four
studies were performed in volunteers, including a study in Japan that was
conducted by BI in the second half of 1996 as the initiation of clinical
development in that country. See "Strategic Alliances."
In TBI patients, two studies were conducted to determine a dosing regimen
that would produce a plasma level of CERESTAT three times the target plasma
level. The target plasma level was that level that was found to be
neuroprotective in an animal model of stroke. Following the first study in which
CERESTAT was administered on a weight-adjusted basis over a four-hour period,
the second study demonstrated that a non-weight-adjusted dosing regimen could
safely maintain such a plasma level for 72 hours. Non-weight-adjusted dosing
regimens are more easily administered in clinical trials and offer marketing
advantages.
In stroke patients, three studies were undertaken to determine a dosing
regimen that would produce a plasma level of CERESTAT equivalent to, or greater
than, the target plasma level. The first was used to determine the safety of
escalating doses of CERESTAT over a four-hour treatment period. The second was a
dose-response trial. In this clinical trial, at 90 days after treatment, the
improvement in neurological function (NIH Stroke Scale) of patients treated with
the highest dose tested was significantly better than that of placebo-treated
patients. A third study determined that a non-weight-adjusted dosing regimen
could safely maintain the target plasma level over a 12-hour period. The Company
commenced Phase III clinical trials for CERESTAT in TBI in March 1996 and in
stroke in July 1996.
On June 24, 1997 the Company announced that it was suspending enrollment
into the Phase III stroke trial following a planned interim analysis of the data
on 368 patients. The interim analysis raised concerns over the benefit to risk
ratio of drug treatment. The companies announced that they planned to collect
further information and conduct an expanded benefit to risk analysis on all of
the approximately 600 patients enrolled as of June 24, 1997 in order to assess
clinical improvement and safety. On December 16, 1997 the companies announced
they would not resume enrollment of new patients into the trial. This decision
followed a second interim analysis of the data on 628 patients who had been
enrolled prior to the temporary suspension of enrollment in June.
On September 16, 1997 the Company announced the discontinuation of its
Phase III trial of CERESTAT for TBI because a planned interim analysis of the
data showed insufficient evidence of positive clinical impact. Analysis of the
data showed that on a wide variety of safety parameters, the drug was safe and
well tolerated. The companies announced that they would continue to collect
further data and conduct an in-depth analysis on the more that 500 patients
enrolled as of September 16, 1997.
In March 1998, the Company reported that further analysis of the Phase III
data indicated that: (i) CERESTAT has an attractive safety profile in the TBI
patient population, and (ii) CERESTAT had a potential therapeutic benefit in a
subset of the stroke patient population which the Company and BI were continuing
to investigate. The Company and BI are expending additional efforts to further
evaluate the stroke findings and to determine if additional clinical studies in
the stroke indication will be pursued, either together or by the Company
independently. There can be no assurance that the results of the analysis will
lead the Company to go forward with additional development of CERESTAT.
Additionally, if the Company elects to continue development, there can be no
assurance that BI will concur with that decision. If the Company were to elect
to go forward with additional
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clinical trials of CERESTAT and BI elected not to go forward, the Company would
retain all commercial rights to CERESTAT but would likely not have sufficient
funds available to complete development of the drug.
CERESTAT: Traumatic Brain Injury
It is estimated that approximately 500,000 individuals suffer severe
injuries to the head each year in the United States. Brain damage results from
the trauma associated with these injuries and from subsequent cerebral ischemia.
The annual economic cost of TBI to the United States has been estimated to be
more than $40.0 billion. At present, there are no FDA-approved treatments that
limit or reduce the brain damage associated with traumatic injuries to the head.
At this time it appears unlikely that the Company will resume development of
CERESTAT for TBI.
CERESTAT: Stroke
In 1994, the American Heart Association estimated that there are
approximately 500,000 incidents of stroke in the United States each year and
that approximately 350,000 people survive the event. Currently, there are
approximately three million disabled stroke survivors in the United States, and
the annual economic cost of stroke to the United States has been estimated at
$30.0 billion. In July 1996, the U.S. Food and Drug Administration ("FDA")
approved the use of tissue plasminogen activator ("tPA") for the treatment of
patients who had suffered a stroke within the preceding three hours and for whom
a CT scan showed no evidence of hemorrhage. This action was based on a study
published in the New England Journal of Medicine in 1995, in which the percent
of patients deemed eligible to participate was less than 4% of all patients
screened. Intravenous tPA acts by dissolving blood clots that might have led to
a stroke. To date, there are no FDA-approved treatments for stroke that act by
any mechanism other than dissolving blood clots which limit or reduce the brain
damage associated with the cerebral ischemia.
In stroke patients, the central nervous system side effects of CERESTAT
include sedation, paresthesias (numbness) and occasional episodes of altered
sensorium, including hallucinations. The Company believes that these side
effects are transitory and manageable. Increases in blood pressure have also
been observed and have been controlled, when necessary.
CNS 5161: Post-Surgical Neuropathic Pain
The potential market for prophylaxis against neuropathic pain has been
identified based on approximately 650,000 procedures performed annually in the
United States. Glutamate (particularly NMDA) receptors have been implicated in
the induction and maintenance of such pain in animal models and NMDA antagonists
have been shown to be effective in animal models of persistent pain.
CNS 5161 is a blocker of the NMDA ion channel that was synthesized by the
Company's chemists to be chemically distinct from CERESTAT. Based on its method
of action and its pharmacokinetic profile in animals, CNS 5161 was advanced
toward clinical evaluation for the treatment of neuropathic pain. Animal studies
have shown that CNS 5161 can prevent the development of a delayed pain response,
which is thought to be related to the development of chronic neuropathic pain in
humans.
The Company completed two Phase I studies of CNS 5161 in 1997. Both were
conducted in male volunteers. The first demonstrated the safety and tolerability
of selected doses of CNS 5161 given intravenously. Data from the first study
were used to choose potentially effective doses that produced little in the way
of side effects in the volunteers. The second study examined the reduction in
pain experienced after placebo, morphine and two separate doses of CNS 5161
(0.25mg and 0.5mg), administered on separate occasions to sixteen male
volunteers. CNS 5161 at 0.5mg was found to produce a statistically significant
reduction in perceived pain as compared to either morphine or placebo. The
Company is considering initiating a Phase II study of CNS 5161 in patients
suffering from post-herpectic neuralgia - a form of pain not adequately treated
with opiates. BI has the right to negotiate a development and marketing
agreement for CNS 5161 for the treatment of brain or spinal cord ischemia. See
"Strategic Alliances."
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Ion-Channel Blockers for Ophthalmic Disorders
Ion-channel blockers may have utility in certain diseases outside the
central nervous system, such as glaucoma and other ophthalmic indications. To
this end, in November 1996, the Company entered into a collaboration with
Allergan, a pharmaceutical company specializing in ophthalmology. In this
collaboration, the Company's molecules which block NMDA ion channels, sodium ion
channels or both, will be evaluated for their ability to prevent vision loss in
animal models of the degeneration of the retina and optic nerve which occurs in
glaucoma. See "Strategic Alliances."
Other Ion-Channel Blockers for Nervous System Disorders
The Company believes that molecules which block the ion channels of nerve
cells have potential as treatments for a number of nervous system disorders.
Accordingly, the Company continues to synthesize and evaluate molecules for
their ability to block ion channels of therapeutic importance.
To discover new treatments for preventing disorders of the central nervous
system which arise from cerebral or spinal cord ischemia, the Company has
synthesized ion-channel blockers with enhanced potency in the environment of
ischemic tissues relative to their potency in the environment of normal tissues.
The Company believes that such targeted ion-channel blockers could achieve
efficacy with fewer unwanted side effects.
In addition to molecules which block NMDA ion channels, the Company has
created a library of small organic molecules which block the sodium ion channels
of nerve cells. In vitro and in vivo studies have demonstrated that sodium
ion-channel blockers can protect nerve cells from ischemic damage and can exert
other beneficial effects, such as preventing seizure activity, reducing
responses to painful stimuli, limiting the consequences of traumatic damage to
nerve fiber bundles and arresting migraine attacks. The Company believes that
molecules which block neuronal sodium ion channels have potential as treatments
for various forms of acute and chronic disorders of the nervous system,
including stroke, epilepsy, pain and migraine. The Company has recently been
working with the Epilepsy Branch at the National Institutes of Health to explore
the potential of its sodium ion-channel blockers as treatments for epilepsy.
As an extension of its work in NMDA and sodium ion-channel blockers, the
Company has synthesized molecules which have the capacity to block both NMDA ion
channels and sodium ion channels. The Company is currently conducting in vitro
and in vivo studies to test the hypothesis that such combination compounds have
enhanced efficacy in treating neurological disorders when compared to the
efficacy of compounds which block only one of these classes of ion channels.
PROTEIN GROWTH FACTORS
rhGGF2: Multiple Sclerosis
The Company is developing the protein growth factor rhGGF2 for the
treatment of multiple sclerosis. MS is a disease of the central nervous system
that is characterized by chronic inflammation and demyelination at multiple
sites in the brain and spinal cord. Approximately 350,000 people in the United
States suffer from MS. The Company is aware of three therapeutics currently
being marketed to treat MS. Betaseron(R) (Chiron Corporation/Schering AG),
Avonex(R) (Biogen, Inc.) and Copaxone(R) (Teva Pharmaceutical Industries
Ltd./Hoechst Marion Roussel Ltd.) are all based on an immunosuppression approach
to the disease, rather than the growth factor approach being pursued by the
Company.
Cambridge NeuroScience is investigating rhGGF2 in preclinical studies as a
therapeutic intervention in the pathological processes involved in MS. rhGGF2 is
a trophic factor for the glial cells that form and maintain the myelin sheath
insulating nerve axons in the central nervous system. These cells are primary
targets involved early in the pathogenesis of MS. The Company has produced
purified rhGGF2 and has demonstrated its efficacy in animal models believed to
be reflective of MS, including experimental autoimmune encephalomyelitis
("EAE"). In the acute phase of this model, rhGGF2 significantly reduced and
delayed the clinical symptoms. In the chronic,
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relapsing-remitting phase of EAE, rhGGF2 significantly reduced the clinical
effects of the disease as well as the number of observed relapses. The Company
has executed an agreement with a contract manufacturer for the production of
Good Manufacturing Practices ("GMP") quantities of rhGGF2 for use in clinical
trials.
rhGGF2: Peripheral Neuropathies
The Company believes that rhGGF2 may also be a potential treatment for
peripheral neuropathies as a result of its activity on peripheral glial cells.
Peripheral neuropathies comprise a collection of disorders that are
characterized by the degeneration of sensory and/or motor nerves. This
degeneration may be caused by injury, chemotherapy, diabetes, inherited
disorders and other factors. It was estimated in 1991 that in excess of one
million individuals in the United States suffered from some form of peripheral
neuropathy. The largest segments of this population are those with
chemotherapy-induced neuropathies and those with diabetic neuropathies. There
are, at present, no FDA-approved therapeutic agents for the prevention,
reduction or reversal of the degeneration and atrophy caused by these disorders
and injuries.
The Company is currently testing rhGGF2 in animal models of peripheral
neuropathies, such as cancer-chemotherapy-induced neuropathy. In two different
experimental paradigms (cisplatin-induced and vincristine-induced neuropathies),
rhGGF2 administration protected peripheral nerves from the effects of these
chemotherapies. The Company also believes that rhGGF2 may be a potential
treatment of other degenerative diseases of the peripheral nerves.
rhGGF2: Other Indications
Cambridge NeuroScience continues to explore the therapeutic potential of
rhGGF2 in applications beyond the central nervous system. For example, rhGGF2
has been shown to have survival actions on retinal nerve cells and inner ear
cells. Company scientists continue to monitor these findings and are currently
investigating the therapeutic potential of rhGGF2 in an animal model of hearing
loss.
Small Molecule Discovery Program Related to GGF2
Based on its experience with rhGGF2 and other members of this protein
family, referred to as neuregulins, the Company entered into a collaboration
with Repligen Corp. ("Repligen") to identify small molecule compounds for cancer
treatments. As a result of this collaboration, it was discovered that certain
compounds can antagonize the activity of neuregulins. The Company believes that
compounds with such activity may be useful in the treatment of breast, ovarian,
brain and other cancers. In the second half of 1997, the Company was awarded a
$100,000 Phase I Small Business Innovation Research grant, by the National
Institutes of Health, to conduct research in this area.
Other Protein Growth Factors
The Company is also conducting research into other growth factors that may
have utility in the treatment of other disorders of the nervous system. GDF-1 is
a member of the TGF-(beta) superfamily, and is broadly and exclusively expressed
in the nervous system. The Company believes that GDF-1 is likely to play a role
in responses to injury, ischemia and demyelination. Recombinant human GDF-1 is
currently being produced at Cambridge NeuroScience. The Company has shown that
GDF-1 potentiated the neurite outgrowth activity of another known growth factor
and also proliferated cerebellar granule cells, which are embryonic neuronal
precursors. Several members of the TGF-(beta) gene family have biological
activities that potentially can be employed for therapeutic effects in the
nervous system, including: the promotion of dopaminergic neuron survival, which
may be applicable as a treatment for Parkinson's disease, the promotion of motor
neuron survival, which may be applicable as a treatment for amyotrophic lateral
sclerosis, and immunosuppression, which may be applicable as a treatment for MS.
F-Spondin is a protein made by an important region of the developing spinal
cord, the floorplate. Since it is related to a protein known to be active in the
sciatic nerve injury model, recombinant F-Spondin may be tested for
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peripheral nerve regeneration. The Company believes that F-Spondin is an
attractive candidate molecule for therapeutic situations involving repair of the
spinal cord or peripheral nervous system.
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount from 60 to 30 staff members. The one-time cost
associated with this reduction in staff, consisting primarily of severance and
related benefits, is estimated to be approximately $800,000, which will be
expensed in the first quarter of 1998. Following this reduction in headcount,
the Company intends to sub-lease approximately half of its existing laboratory
and office facilities space. The Company is continuing to evaluate alternatives
for maximizing shareholder value, which may include the sale of some or all of
the Company's technology assets. On March 9, 1998, the Company's Board of
Directors declared a dividend in the amount of $1.00 per share, payable on April
14, 1998 to shareholders of record on April 2, 1998. The total dividend payable
is expected to be approximately $18 million, based upon the number of common
shares outstanding at February 28, 1998. Although the Company believes that it
has adequate resources to pursue the development of CERESTAT with BI, if
warranted, this reduction in headcount and dividend payment will result in fewer
resources being devoted to the Company's other research and development
programs.
STRATEGIC ALLIANCES
The Company has formed collaborations with pharmaceutical companies to
assist in the development of its potential products, provide capital for such
development and share development risk. The Company from time to time conducts
discussions with selected companies regarding collaborations, mergers,
acquisitions or product-licensing arrangements. No assurance can be given,
however, that any collaborations, mergers, acquisitions or licensing
arrangements will be completed in the foreseeable future or on terms favorable
to the Company.
Boehringer Ingelheim International GmbH
In March 1995, Cambridge NeuroScience and BI entered into an agreement to
collaborate on the worldwide development and commercialization of CERESTAT.
Under the terms of the agreement, BI is obligated to fund 75% of the development
costs for CERESTAT in the United States and Europe and all of the development
costs in Japan. Under the agreement, product development is managed by a Joint
Development Team, with representation from both companies. This team is
supervised by a Joint Steering Committee, with two members from each company.
Upon signing the agreement, the Company received $15.0 million, consisting of
$5.0 million for expense reimbursement and $10.0 million for 1,250,000 shares of
Common Stock. In September 1996, and in connection with the commencement of the
Phase III stroke trial by BI, the Company received a milestone payment of $10.0
million for 1,237,624 shares of Common Stock. The Company may receive up to an
additional $18.0 million in cash without the issuance of additional equity after
achieving certain other milestones and will receive royalties on any product
sales.
Cambridge NeuroScience has an option to co-promote CERESTAT in the United
States with BI and the Company has notified BI of its intent to exercise this
option upon completion of a separate agreement. If approved, BI will market the
product in Europe and other geographic regions exclusively and will pay the
Company royalties on sales. When the Company and BI decided to stop enrollment
into the Phase III trials of CERESTAT, the companies agreed to delay the
negotiation of a co-promotion agreement until such time as the development
pathway of CERESTAT becomes known. Cambridge NeuroScience has retained worldwide
manufacturing rights. BI has an option to acquire the worldwide manufacturing
rights in exchange for increased royalty payments. Under the terms of the
agreement, BI has certain termination rights, including the right to terminate
the agreement upon 90 days' written notice to the Company. See "Marketing and
Sales" and "Manufacturing."
The Company and BI have collaborated on two Phase III trials of CERESTAT.
Both trials have been stopped prior to planned completion. Interim analyses of
the data from both trials have yielded results that caused the companies to
discontinue the trials. The Company continues to analyze data from the trials.
There can be no assurance that results of the analysis will lead either the
Company or BI to elect to continue development. If BI were to elect not to
continue development or to terminate the collaboration, the Company may not have
adequate
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financial resources to continue development without a partner. See " -- Product
Candidates -- Ion-Channel Blockers -- CERESTAT: Background and Clinical Trial
Status."
Allergan
In November 1996, the Company entered into a collaboration with Vision
Pharmaceuticals L.P. d/b/a Allergan Inc. ("Allergan") to jointly develop NMDA
ion-channel blockers, sodium ion-channel blockers and combination ion-channel
blockers, initially for the treatment of ophthalmic indications, including
glaucoma. Glaucoma is the second leading cause of preventable blindness in the
world, with almost three million patients in the United States alone. The
disease is usually associated with increased pressure within the eye, which can
damage the retina and the optic nerve and eventually lead to blindness. The
Company and Allergan believe that it may be possible to treat glaucoma by
blocking ion channels and thereby protecting the retina and the optic nerve from
damage. This collaboration combines the Company's proprietary technology in the
area of ion-channel blockers and Allergan's expertise in the global marketing of
treatments for eye disease and allows Cambridge NeuroScience to explore
additional areas of clinical need.
Upon signing the agreement, Allergan purchased 175,103 shares of Common
Stock from the Company for $3.0 million. Allergan will provide an additional
$3.0 million in research funding over a three-year period, subject to certain
provisions, and has established a $2.0 million line of credit for the Company.
The collaboration is supervised by a Research Management Committee, with equal
representation from both parties. Allergan will be responsible for the
development of potential products and will bear all of the development costs.
Cambridge NeuroScience may receive up to an additional $18.5 million in cash
upon the achievement of certain milestones and will receive a royalty on any
product sales.
Allergan will manufacture and market products developed under the
collaboration worldwide. Allergan has certain termination rights under the terms
of the agreement. Allergan may terminate the research phase of the collaboration
if the Research Management Committee determines that there is no reasonable
scientific basis for the commercialization of products covered by the
collaboration. Allergan may terminate the agreement at any time after May 1998
upon six months prior written notice. Either party may, in its sole discretion,
terminate the agreement upon 90 days prior written notice of a material breach
by the other party.
The J. David Gladstone Institutes
In December 1996, Cambridge Neuroscience, The J. David Gladstone Institutes
("Gladstone") and The Regents of the University of California (the "University")
entered into a collaboration for the development of treatments for Alzheimer's
disease and certain other neurological diseases, disorders or injuries. The
collaboration will focus on novel pharmaceuticals that inhibit the activity of a
form of apolipoprotein E ("apoE"), a molecule that has been widely linked to
Alzheimer's disease. Alzheimer's disease is a neurodegenerative disorder that
affects approximately four million people in the United States. The disease
destroys neurons in the brain, causing progressive dementia and eventually
death. There are currently no effective therapies that reverse or prevent this
disorder. In connection with the collaboration, the Company formed a subsidiary,
Cambridge NeuroScience Partners, Inc. ("CNPI"). Cambridge NeuroScience purchased
80% of the outstanding common stock of CNPI and made a total capital
contribution of $1.25 million in CNPI immediately prior to the consummation of
the collaboration. The University and Gladstone own 5% and 15%, respectively, of
the outstanding shares of CNPI common stock.
Pursuant to the terms of the collaboration, Gladstone will conduct a
research program over a three-year period, for which CNPI will provide at least
$1.25 million in funding per year. In the event that CNPI is unable to raise the
required funds to make its research funding payments, Cambridge NeuroScience
will lend CNPI, interest-free, all amounts necessary to enable CNPI to make such
payments. Such debt will be convertible into securities of CNPI under certain
circumstances in accordance with the stockholders' rights agreement. The
University granted CNPI an exclusive three-year option to negotiate an exclusive
worldwide, royalty-bearing license for patentable rights in intellectual
property covered by or arising from the research program within the field,
subject to certain terms and conditions set forth in the option agreement. CNPI
may not exercise the option any earlier than 30 days
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<PAGE> 12
prior to the second anniversary of the effective date of the option agreement
unless CNPI terminates the research agreement for breach by Gladstone prior to
such date. CNPI paid the University an initial license option fee and will make
additional option fee payments during the term of the research program and, if
applicable, upon exercise of the option. The final terms of such license have
not been determined but will require ongoing commitments and expenditures, in
addition to royalty payments, by CNPI. There can be no assurance that such
commitments and other terms will be favorable to CNPI and/or the Company. The
University and Gladstone also granted CNPI a right of first negotiation for an
exclusive license for inventions arising from the research program outside of
the field. Cambridge NeuroScience has guaranteed CNPI's obligations with respect
to the collaboration, including CNPI's financial obligations. Each of the
research agreement and option agreement is generally subject to termination upon
prior notice of a material breach by any of the parties thereto.
Repligen
The Company has established a collaboration with Repligen in an effort
to explore the possible development of small molecule compounds for cancer
treatments.
MARKETING AND SALES
Cambridge NeuroScience does not currently sell any products and therefore
has no marketing, sales, or distribution organization. However, under the terms
of the licensing agreement with BI for developing and commercializing CERESTAT,
Cambridge NeuroScience has an option to co-promote this product in the United
States. The Company has informed BI of its intent to exercise this option. If
the Company exercises this option, and upon completion of a separate
co-promotion agreement, the Company intends either to hire and train a qualified
sales force to perform its promotional activities to prescribing physicians in
the United States or to contract with a third party to perform such activities.
When the Company and BI decided to stop enrollment into the Phase III trials of
CERESTAT, the companies agreed to delay the negotiation of a co-promotion
agreement until such time as the development pathway of CERESTAT becomes known.
Cambridge NeuroScience believes that, in the case of TBI and stroke
patients, ion-channel blocker treatments would be administered in the context of
emergency medicine. Prophylactic treatments for preventing brain damage from
surgical complications would likely be administered by anesthesiologists. In
addition, treatments for most peripheral neural and muscular disorders will
typically be administered as chronic therapy under the direction of
neurologists. Because all of these drug treatments would be hospital- or
specialty-clinic-based, the Company believes that significant United States
sales of these product candidates could be generated with a moderately sized
sales force, rather than the more expansive sales force which would be necessary
to sell products directly to physicians.
MANUFACTURING
Cambridge NeuroScience has no manufacturing facilities and plans to rely
upon outside manufacturers to produce any near- or intermediate-term products.
To date, the Company has contracted with chemical synthesis groups to produce
kilogram quantities of several of its product candidates. The Company intends to
establish and maintain its own quality-control program for each line of
products, including a set of standard operating procedures, designed not only to
assure that the Company's products are manufactured in accordance with GMP
guidelines and other applicable regulations, but also to maintain consistent
product quality. However, no specific arrangements have been made, and there can
be no assurance that the Company will be able to establish such capabilities. BI
has an option to acquire manufacturing rights for CERESTAT in exchange for
increased royalty payments. The Company is in the process of finalizing the
production process to produce gram quantities of rhGGF2 under GMP guidelines and
has secured production arrangements with a contract manufacturer.
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COMPETITION
The fields in which Cambridge NeuroScience is involved are characterized by
rapid technological progress. New developments are expected to continue at a
rapid pace in both industry and academia. There are many companies, both public
and private, including large pharmaceutical companies, chemical companies and
specialized genetic engineering companies, engaged in developing products
competitive with products under development by the Company. Many of these
companies have greater capital, human resources and research and development,
manufacturing and marketing experience than Cambridge NeuroScience. Such
companies may succeed in developing products that are more effective or less
costly than any that may be developed by Cambridge NeuroScience and may also
prove to be more successful than Cambridge NeuroScience in production and
marketing. Competition may increase further as a result of potential advances in
the commercial applicability of biotechnology and greater availability of
capital for investment in these fields. In addition, academic, government and
industry-based research is intense, resulting in considerable competition in
obtaining qualified research personnel, submitting patent filings for protection
of intellectual property rights and establishing corporate strategic alliances.
There can be no assurance that research, discoveries and commercial developments
by others will not render any of the Company's programs or potential products
noncompetitive.
In July 1996, the FDA approved the use of tPA for the treatment of patients
who had suffered a stroke within the preceding three hours and for whom a CT
scan showed no evidence of hemorrhage. Intravenous tPA acts by dissolving blood
clots that might have led to a stroke. In addition, a number of companies are
developing other drugs to treat TBI and/or stroke. The Company believes that the
most significant competition for CERESTAT will come from other inhibitors of
responses mediated via specific ion channels. For instance, Novartis is
conducting a Phase III clinical trial in Europe of D-CPPene, which is being
developed for TBI only, and acts through a mechanism similar to, but distinct
from, that of CERESTAT. A New Drug Application (NDA) for the use of Lubeluzole
(Janssen Pharmaceutica, N.V., a subsidiary of Johnson & Johnson)in stroke was
submitted in 1997 and was accepted for filing by the U.S. Food and Drug
Administration (FDA). However, the Company believes that further regulatory
action will not be taken until results are available from an ongoing subsequent
Phase III clinical trial. There are ongoing Phase III clinical trials for
Fosphenytoin (Warner-Lambert Company) in stroke and SNX-111 (Neurex Corporation)
for TBI. Lubeluzole, Fosphenytoin and SNX-111 have actions on ion channels and
are claimed to be neuroprotective, but act through mechanisms other than the
NMDA ion-channel complex. Some compounds under development act at different
stages in the nerve cell death cascade. In 1997, Interneuron Pharmaceuticals,
Inc. submitted an NDA to the U.S. FDA for CerAxon (citicoline sodium) to treat
patients with ischemic stroke. The Company believes that CerAxon does not act on
ion channels but on other aspects of the nerve cell death cascade. The Company
believes that, even if these compounds prove to be efficacious, those that act
at other stages in the cascade will be synergistic, rather than competitive with
CERESTAT.
The Company is aware of three therapeutics currently being marketed to
treat MS. Betaseron(R) (Chiron Corporation/Schering AG), Avonex(R) (Biogen,
Inc.) and Copaxone(R) (Teva Pharmaceuticals Industries Ltd./Hoechst Marion
Roussel Ltd.) are all based on an immunosuppression approach to the disease,
rather than the growth factors approach being pursued by the Company. There can
be no assurance that the introduction of these or other products that the
Company is unaware of will not have an adverse effect on the Company's business,
financial condition and results of operations.
The Company will, for the foreseeable future, rely on its strategic
partners for certain preclinical evaluation and clinical development of its
product candidates and manufacturing and marketing of any products. In addition,
the Company relies on its strategic partners, in part, for support in its drug
discovery operations. The pharmaceutical companies with which the Company has
collaborations are in some cases attempting to develop other products to treat
diseases within the fields of the collaborations with the Company. Generally,
the Company's agreements with its strategic partners do not prohibit the
strategic partners from engaging in competitive activities with the Company. Any
product candidate of the Company, therefore, may be subject to competition with
a potential product under development by the pharmaceutical company with which
the Company is collaborating in connection with such product candidate.
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Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. The Company expects the technology associated with the
Company's research and development will continue to develop rapidly, and the
Company's future success will depend in large part on its ability to maintain a
competitive position with respect to this technology. Rapid technological
development by the Company or others may result in compounds, products or
processes becoming obsolete before the Company recovers any expenses it incurs
in connection with developing such products.
PATENTS AND PROPRIETARY TECHNOLOGY
Proprietary protection for the Company's products, technology and processes
is essential to its business. The Company's policy is to protect its technology
by, among other things, filing or causing to be filed patent applications for
technology that it considers important to the development of its business. As of
December 31, 1997, Cambridge NeuroScience had licensed or owned rights in 40
issued U.S. patents. Research and development efforts by the Company and its
collaborators led to the issuance of 18 U.S. patents and the allowance of 5
others in 1997. In addition, 7 U.S. patent applications were filed in 1997 on
behalf of the Company and its collaborators, bringing the total number of
pending U.S. applications to 65. These U.S. filings have corresponding patent
filings in other countries as well. Of the ten issued U.S. patents covering the
NMDA ion-channel blockers and their use, none will expire prior to 2007. The
Company is awaiting action on various patent applications that have either been
filed by it or by academic institutions with which it collaborates.
The Company intends to file, or cause to be filed, additional patent
applications, where appropriate, relating to new product discoveries or
improvements. The use of patents to protect proprietary positions for synthetic
chemicals is well established within the pharmaceutical industry. While the
precedents for gaining patent protection for biologically derived or produced
products through recombinant DNA technology are not as well developed, many
patents have been issued for products of this technology. There can be no
assurance, however, that patents will provide meaningful proprietary protection
to the Company, given the uncertain and complex legal and factual questions
relating to their breadth and enforceability.
There are patents held by third parties that relate to the manufacture,
development and use of the Company's product candidates for which the Company
has licenses. There can be no assurance that the Company will not in the future
require licenses to additional patents, that such licenses will be available on
commercially reasonable terms, if at all, that existing or future licenses will
not be terminated or that any such termination or failure to obtain a license
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
The Company has licensed rights to inventions relating to rhGGF2 which are
covered by five issued U.S. patents, several allowed U.S. patent applications
and other pending patent applications in the United States and foreign
countries. The Company believes that its employees and those of its licensor are
the original inventors and that the Company and its licensor are entitled to
patent protection in the United States, but the Company is aware of a
third-party patent and pending patent applications in the United States and
corresponding patent applications pending in some foreign countries that, if
issued and valid, may be construed to cover aspects of the Company's rhGGF2
product candidates. There can be no assurance that the claims of the U.S. patent
issued to the third party are not infringed, and that the claims of future
patents issuing from the third-party patent applications, if any, will not be
infringed by the Company's proposed manufacture, use or sale of products based
on the rhGGF2 technology. There can be no assurance that Cambridge NeuroScience
would prevail in any legal action seeking damages or injunctive relief for
infringement of the existing third-party patent or any patent that might issue
from such third-party applications or that any license required under such
patent would be available or, if available, would be available on commercially
reasonable terms. Failure to obtain a required license or to successfully
establish non-infringement of, or the invalidity or unenforceability of, such
third-party patents could preclude the manufacture, sale and use of the
Company's products based on such rhGGF2 technology.
Patents granted to the Company in any areas of the Company's technology may
be subject to interference proceedings in the United States or opposition
proceedings in foreign countries brought by third parties. There can be no
assurance that the Company would prevail in any such proceedings or that such
proceedings would not result
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in a material adverse effect on the Company's business, financial condition or
results of operations. An unfavorable decision in an interference or opposition
proceeding may have a material adverse effect on the business, financial
condition and results of operations of the Company.
The Company also relies upon trade secrets, know-how and continuing
technological advances to develop and maintain its competitive position. To
maintain the confidentiality of trade secrets and proprietary information, the
Company maintains a policy of requiring employees, Science Advisory Board
members, consultants and collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with the Company.
These agreements are designed both to enable the Company to protect its
proprietary information by controlling the disclosure and use of technology to
which it has rights and to provide for ownership in the Company of proprietary
technology developed at the Company. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets in the event of unauthorized use or disclosure of such information. In
addition, whenever the U.S. government funds research programs, it may obtain
nonexclusive rights to patented subject matter otherwise subject to exclusive
rights.
GOVERNMENT REGULATION
The manufacture and marketing of pharmaceutical products in the United
States require the approval of the FDA under the Federal Food, Drug and Cosmetic
Act. Similar approvals by comparable agencies are required in most foreign
countries. The FDA has established mandatory procedures and safety standards
which apply to the preclinical testing and clinical trials, as well as to the
manufacture and marketing of pharmaceutical products. Pharmaceutical
manufacturing facilities are also regulated by state, local and other
authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animal models to assess a drug's efficacy and
to identify potential safety problems. The results of these studies must be
submitted to the FDA as part of an Investigational New Drug ("IND") application,
which must be reviewed by the FDA before proposed clinical testing can begin.
Typically, clinical testing involves a three-phase process. Phase I clinical
trials are conducted with a small number of subjects and are designed to provide
information about both product safety and the expected dose of the drug. Phase
II clinical trials are designed to provide additional information on dosing and
safety in a limited patient population; on occasion, they may provide evidence
of product efficacy. Phase III clinical trials are large-scale studies designed
to provide statistically valid proof of efficacy as well as safety in the target
patient population. The results of the preclinical testing and clinical trials
of a pharmaceutical product are then submitted to the FDA in the form of a New
Drug Application ("NDA"), or for a biological product in the form of a Product
License Application ("PLA"), for approval to commence commercial sales.
Preparing such applications involves considerable data collection, verification,
analysis, and expense. In responding to an NDA or a PLA, the FDA may grant
marketing approval, request additional information, or deny the application if
it determines that the application does not satisfy its regulatory approval
criteria.
Prior to marketing, any product developed by Cambridge NeuroScience must
undergo an extensive regulatory approval process, which includes preclinical
testing and clinical trials of such product to demonstrate safety and efficacy.
This regulatory process can require many years and the expenditure of
substantial resources. Data obtained from preclinical testing and clinical
trials are subject to varying interpretations, which can delay, limit, or
prevent FDA approval. In addition, changes in FDA approval policies or
requirements may occur or new regulations may be promulgated which may result in
delay or failure to receive FDA approval. Similar delays or failures may be
encountered in foreign countries. Delays and costs in obtaining regulatory
approvals would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company recently announced
the discontinuation of enrollment in Phase III clinical trials for its lead
product candidate, CERESTAT. See "-- Product Candidates -- Ion-Channel
Blockers -- CERESTAT: Background and Clinical Trial Status."
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality-control and manufacturing procedures conform
on an ongoing basis with GMP. In complying with GMP, manufacturers must continue
to expend time, money, and effort in the area of production and quality control
to ensure full technical compliance. After the establishment is licensed, it is
subject to periodic inspections by the FDA.
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The requirements, which the Company must satisfy to obtain regulatory
approval by governmental agencies in other countries prior to commercialization
of its products in such countries, can be as rigorous and costly as those
described above.
The Company is also subject to various laws and regulations relating to
safe working conditions, laboratory and manufacturing practices, the
experimental use of animals, and the use and disposal of hazardous or
potentially hazardous substances, including radioactive compounds and infectious
disease agents used in connection with the Company's research. Compliance with
laws and regulations relating to the protection of the environment has not had a
material effect on capital expenditures or the competitive position of the
Company. However, the extent of government regulation which might result from
any legislative or administrative action cannot be accurately predicted.
REIMBURSEMENT
The Company's ability to commercialize pharmaceutical products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third-party payors are increasingly challenging the prices charged
for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any products
developed by the Company. Government and other third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products, and by refusing, in
some cases, to provide coverage for uses of approved products for disease
indications for which the FDA has not granted marketing approval. In particular,
the Company anticipates that a large percentage of patients who may receive
CERESTAT for the treatment of stroke will be covered by Medicare and be subject
to limitations on reimbursement. If adequate coverage and reimbursement levels
are not provided by government and third-party payors for the Company's
products, the market acceptance of these products would be adversely affected.
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control. In addition, an increasing emphasis on
managed care in the United States has and will continue to put pressure on
pharmaceutical pricing. Such initiatives and proposals, if adopted, could
decrease the price that the Company receives for any products it may develop and
sell in the future and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. Further, to the extent
that such proposals or initiatives have a material adverse effect on other
pharmaceutical companies that are collaborators or prospective collaborators for
certain of the Company's potential products, the Company's ability to
commercialize its potential products may be adversely affected.
EMPLOYEES
As of December 31, 1997, the Company had 68 full-time employees, of whom 53
were engaged in research and development and 15 in administration and finance.
As of March 9, 1998, following a reduction in headcount, the Company had 28
full-time employees, of whom 19 were engaged in research and development and
nine in administration and finance. Doctorates or other advanced degrees are
held by 15 of the Company's remaining employees. Each of the Company's employees
has signed a confidentiality agreement. The Company's employees are not covered
by a collective bargaining agreement. The Company considers its employee
relations to be good.
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ITEM 1 (a). EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Elkan R. Gamzu 55 President; Chief Executive Officer; Director
Robert N. McBurney 50 Senior Vice President, Research; Chief
Scientific Officer
Harry W. Wilcox, III 43 Senior Vice President, Finance and Business
Development; Chief Financial Officer; Treasurer;
Assistant Secretary
Gregory B. Butler 44 Vice President for Legal Affairs and Intellectual
Property
William F. Holt 49 Vice President, Drug Discovery Operations
Laima I. Mathews 50 Vice President, Drug Development
</TABLE>
ELKAN R. GAMZU, PH.D., joined the Company as Vice President of Development
in October 1989. Dr. Gamzu served as President, Chief Operating Officer and
Director of the Company from June 1990 through December 1993, at which time he
became Chief Executive Officer. Prior to joining the Company, Dr. Gamzu held a
number of positions at the Parke-Davis Pharmaceutical Research Division of
Warner-Lambert Company from 1985 to 1989, most recently as Vice President, Drug
Development. Prior thereto, he held various positions at Hoffmann-LaRoche, Inc.,
from 1971 to 1985. Dr. Gamzu's industry experience includes efforts to develop
products to treat severe neurological and psychiatric disorders such as
Alzheimer's disease, epilepsy, schizophrenia, and depression. While at
Warner-Lambert Company, he focused on the development of tacrine (Cognex(R)),
the first drug approved in the United States for use in the treatment of
Alzheimer's disease, and gabapentin (Neurontin(R)) for use in the treatment of
epilepsy. Dr. Gamzu earned a B.A. degree in Psychology and Sociology from Hebrew
University (Jerusalem, Israel), and M.A. and Ph.D. degrees in Psychology from
the University of Pennsylvania.
ROBERT N. MCBURNEY, PH.D., joined the Company as Director of
Electrophysiology and Cell Biophysics in December 1987, and served as Vice
President, Research from June 1990 through December 1993, at which time he
became Senior Vice President, Research and Chief Scientific Officer. Prior to
joining Cambridge NeuroScience, Dr. McBurney served from 1984 to 1987 as the
Assistant Director of the Medical Research Council Neuroendocrinology Unit in
Newcastle upon Tyne, England. Dr. McBurney earned B.Sc. and Ph.D. degrees in
Physiology from the University of New South Wales, and conducted postdoctoral
studies in Neurophysiology at Cambridge University and the National Institutes
of Health. Dr. McBurney has had numerous articles published on neurophysiology
in various scientific journals.
HARRY W. WILCOX, III, joined the Company as Senior Vice President, Finance
and Business Development and Chief Financial Officer in December 1995. Prior to
joining Cambridge NeuroScience, Mr. Wilcox served as Vice President, Finance and
Chief Financial Officer of Cellcor, Inc., a biotechnology company, since 1990.
While at Cellcor, Mr. Wilcox was also named Treasurer and Senior Vice President
of Business Development. From 1988 to 1990, he was a founder and general partner
and Chief Financial Officer of Highland Capital Partners, L.P., a venture
capital firm. From 1983 to 1987, Mr. Wilcox was Controller, Vice President of
Finance and Chief Financial Officer at Charles River Ventures, Inc. a venture
capital firm. Mr. Wilcox earned an M.B.A. degree from Boston University and a
B.A. degree in Finance from the University of Arizona. Mr. Wilcox is a Certified
Public Accountant.
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GREGORY B. BUTLER, PH.D., joined the Company in 1991 as Patent Liaison
Officer. In September 1997, Dr. Butler was named Vice President for Legal
Affairs and Intellectual Property. Prior to joining the Company, Dr. Butler held
various positions at the law firm of Hamilton, Brook, Smith and Reynolds and
Baxter Healthcare Corporation. Dr. Butler received an A.B. in Biology from St.
Anselm College, a Ph.D. in cell biology from the University of Vermont College
of Medicine and conducted his post-doctoral studies at Harvard Medical School.
Dr. Butler received his law degree from the New England School of Law and is
licensed to practice law in the Commonwealth of Massachusetts and is admitted to
practice before the United States Patent and Trademark Office. As of March 9,
1998, pursuant to the Company's reduction in headcount, Dr. Butler's employment
with the Company was terminated.
WILLIAM F. HOLT, PH.D., joined the Company in 1991 as Director of In Vivo
Pharmacology and served in that capacity until March 1997. In March 1997, he
became Vice President, Drug Discovery Operations and served in that capacity
until March 1998, at which time Dr. Holt left the Company. Prior to joining
Cambridge NeuroScience, Dr. Holt held various positions at Pfizer, Inc. from
1983 to 1991, most recently as Manager in the Department of Metabolic Diseases
and General Pharmacology. He established a number of drug discovery programs at
Pfizer (e.g. proton pump inhibitors), and managed the development of two agents
to Phase II clinical trials. In the drug development sector, he set up and
managed the General Pharmacology program to evaluate the drug safety profiles of
compounds. From 1981 to 1983, Dr. Holt served as Associate Senior Investigator
in Pharmacology at SmithKline Beckman. Dr. Holt received a B.Sc. Honors degree
in Biomedical Science from Memorial University of Newfoundland, an M. Sc. in
Comparative Physiology from the University of British Columbia and a Ph.D. in
Physiology and Biophysics from the Division of Medical Sciences at Harvard
University.
LAIMA I. MATHEWS joined the Company in September 1992 as Director of
Regulatory Affairs and served in that capacity until March 1997, when she was
appointed Vice President of Drug Development. Prior to joining the Company, Mrs.
Mathews held various positions at G.D. Searle/The NutraSweet Company (Monsanto
Companies) from 1972 through 1992. Her experience includes all aspects of
international development and registration for ethical and consumer
pharmaceutical products, medical devices and food additives. She earned a B.A.
from Loyola University of Chicago.
- ----------------------------------------------------------------------------
Cognex(R) and Neurontin(R) are registered trademarks of the Warner-Lambert
Company.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company has facilities in Cambridge,
Massachusetts, where it leases and occupies a total of approximately 42,000
square feet of space, which includes approximately 33,000 square feet of
research laboratories. The description of the lease terms is incorporated by
reference from Note H to the Consolidated Financial Statements. In connection
with the Company's cost reduction plan, announced on March 9, 1998, the Company
reduced headcount from approximately 60 to 30 employees. Following this
reduction in staff, the Company intends to sub-lease approximately half of its
existing laboratory and office space.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor either of its subsidiaries is a party to any legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1997.
18
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.001 par value ("Common Stock"), is traded on
the Nasdaq National Market under the symbol "CNSI". The following table sets
forth the high and low sales prices for the Company's Common Stock on the Nasdaq
National Market for the periods indicated:
<TABLE>
<CAPTION>
High Low
----------- ------------
<S> <C> <C>
January 1 - March 31, 1996 14-3/4 8-1/2
April 1 - June 30, 1996 13-1/2 7-3/8
July 1 - September 30, 1996 9-1/4 6-3/4
October 1 - December 31, 1996 15-1/4 8-1/2
January 1 - March 31, 1997 14-5/8 10-1/2
April 1 - June 30, 1997 12 3-5/8
July 1 - September 30, 1997 5-1/8 2-1/8
October 1 - December 31, 1997 2-3/4 1-15/32
</TABLE>
There were approximately 178 holders of record of Common Stock and
approximately 3,400 beneficial owners as of December 31, 1997. Prior to March 9,
1998, the Company had never declared nor paid any cash dividends on its capital
stock. On March 9, 1998 the Company's Board of Directors declared an
extraordinary dividend on its capital stock of $1.00 per share of outstanding
Common Stock, payable on April 14, 1998 to holders of record as of April 2,
1998. Future cash dividends, if any, will be paid at the discretion of the
Company's Board of Directors and will depend, among other things, upon the
Company's future operations, capital requirements, general financial condition
and such other factors as the Board of Directors may deem relevant.
19
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following selected financial data are derived from the consolidated
financial statements of the Company which have been audited by Ernst & Young
LLP, independent auditors. The selected financial data set forth below should be
read in conjunction with the consolidated financial statements of the Company
and related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this document.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (in thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $ 4,035 $ 2,396 $ 8,218 $ 299 $ 417
Operating expenses:
Research and development 17,650 13,978 13,850 12,722 12,763
General and administrative 2,616 2,585 2,158 2,863 3,488
-------- -------- -------- -------- --------
Total operating expenses 20,266 16,563 16,008 15,585 16,251
-------- -------- -------- -------- --------
Loss from operations (16,231) (14,167) (7,790) (15,286) (15,834)
Interest income, net 2,393 1,178 736 401 365
-------- -------- -------- -------- --------
Net loss $(13,838) $(12,989) $ (7,054) $(14,885) $(15,469)
======== ======== ======== ======== ========
Net loss per share (1) $ (0.79) $ (0.93) $ (0.59) $ (1.46) $ (1.79)
======== ======== ======== ======== ========
Weighted average shares
outstanding 17,518 13,980 11,927 10,230 8,634
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 12,020 $ 26,664 $ 21,937 $ 6,269 $ 7,907
Marketable Securities 26,561 -- -- -- --
Working capital 33,588 18,362 17,651 3,493 4,814
Total assets 40,891 29,220 24,321 9,330 11,159
Total liabilities 6,568 9,573 4,793 3,149 3,515
Accumulated deficit (103,482) (89,644) (76,655) (69,601) (54,716)
Stockholders' equity 34,323 19,647 19,528 6,181 7,644
</TABLE>
- ----------
(1) See Note A of Notes to the Consolidated Financial Statements.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since inception, the Company has been primarily engaged in research and
development. To date, Cambridge NeuroScience has not received any revenue from
the sale of products. The Company has not been profitable since inception and
expects to incur substantial operating losses for at least the next several
years.
Cambridge NeuroScience has financed its operations through proceeds from an
initial public offering and follow-on public offerings in 1991 and 1997, various
private placements of preferred equity securities prior to the initial public
offering, a private placement of Common Stock to institutional investors in
1994, two directed public offerings in 1995, its collaborations with BI and
Allergan which commenced in March 1995 and November 1996, respectively, research
grants and investment income earned on its cash balances and short-term
investments.
In 1995, the Company entered into a collaboration with BI for the
development and commercialization of CERESTAT. The Company received $15.0
million upon signing the agreement, consisting of $5.0 million in the form of an
expense reimbursement and $10.0 million for 1,250,000 shares of the Company's
Common Stock. In 1996, pursuant to the agreement, BI purchased an additional
1,237,624 shares of the Company's Common Stock for $10.0 million. Pursuant to
the collaboration, BI will fund 75% of the development costs for CERESTAT in the
United States and Europe and all of the development costs in Japan, and the
Company is entitled to receive royalties on product sales. The Company has the
option to co-promote in the United States. Any co-promotion activities by the
Company will result in increased sales and marketing and general and
administrative expenditures. In addition, the Company may receive up to an
additional $18.0 million in cash upon the achievement of certain milestones.
The Company and BI commenced Phase III clinical trials for CERESTAT in TBI
in March 1996 and in Stroke in July 1996. In June 1997, the Company and BI
suspended patient enrollment into the stroke trial after a planned interim
analysis of the data raised concerns over the benefit to risk ratio of drug
treatment. In September 1997, the Company announced the discontinuation of the
TBI trial because a planned interim analysis of the data showed insufficient
evidence of positive clinical impact. In December 1997, following an expanded
analysis on all patients enrolled in the stroke trial as of June 1997, the
partners announced that enrollment into the stroke trial would not resume. At
that time, the Company announced its plan to further evaluate the data before
making any decisions about the future development of CERESTAT.
In March 1998, the Company reported that further analysis of the Phase III
data indicated that: (i) CERESTAT has an attractive safety profile in the TBI
patient population, and (ii) CERESTAT had a potential therapeutic benefit in a
subset of the stroke patient population which the Company and BI were continuing
to investigate. The Company and BI are expending additional efforts to further
evaluate the stroke findings and to determine if additional clinical studies in
the stroke indication will be pursued, either together or by the Company
independently. There can be no assurance that the results of the analysis will
lead the Company to go forward with additional development of CERESTAT.
Additionally, if the Company elects to continue development, there can be no
assurance that BI will concur with that decision. If the Company were to elect
to go forward with additional clinical trials of CERESTAT and BI elected not to
go forward, the Company would retain all commercial rights to CERESTAT but would
likely not have sufficient funds available to complete development of the drug.
In November 1996, the Company entered into a collaboration with Allergan
for the development of NMDA ion-channel blockers, sodium ion-channel blockers
and combination ion-channel blockers for the treatment of ophthalmic disorders,
including glaucoma. In conjunction with the signing of this agreement, the
Company received $3.0 million for 175,103 shares of the Company's Common Stock.
Allergan will bear all of the development costs for potential products arising
from the collaboration, and the Company is entitled to receive royalties on any
product sales.
In December 1996, the Company formed a subsidiary, Cambridge NeuroScience
Partners, Inc. (CNPI) to pursue the development of treatments for Alzheimer's
disease and other neurological disorders. CNPI entered into a collaboration with
the J. David Gladstone Institutes (Gladstone). Pursuant to this collaboration
agreement, Gladstone is conducting a research program over a three-year period,
for which CNPI will provide at least $1.25
21
<PAGE> 22
million in funding per year. The Company owns 80% of the outstanding stock of
CNPI and has guaranteed CNPI's obligations with respect to its collaboration
with Gladstone.
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount from 60 to 30 staff members. The one-time cost
associated with this reduction in staff, consisting primarily of severance and
related benefits, is estimated to be approximately $800,000, which will be
expensed in the first quarter of 1998. Following this reduction in headcount,
the Company intends to sub-lease approximately half of its existing laboratory
and office facilities space. The Company is continuing to evaluate alternatives
for maximizing shareholder value, which may include the sale of some or all of
the Company's technology assets. On March 9, 1998, the Company's Board of
Directors declared a dividend in the amount of $1.00 per share payable on April
14, 1998 to shareholders of record on April 2, 1998. The total dividend payable
is expected to be approximately $18 million, based upon the number of common
shares outstanding at February 28, 1998.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues
Research and development revenue increased $1.5 million to $3.9 million for
the year ended December 31, 1997, from $2.4 million for the year ended December
31, 1996. Research and development revenue in 1997 included $2.9 million
pursuant to the collaboration agreement with BI, compared to $2.3 million in the
same period in 1996. The Company recognizes revenue from the BI collaboration in
the amount that its CERESTAT development expenses exceed 25% of the CERESTAT
development expenses of the Company and BI combined. Revenue pursuant to the BI
agreement is based upon the relative spending of the two partners and future
revenue is also dependent upon the decision to be made with respect to the
future development of CERESTAT under this agreement. Given the current status of
the Phase III clinical trials for CERESTAT, there can be no assurance that the
Company will have revenue pursuant to this agreement in future periods. See
"-- Overview." Also included in research and development revenue in 1997 was
$1.0 million pursuant to the collaboration with Allergan, which began in
November 1996, compared to $114,000 in 1996. In 1997, the Company had $150,000
in revenue from two Phase I Small Business Innovation Research (SBIR) grants
from the National Institutes of Health.
Operating Expenses
Operating expenses increased to $20.3 million for the year ended December
31, 1997, compared to $16.6 million in 1996, an increase of $3.7 million.
Research and development expenses increased by $3.7 million to $17.7 million in
1997, from $14.0 million in 1996. This increase reflects the increase in costs
associated with the Phase III clinical trials of CERESTAT as well as the cost
associated with the funding of the collaboration between CNPI and Gladstone,
which began in December 1996. Research and development expenses comprised 87% of
total operating expenses in 1997, compared to 84% in 1996. General and
administrative expenses of $2.6 million in 1997 were comparable to those
incurred in 1996. The level of research and development expenses incurred by the
Company in the future will depend, in significant part, on whether the Company
continues the development of CERESTAT. See "-- Overview." In addition, the
Company is continuing to evaluate other alternatives for maximizing shareholder
value, which may include the sale of some or all of the Company's technology
assets. If clinical trials or other development activities for CERESTAT are
not resumed, or if the Company were to sell some or all of its technology
assets, then future research and development expenses would be substantially
reduced.
Interest Income
Interest income was $2.4 million for the year ended December 31, 1997,
compared to $1.2 million for 1996, an increase of $1.2 million. This increase
was due to the higher cash balances available for investment in 1997, as a
result of the public offering of stock in February 1997 and the second equity
investment by BI in September 1996.
22
<PAGE> 23
Net Loss Per Share
For the year ended December 31, 1997, the Company had a net loss of $13.8
million or $0.79 per share, compared to $13.0 million or $0.93 per share for the
year ended December 31, 1996. The decrease in the net loss per share reflects an
increase in the weighted average shares outstanding in 1997, compared to 1996,
due to the sale of 2,760,000 shares of common stock in a public offering in
February 1997, the issuance of 1,237,624 shares of common stock in September
1996 in exchange for the BI milestone payment and the sale of 175,103 shares of
common stock to Allergan in November 1996, pursuant to the commencement of the
collaboration agreement.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues
Research and development revenue decreased to $2.4 million for the year
ended December 31, 1996 from $8.2 million for the year ended December 31, 1995,
a decrease of $5.8 million. Revenue in 1995 included the receipt of $5.0 million
in March 1995 upon the signing of the collaboration agreement with BI,
representing reimbursement of previously incurred CERESTAT costs. Of the total
research and development revenue under the BI agreement, revenue relating to
current period spending was $2.3 million in 1996, compared to $3.5 million in
1995, a decrease of $1.2 million. This decrease was due to an increase in
spending by BI relative to the amount spent in the fiscal period by both
companies.
In November 1996, the Company entered into a collaboration agreement with
Allergan for the development of treatments for ophthalmic disorders, including
glaucoma. Revenue in 1996 included $114,000 received pursuant to the Allergan
collaboration.
Operating Expenses
Operating expenses increased to $16.6 million for the year ended December
31, 1996, from $16.0 million for the same period in 1995, an increase of
$600,000. Research and development expenses of $14.0 million in 1996 were
comparable to those incurred in 1995. Research and development expenses were 84%
of total operating expenses in 1996, compared to 87% in 1995.
General and Administrative expenses increased to $2.6 million in the year
ended December 31, 1996, from $2.2 million in the same period in 1995, an
increase of $400,000. This increase is due to the costs associated with higher
headcount in 1996, primarily in support of the Company's business development
and investor relations activities.
Interest Income
Interest income was $1.2 million for the year ended December 31, 1996,
compared to $736,000 in the same period in 1995, an increase of $464,000. This
increase reflects the higher cash balances available for investment during 1996,
primarily due to the proceeds from issuances of Common Stock in the fourth
quarter of 1995 and the proceeds received in 1996 pursuant to the second equity
investment by BI.
Net loss Per Share
The net loss for the year ended December 31, 1996 increased to $13.0
million, or $0.93 per share, from $7.1 million, or $0.59 per share, for the same
period in 1995. This increase in net loss per share was due primarily to the
decrease in research and development revenue, offset in part by an increase in
the weighted average shares outstanding from 11.9 million for the year ended
December 31, 1995 to 14.0 million for the same period in 1996.
23
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of $12.0
million and investments in marketable securities of $26.6 million, compared to
cash and cash equivalents of $26.7 million at December 31, 1996. In February
1997, the Company received $28.5 million in proceeds, before related costs of
$400,000, from a public offering of 2,760,000 shares of Common Stock at $11.00
per share. In 1997, the Company used $16.1 million for operating purposes and
$301,000 for the purchase of equipment, furniture and fixtures. On March 9,
1998, the Company's Board of Directors declared a dividend in the amount of
$1.00 per share payable on April 14, 1998 to shareholders of record on April 2,
1998. The total dividend payable is expected to be approximately $18 million,
based upon the number of common shares outstanding at February 28, 1998. At
February 28, 1998, the Company had cash and cash equivalents of $11.8 million
and investments in marketable securities of $24.6 million.
Pursuant to the agreement with BI, the Company is obligated for 25% of the
development costs incurred in the United States and Europe. BI is obligated for
the remaining 75% of such costs and all of the development costs in Japan. Any
costs incurred in excess of one party's contractual obligation will be
reimbursed by the other party. The cash reimbursement and the revenue earned are
subject to each party's relative expenditures and therefore may fluctuate in
each fiscal year. The agreement provides that BI will advance cash to the
Company in the event that it is expected that the Company's expenditures will
exceed its contractual obligation. On an annual basis, actual spending is
reconciled with the budget and may result in the Company's repayment to BI of
any excess advances. No advances were received during 1997. As of December 31,
1997, the Company estimates that it had received approximately $2.7 million in
excess advances from BI and anticipates repaying that amount to BI in the near
future. The estimated amount of excess advances received is subject to the
annual reconciliation of spending by both parties, expected to be completed in
the first half of 1998.
In the second half of 1997, the Company and BI discontinued the clinical
trials of CERESTAT in both stroke and traumatic brain injury. Substantially all
of the costs associated with the completion of the trials and analysis of data
has been recognized by the Company in 1997. The Company and BI have continued to
collect and analyze data from both Phase III trials. Based on the results of
this analysis, BI and the Company will determine whether there is a basis for
further development of CERESTAT in other indications and what the future course
of development will be. There can be no assurance that there will be a basis for
continued development of CERESTAT, nor that BI and the Company will agree on the
course of future development. If BI and the Company fail to agree on future
development, there could be a significant financial impact on the Company's
ability to develop CERESTAT, and the Company would earn no further revenue under
the collaboration agreement.
Pursuant to the collaboration agreement signed in November 1996 with
Allergan, the Company may receive up to $3.0 million in research and development
funding through 1999. At December 31, 1997, the Company had received $1.4
million pursuant to this funding arrangement, of which $1.0 million was
recognized as revenue in 1997. Under the agreement, Allergan is responsible for
the development of potential products and will bear all associated costs. The
collaboration also provides that the Company may receive up to an additional
$18.5 million upon the achievement of certain milestones. However, there can be
no assurance as to when or if these milestones will be achieved.
Pursuant to the collaboration agreement between CNPI and Gladstone, CNPI
will provide at least $1.25 million in funding per year over three years.
Through December 31, 1997, CNPI made payments to Gladstone totaling $1.9
million. The Company owns 80% of the outstanding stock of CNPI and has
guaranteed CNPI's obligations with respect to its collaboration with Gladstone.
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount from 60 to 30 staff members. The one-time cost
associated with this reduction in staff, consisting primarily of severance and
related benefits, is estimated to be approximately $800,000, which will be
expensed in the first quarter of 1998. Following this reduction in headcount,
the Company's intent is to sub-lease approximately half of its existing
laboratory and office facilities space. The Company is continuing to evaluate
alternatives for maximizing shareholder value, which may include the sale of
some or all of the Company's technology assets. On
24
<PAGE> 25
March 9, 1998, the Company's Board of Directors declared a dividend in the
amount of $1.00 per share payable on April 14, 1998 to shareholders of record on
April 2, 1998. The total dividend payable is expected to be approximately $18
million, based upon the number of common shares outstanding at February 28,
1998.
The Company believes that the cash and cash equivalents and investments in
marketable securities remaining after the payment of the dividend on April 14,
1998 will be sufficient to maintain operations into 1999.
The Company's primary expenditures are expected to be in the areas of
research and development, general and administrative expenses, and capital
expenditures. In the event the Company and BI decide to continue development of
CERESTAT, the Company will be obligated to pay no more than 25% of the future
development expenses related to this program. The Company will require
substantial additional funds for its research and product development programs,
pursuing regulatory clearances, establishing production, sales and marketing
capabilities and other operating expenses. Despite the potential future
milestone payments under the BI and Allergan agreements, adequate funds for
these purposes may not be available when needed on terms acceptable to the
Company. Although the Company believes that it has adequate resources to
pursue the development of CERESTAT with BI, if warranted, the above-mentioned
reduction in headcount and dividend payment will result in fewer resources being
devoted to the Company's other research and development programs. Insufficient
funds may require the Company to delay, scale back or eliminate certain of its
research and product development programs or to license third parties to
commercialize products or technologies that the Company might otherwise
undertake itself.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income, which establishes standards
for the reporting and display of comprehensive income and its components.
Statement No. 130 becomes effective in 1998 and requires reclassification of
earlier financial statements presented. Statement No. 130 is not expected to
have a material impact on the Company's financial statements. In June 1997, the
FASB also issued Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information, which changes the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. Statement No. 131 becomes effective in
1998 and is not expected to have an impact on the Company's financial
statements.
The Company does not believe that inflation has had a material impact on
its results of operations.
The Company is aware of the issues that many computer systems will face as
the year 2000 approaches. These issues are the result of computer programs
having been written using two digits rather than four digits to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000,
resulting in system failures or miscalculations. The Company is in the process
of conducting a review of its computer systems to identify the systems that
could be affected by the Year 2000 problem and will develop an implementation
plan to resolve the issue. The Year 2000 problem is not expected to pose a
significant problem for the Company.
The discussion contained in this section as well as elsewhere in this
Annual Report on Form 10-K may contain forward-looking statements based on the
current expectations of the Company's management. See "Important Factors
Regarding Forward-Looking Statements" attached hereto as Exhibit 99.1 and
incorporated by reference into this Form 10-K. The Company cautions readers
that there can be no assurance that the actual results or business conditions
will not differ materially from those projected or suggested in the
forward-looking statements as a result of various factors, including but not
limited to the following: uncertainties relating to the completion of clinical
trials of the Company's product candidates, particularly with respect to the
Company's lead product, CERESTAT; uncertainties as to the Company's ability to
continue operations and achieve profitability; the early stage of development of
all of the Company's product candidates; the Company's reliance on current and
prospective collaborative partners to supply funds for research and development
and to commercialize its products; intense competition related to the research
and development of products competitive with products under development by the
Company; uncertainties as to the protection of proprietary rights relating to
the Company's products; the Company's lack of experience in manufacturing and
the Company's reliance on
25
<PAGE> 26
contract manufacturers for the production of products for development and
commercial purposes; the Company's lack of marketing and sales experience and
the risk that any products the Company develops may not receive commercial
acceptance in the markets that the Company expects to target; uncertainty as to
whether there will exist adequate reimbursement for the Company's products from
government, private health insurers and other organizations; and uncertainties
as to the extent of future government regulation of the Company's business. As
a result, all of the Company's future development efforts involve a high degree
of risk. Readers are cautioned not to place undue reliance on the
forward-looking statements contained in this section or elsewhere in this Annual
Report on Form 10-K which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to the
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is contained on pages F-2 through F-14
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Company" in Part I, Item 1(a) hereof.
NAME (AGE) BUSINESS EXPERIENCE DURING PAST
- ---------- FIVE YEARS AND OTHER DIRECTORSHIPS
----------------------------------
Nancy S. Amer Director since September 1994. Ms. Amer is a General
(36) Partner of Crescent Gate, L.P., a middle-market
buyout fund. From December 1994 through December
1996, Ms. Amer was a Managing Director of the
Harvard Private Capital Group, Inc., a subsidiary of
Harvard Management Company, Inc., which manages the
Harvard University endowment. Prior to joining
Harvard, Ms. Amer was a senior consultant with the
Boston Consulting Group, Inc. Ms. Amer earned B.A.
and M.B.A. degrees from Harvard University.
Burkhard Blank, M.D. Director since July 1995. Dr. Blank joined
(43) Boehringer Ingelheim GmbH, an operating division of
BI, in 1986 and has served as the head of
international project management for Boehringer
Ingelheim GmbH since 1993. From 1988 to 1993, Dr.
Blank served as a project leader for worldwide
development of various programs at BI.
Ira A. Jackson Director since May 1992. Mr. Jackson is an Executive
(49) Vice President of BankBoston, a commercial bank,
where he has served since 1987. Prior thereto, Mr.
Jackson was Commissioner of Revenue for the
Commonwealth of Massachusetts for a period of five
years. Earlier, he was Associate Dean of the John F.
Kennedy School of Government at Harvard University.
Mr. Jackson received an A.B. from Harvard University
and an M.P.A. from the Kennedy School of Government
and attended the Advanced Management Program at the
Harvard Business School.
26
<PAGE> 27
S. Joshua Lewis Director since April 1996. Mr. Lewis, a Managing
(35) Director of E.M. Warburg, Pincus & Co., LLC. (EMW
LLC), a private equity investment firm, has been
affiliated with EMW LLC since 1989. Mr. Lewis is a
director of CN Biosciences, Inc., a publicly held
life sciences supplies company and Ventana Genetics,
Inc., a private gene-based drug discovery company.
Joseph B. Martin, Director since February 1987. Dr. Martin has been
M.D., Ph.D. (59) Dean of Harvard Medical School since July 1997.
Prior thereto, Dr. Martin was Chancellor of the
University of California, San Francisco since July
1993 and was Dean and Professor of Neurology of the
School of Medicine at the University of California,
San Francisco since 1989. From 1978 to 1989, he was
Chairman of the Neurology Department at
Massachusetts General Hospital and Professor of
Neurology at Harvard Medical School.
Paul C. O'Brien Director since May 1992. Since January 1995, Mr.
(58) O'Brien has been President and Chief Executive
Officer of The O'Brien Group Inc., a consulting
company. From 1993 until December 1994, Mr. O'Brien
was Chairman of New England Telephone and Telegraph
Company, a wholly-owned subsidiary of NYNEX
Corporation. Prior thereto he served as President
and Chief Executive Officer of New England Telephone
and Telegraph Company. He is a director of
BankBoston Corporation, Shiva Corporation and First
Pacific Networks Co., manufacturers of
communications and network products, and Renaissance
Worldwide, Inc., an information technology
consulting company, and is Chairman of View Tech,
Inc. a telecommunications systems company. Mr.
O'Brien earned a B.S. degree in electrical
engineering from Manhattan College, an M.B.A. degree
from New York University and holds three honorary
doctorates.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
The Company's executive officers and directors are required under Section
16(a) of the Exchange Act to file reports of ownership of the Company's
securities and changes in ownership with the Securities and Exchange Commission.
Copies of these reports must also be furnished to the Company.
Based solely on a review of reports furnished to the Company and written
representation that no other reports were required, the Company believes that
during 1997 the executive officers and directors of the Company complied with
all applicable Section 16(a) filing requirements, except that Drs. Gamzu and
McBurney, Mr. Wilcox and Ross S. Gibson, a former officer of the Company,
reported on March 16, 1998, the receipt of option grants from the Company, and
Dr. McBurney reported the gift of Cambridge NeuroScience stock held by him to a
trust for the benefit of his children, which reports were due on February 13,
1998. On March 25, 1998, Ms. Amer reported the receipt of an option grant from
the Company, which report was due on February 13, 1998. Mr. Gibson voluntarily
terminated his employment with Cambridge NeuroScience in June 1997.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in part under the caption "Certain
Relationships and Related Transactions" in Part III, Item 13 hereof.
EXECUTIVE COMPENSATION
The Compensation and Benefit Committee Report on Executive Compensation
and tables set forth below provide information about the compensation of the
executive officers of the Company.
27
<PAGE> 28
COMPENSATION AND BENEFIT COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation and Benefits Committee of the Board of Directors (the
"Committee") has furnished the following report on executive compensation:
Compensation Philosophy
The Company has developed and implemented compensation policies, plans
and programs that seek to enhance the viability of the Company thereby
increasing stockholder value, by closely aligning the financial interests of the
Company's executive officers with those of its stockholders. In support of these
goals, annual base salaries, annual incentives and long-term incentives are
fixed at competitive levels to attract and retain executive officers and other
key employees of outstanding ability and to motivate them to perform to the
fullest of their abilities. The incentive programs are variable and closely tied
to Company and individual performance in a manner that encourages a strong focus
of building the business into one that has strong stockholder value.
Base Salary Administration
The salary plan for each named executive officer is reviewed individually
on an annual basis at their anniversary date. The Human Resources Director and
CEO review and recommend a base salary level to the Committee for each executive
officer based on current competitive practices, relying on industry standards
and practices, internal comparisons and individual performance judgments as to
past and expected future contributions of the individual executive officers. The
industry standards used include both national and New England-based published
biotechnology surveys as well as focused survey data initiated by the Company.
Comparisons are made to companies that are similar in size, stage of development
and, in some instances, in the same geographic area as the Company.
Incentive Compensation: Annual Incentives
Annual incentives are payable to each executive officer upon the
attainment of predetermined corporate objectives. These objectives are approved
at the beginning of the year by the Committee and comprise product, program,
financial, business and personal objectives. At the end of the year, the
Committee reviews the attainment of the overall plan and objectives, each named
individual's contribution to this attainment as well as each executive's ongoing
contribution to the Company's development and determines the appropriate bonus
payment. At full achievement of objectives, the CEO is targeted to receive 30%
of his annual base salary, the Senior Vice President, Research is targeted to
receive 25% and all other executive officers are targeted to receive 20%. The
amounts actually paid may be more or less than the targeted bonus based on over
or under achievement of objectives.
As a result of the suspension of the Phase III clinical trials of
CERESTAT in stroke and TBI and the significant decrease in market price of the
Company's Common stock in the second half of 1997, the Committee felt that it
was not appropriate to award bonuses to the management team.
Incentive Compensation: Long-Term Incentives
The Company has established the 1991 Equity Incentive Plan (the "Equity
Plan") which serves as the long-term incentive program for executive officers as
well as all employees of the Company. It is the Company's philosophy that all
employees of the Company should be stockholders thereby sharing in the long-term
success of the Company. Upon employment, the Company grants stock options to
regular, full-time employees. After two years of employment, each regular,
full-time employee is eligible to receive annual stock option grants. In
determining the size of stock option awards, the Committee considers competitive
market data and Company performance as well as individual performance. The
Committee has developed a guideline for the size of both the on-hire and annual
awards that is based upon the compensation level of each position within the
Company.
28
<PAGE> 29
Under the Equity Plan, options granted at the date of employment vest 50%
after two years and 6.25% per quarter thereafter, thereby becoming fully vested
after four completed years of employment. After two years of continuous
employment, all employees and executive officers, including the CEO, are
eligible for additional grants of stock options. Annual grants vest at a rate of
6.25% per quarter and are fully vested four years from the grant date. This
vesting schedule, together with the 10-year life of the options, is consistent
with the idea of providing a reward to all employees and executive officers for
remaining with the Company during the vesting periods and contributing to the
long-term growth and viability of the Company, and increasing value for all
stockholders. In 1997, the size of these grants was based upon industry surveys,
individual employee performance and anticipated ongoing contribution to the
Company's development.
Annual grants made to the named executive officers in 1997 are summarized
in the table entitled "Option Grants in Last Fiscal Year."
The Committee believes that the executive officer team will receive
appropriate rewards under this program of corporate incentives but only if they
achieve the performance goals established for them and the Company and if they
succeed in building value for the Company's stockholders.
Chief Executive Compensation
The CEO's overall compensation package, which is reviewed and determined
by the Committee, is intended to be competitive with industry standards and
motivate the CEO to achieve the Company's annual and longer-term objectives.
Annual incentive compensation reflects the Committee's assessment of performance
against pre-established objectives. For 1997, as discussed above, the CEO did
not receive an annual incentive award. In 1997, the CEO was awarded a stock
option grant that was based on a review of competitive data and is in line with
internal comparisons. The goal of this award is to motivate leadership for
long-term Company success and to provide significant reward upon achievement of
Company objectives and enhancement of stockholder value. The Committee continues
to believe that, at this point in the Company's development, it remains
appropriate that the CEO's compensation package be increasingly weighted to
stock options.
Compensation Deductibility
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), imposes a limit on tax deductions for annual compensation in excess of
one million dollars paid by a corporation to its chief executive officer and the
other four most highly compensated officers of a corporation. This provision
excludes certain forms of "performance based compensation" from the compensation
taken into account for the purposes of that limit. The Company has established
individual limits on the number of options that may be granted under the Equity
Plan to permit the options to qualify for the exclusion from the limitation on
deductibility. The Committee will continue to assess the impact of Section
162(m) on its compensation practices and determine what further action, if any,
is appropriate.
Compensation and Benefits Committee
Paul C. O'Brien, Chairman
Nancy S. Amer
S. Joshua Lewis
29
<PAGE> 30
COMPARATIVE STOCK PERFORMANCE GRAPH
The table set forth below compares the Company's cumulative total
stockholder return with the cumulative total return of the Nasdaq Stock Market
(U.S.) Index ("Nasdaq Market Index") and a peer group index ("Peer Group Index
A") comprised of the following neuroscience companies, each on an annual basis:
Cocensys, Inc.; Neurex Corporation; Neurocrine Biosciences, Inc.; Neurogen
Corporation; and Sibia Neurosciences, Inc. The peer group index included in the
stock performance graph presented in the Company's 1997 Proxy Statement also
included Cephalon, Inc. and Regeneron Pharmaceuticals, Inc. and did not include
Neurocrine Biosciences, Inc. and Sibia Neurosciences, Inc. The Company believes
that the businesses of Cephalon and Regeneron are no longer comparable to that
of Cambridge NeuroScience and, therefore, has removed them from the peer group
index. Cephalon is a substantially larger company than Cambridge NeuroScience
with marketed products and product candidates at later stages of development. As
a result of an agreement entered into in 1997, Regeneron is effectively a
captive subsidiary of Proctor & Gamble Company. Neurocrine and Sibia are
biotechnology companies comparable in size and at similar stages of product
development to Cambridge NeuroScience. In addition to Peer group Index A,
defined above, the table set forth below also includes, for comparative
purposes, a peer group index ("Peer Group Index B") comprised of the companies
included in the peer group index in the Company's 1997 Proxy Statement:
Cephalon, Inc.; Cocensys Inc.; Neurex Corporation; Neurogen Corporation; and
Regeneron Pharmaceuticals, Inc.
The comparative returns assume an investment of $100 in the Common Stock
of the Company, the stock comprising the Nasdaq Market Index, and the stock
comprising Peer Group Index A and Peer Group Index B on December 31, 1992.
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/94 12/30/95 12/29/96 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cambridge
NeuroScience, Inc. 100.0 100.0 54.8 116.1 153.2 25.4
Nasdaq Market Index 100.0 114.8 112.2 158.7 195.2 239.5
Peer Group
Index A 100.0 58.4 47.2 172.4 176.4 133.3
Peer Group
Index B 100.0 107.3 45.9 201.3 155.2 99.3
</TABLE>
30
<PAGE> 31
The following table sets forth certain compensation information for the
Chief Executive Officer of the Company and each of the four other most highly
compensated executive officers whose salary and bonus for 1997 exceeded $100,000
(collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
----------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) (1) ($) (2) (#) (3) ($) (4)
- --------------------------- ------ --------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Elkan R. Gamzu, 1997 $262,500 $ -- 135,000 $12,044
President and Chief 1996 262,500 59,063 50,000 11,653
Executive Officer 1995 250,000 63,750 72,500 11,029
William F. Holt (5) 1997 138,286 -- 1,250 3,443
Vice President, Drug 1996 127,429 15,291 7,500 2,693
Discovery Operations 1995 126,818 12,443 10,000 120
Laima I. Mathews 1997 119,206 -- 1,250 6,774
Vice President, Drug 1996 108,284 13,400 6,000 5,558
Development 1995 106,239 11,236 9,000 6,494
Robert N. McBurney, 1997 224,700 -- 15,000 10,694
Senior Vice President, 1996 210,000 39,375 30,000 10,579
Research and Chief 1995 200,000 42,500 50,000 10,899
Scientific Officer
Harry W. Wilcox, III 1997 189,578 -- 30,000 12,116
Senior Vice President of 1996 175,000 26,250 -- 11,187
Finance and Business 1995 7,292 -- 50,000 --
Development and Chief
Financial Officer
</TABLE>
- --------------
(1) Includes compensation deferred by the Company's named executive officers
during fiscal years 1997, 1996 and 1995 pursuant to the Cambridge
NeuroScience, Inc. 401(k) Plan, adopted in 1988.
(2) Bonuses were earned in the year indicated and are generally paid in the
subsequent year.
(3) Consists of options granted under the Equity Plan to acquire shares of
the Company's Common Stock.
(4) The amounts shown in this column for the fiscal year 1997 are derived
from the following figures for Drs. Gamzu, Holt and McBurney, Mr. Wilcox
and Mrs. Mathews, respectively: $2,400, $227, $1,050 and $2,476 for
Company paid term life insurance premiums (Mrs. Mathews did not receive
this benefit in 1997); $144 each for Company paid group life insurance
premiums; and, $9,500, $3,072, $9,500, $9,496 and $6,630 for the Company
match of contributions to the Cambridge NeuroScience, Inc. 401(k) Plan.
The amounts shown in this column for the fiscal year 1996 include the
following amounts for Drs. Gamzu, Holt and McBurney, Mr. Wilcox and Mrs.
Mathews, respectively: $9,500, $2,549, $9,500, $9,500 and $5,414 for the
Company match of contributions to the Cambridge NeuroScience, Inc. 401(k)
Plan and $144 each for Company paid group life insurance premiums. Also
included in the 1996 amounts are the following for Drs. Gamzu and
McBurney and Mr. Wilcox, respectively: $2,009, $935 and $1,543 for
Company paid term
31
<PAGE> 32
life insurance premiums. The amounts shown in this column for the fiscal
year 1995 include the following amounts for Drs. Gamzu and McBurney and
Mrs. Mathews, respectively: $9,240, $9,240 and $6,374 for the Company
match of contributions to the Cambridge NeuroScience, Inc. 401(k) Plan
(Dr. Holt and Mr. Wilcox did not participate in the 401(k) Plan in 1995)
and $120 each for Company paid group life insurance premiums. Also
included in 1995 amounts are $1,669 and $1,539 for Company paid term life
insurance premiums for Drs. Gamzu and McBurney, respectively. Dr. Holt
and Mrs. Mathews became executive officers of the Company in 1997 and Mr.
Wilcox joined the Company in December 1995.
(5) Dr. Holt left the Company on March 9, 1998. Pursuant to the terms of the
1991 Equity Incentive Plan, all non-vested options outstanding on the
date of termination of employment with the Company were forfeited. All
vested but unexercised options will be canceled ninety days after
termination date.
The following table provides information regarding the stock options
granted during 1997 to the named executive officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE
SECURITIES OPTIONS AT ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OR OPTION TERM (1)
GRANTED IN FISCAL BASE PRICE EXPIRATION ------------------------------
NAME (#) YEAR ($/SH) DATE 5% ($) 10% ($)
- ----------------------- ------------- ------------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Elkan R. Gamzu 135,000 49.8% $ 12.25 1/27/07 $1,040,035 $2,635,652
William F. Holt (2) 1,250 .5% 12.25 1/27/07 9,630 24,404
Laima I. Mathews 1,250 .5% 12.25 1/27/07 9,630 24,404
Robert N. McBurney 15,000 5.5% 12.25 1/27/07 115,559 292,850
Harry W. Wilcox, III 30,000 11.1% 12.25 1/27/07 231,119 585,700
</TABLE>
- ----------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term and are not
intended to be a forecast of possible future appreciation, if any, in the
price of the Company's Common Stock. These gains are based on assumed rates
of stock price appreciation of 5% and 10% compounded annually from the date
the respective options were granted.
(2) See Note (5) to the Summary Compensation Table, above.
32
<PAGE> 33
The following table provides information regarding the stock options
exercised during 1997 by the named executive officers.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1)
EXERCISE REALIZED ------------------------------- ------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------- ----------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Elkan R. Gamzu - - 244,530 182,970 $-- $--
William F. Holt (2) - - 44,295 11,955 -- --
Laima I. Mathews - - 27,546 8,704 -- --
Robert N. McBurney - - 164,687 60,313 -- --
Harry W. Wilcox, III - - 30,625 49,375 -- --
</TABLE>
- -----------
(1) Based on the closing price of the Company's Common Stock as reported on the
Nasdaq National Market on December 31, 1997 of $1.969.
(2) See Note (5) to the Summary Compensation Table, above.
EMPLOYMENT AGREEMENTS
Pursuant to the terms of Dr. Elkan R. Gamzu's employment agreement with the
Company, dated June 5, 1990, the Company has agreed to pay him a severance
payment equal to his annual base salary if the Company terminates his employment
at any time.
COMPENSATORY ARRANGEMENT
The Company has adopted a compensatory arrangement pursuant to which
certain executive officers and other members of management will be compensated
in the event of the successful completion of the sale, merger or liquidation of
the Company. The individuals covered by this arrangement are Drs. Gregory B.
Butler, Graham Durant, Elkan R. Gamzu, David Gwynne, William F. Holt and Robert
N. McBurney and Mr. Harry W. Wilcox and Mrs. Laima I. Mathews. Compensation to
be paid to these employees includes a "success bonus" based on a percentage of
the dollar value of the transaction entered into by the Company. Except as
otherwise determined by the Board of Directors, in the event that any of these
individuals voluntarily terminates his or her employment with the Company prior
to the successful completion of such a transaction, no bonus will be paid to
that individual. Additionally, in the event that the Company terminates the
employment of these individuals, he or she will receive severance payments
ranging from 25% to 100% of such individual's base salary and the continuation
for a prescribed period of all employee benefits currently provided by the
Company. As of March 9, 1998, Drs. Holt and Butler were no longer employed by
the Company. Pursuant to this plan, Drs. Holt and Butler remain eligible to
receive the bonus described above.
DIRECTOR COMPENSATION
Effective June 1992, the Company agreed to compensate outside directors for
attendance at meetings of the Board of Directors and committees thereof at a
rate of $12,000 per year, paid quarterly. Dr. Martin and Messrs. Jackson and
O'Brien and Ms. Amer are currently compensated pursuant to this arrangement.
33
<PAGE> 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's outstanding Common Stock as of February
28, 1998 by (i) each person who is known by the Company to own beneficially more
than 5% of the Company's Common Stock, (ii) each of the Company's directors and
nominees for director, (iii) the Chief Executive Officer of the Company, (iv)
each of the other four most highly compensated executive officers and (v) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY OWNED (1)
---------------------------------------
BENEFICIAL OWNER SHARES PERCENT (2)
- ----------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Boehringer Ingelheim International GmbH 2,487,624 13.9%
Postbox 200
D-55216 Ingelheim, Rhein
Germany
Warburg, Pincus Capital Partners Liquidating Trust (3) 2,262,488 12.6%
466 Lexington Avenue
New York, New York 10017
State of Wisconsin Investment Board 1,745,000 9.7%
P.O. Box 7842
Madison, Wisconsin 53703
Aeneas Venture Corporation (4) 1,192,033 6.7%
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, Massachusetts 02210
Burkhard Blank (5) 2,487,624 13.9%
S. Joshua Lewis (6) 2,262,488 12.6%
Elkan R. Gamzu (7) 495,381 2.7
Robert N. McBurney (8) 265,900 1.5%
Joseph B. Martin (9) 50,125 *
Paul C. O'Brien (10) 47,625 *
William F. Holt (11) 48,350 *
Harry W. Wilcox, III (12) 46,353 *
Laima I. Mathews (13) 34,278 *
Ira A. Jackson (14) 22,625 *
Nancy S. Amer (15) 5,000 *
All current executive officers and directors as a group
(11 persons) (16) 5,765,749 31.1%
</TABLE>
- --------------------------------------
* Less than one percent
(1) Except as otherwise indicated, each owner has sole voting and investment
power of the shares owned.
34
<PAGE> 35
(2) Shares issuable upon the exercise of options described in the following
notes are treated as outstanding solely for purposes of calculating the
percentage ownership of such person or group.
(3) The principal business of Warburg, Pincus Capital Partners Liquidating
Trust (WPLT) is to manage the orderly liquidation of the assets formerly
held by Warburg, Pincus Capital Partners, L.P., a Delaware limited
partnership (WPCP), that was formerly engaged in making venture capital and
related investments, whose partnership agreement terminated on September
30, 1997. Prior to termination of the partnership agreement, WPCP
distributed an aggregate of 2,262,488 shares of the Company's common stock
to WPLT. The trustees of WPLT are Lionel I. Pincus, John L. Vogelstein and
Stephen Distler. Each of Messrs. Pincus, Vogelstein and Distler disclaims
beneficial ownership of any shares owned by WPLT. Mr. Pincus is Managing
Partner of Warburg Pincus & Co., a New York general partnership (WP) and
Chairman of the Board, Chief Executive Officer and Managing Partner of E.M.
Warburg, Pincus & Co., LLC (EMW LLC). Mr. Vogelstein is a general partner
of WP and the Vice Chairman of the Board and member of EMW LLC; and Mr.
Distler is a general partner of WP and the Treasurer, a managing director
and a member of EMW LLC. Mr. Lewis, a director of the Company, is Managing
Director of EMW LLC. As such, Mr. Lewis may be deemed to have an indirect
pecuniary interest within the meaning of Rule 16a-1 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in an indeterminate
portion of the shares beneficially owned by WPLT. See Note (6) below.
(4) Aeneas Venture Corporation ("Aeneas") is a wholly owned subsidiary of the
President and Fellows of Harvard College, and is an investment affiliate of
Harvard Private Capital Group, Inc.
(5) All of the shares indicated as owned by Dr. Blank are owned directly by
Boehringer Ingelheim International GmbH ("BI") and are included because of
Dr. Blank's affiliation with BI. Dr. Blank is the head of international
project management for Boehringer Ingelheim GmbH, which is an operating
division of BI. Dr. Blank disclaims "beneficial ownership" of these shares
within the meaning of Rule 13d-3 under the Exchange Act.
(6) All of the shares indicated as owned by Mr. Lewis are owned directly by
WPLT and are included because of Mr. Lewis' affiliation with WPLT. Mr.
Lewis disclaims "beneficial ownership" of these shares within the meaning
of Rule 13d-3 under the Exchange Act. See Note (3) above.
(7) Includes 280,311 shares which may be acquired within 60 days by Dr. Gamzu
pursuant to the exercise of stock options and 10,010 shares held in the
Cambridge NeuroScience, Inc. 401(k) Plan.
(8) Includes 179,586 shares which may be acquired within 60 days by Dr.
McBurney pursuant to the exercise of stock options and 9,814 shares held in
the Cambridge NeuroScience, Inc. 401(k) Plan. Also includes 10,000 shares
held in trust for Dr. McBurney's children.
(9) Includes 22,625 shares which may be acquired within 60 days by Dr. Martin
pursuant to the exercise of stock options.
(10) Includes 22,625 shares which may be acquired within 60 days by Mr. O'Brien
pursuant to the exercise of stock options.
(11) Includes 47,108 shares which may be acquired within 60 days by Dr. Holt
pursuant to the exercise of stock options and 1,242 shares held in the
Cambridge NeuroScience, Inc. 401(k) Plan. On March 9, 1998, Dr. Holt left
the Company. All of Dr. Holt's unvested options have been forfeited. Any
vested options remaining unexercised ninety days after termination of
employment with the Company will be canceled.
(12) Includes 37,500 shares which may be acquired within 60 days by Mr. Wilcox
pursuant to the exercise of stock options and 3,221 shares held in the
Cambridge NeuroScience, Inc. 401(k) Plan.
35
<PAGE> 36
(13) Includes 29,390 shares which may be acquired within 60 days by Mrs. Mathews
pursuant to the exercise of stock options and 4,888 shares held in the
Cambridge NeuroScience, Inc. 401(k) Plan.
(14) Consists of 22,625 shares which may be acquired within 60 days by Mr.
Jackson pursuant to the exercise of stock options.
(15) Consists of 5,000 shares which may be acquired within 60 days by Ms. Amer
pursuant to the exercise of stock options.
(16) See Notes (1), (2), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14)
and (15) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained under the captions "Employment
Agreements", "Compensatory Arrangement" and "Director Compensation" in Part II,
Item 11 hereof.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following Financial Statements of the Company are included in response
to Item 8 of this report:
PAGE
----
Index to Consolidated Financial Statements F-1
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
(a)(2) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are included since they are either not
required, not applicable, or the information is otherwise included.
(a)(3) EXHIBITS
3.1 Restated Certificate of Incorporation of Registrant. Filed as Exhibit
4.1 to Registration Statement on Form S-8, File No. 33-42933, and
incorporated herein by reference.
3.3 By-laws of Registrant. Filed as Exhibit 4.2 to Registration Statement
on Form S-8, File No. 33-42933, and incorporated herein by reference.
36
<PAGE> 37
4.1 Specimen Stock Certificate for Common Stock, $.001 par value. Filed as
Exhibit 4.1 to Registration Statement on Form S-1, File No. 33-40078,
and incorporated herein by reference.
10.1 Stockholders' Agreement dated December 29, 1988 among the Company and
certain investors, as amended by Waiver and Consent dated as of
February 5, 1991. Filed as Exhibit 10.3 to Registration Statement on
Form S-1, File No. 33-40078, and incorporated herein by reference.
10.2 Scientific Advisor Agreement dated September 10, 1986 and amendment
dated December 6, 1986 between the Company and Dr. Joseph Martin. Filed
as Exhibit 10.5 to Registration Statement on Form S-1, File No.
33-40078, and incorporated herein by reference.
10.3 Form of Stockholders' Agreement dated March 19, 1987 among the Company
and certain stockholders. Filed as Exhibit 10.6 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.4 Form of Restricted Stock Purchase Agreement with a certain Director and
executive officers. Filed as Exhibit 10.8 to Registration Statement on
Form S-1, File No. 33-40078, and incorporated herein by reference.
10.5 Common Stock Purchase Warrant dated February 15, 1991 with Aeneas
Venture Corporation. Filed as Exhibit 10.9 to Registration Statement on
Form S-1, File No. 33-40078, and incorporated herein by reference.
10.6 Form of Waiver, Consent and Agreement dated as of April 22, 1991
between the Company and certain investors. Filed as Exhibit 10.10 to
Registration Statement on Form S-1, File No. 33-40078, and incorporated
herein by reference.
10.9* Letter Agreement dated June 5, 1990 between the Company and Elkan R.
Gamzu, Ph.D. Filed as Exhibit 10.13 to Registration Statement on Form
S-1, File No. 33-40078, and incorporated herein by reference.
10.11* 1991 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to the
Registration Statement on Form S-8, File No. 333-05431, as filed with
the Commission on June 7, 1996, and incorporated herein by reference.
10.12* 1992 Director Stock Option Plan, as amended. Filed herewith.
10.13 Lease for One Kendall Square dated July 16, 1992 between the Company
and the Trustees of Old Kendall Realty Trust and addendum dated as of
September 22, 1992 (the "Lease"). Filed as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1992, as filed
with the Commission on March 28, 1993, and incorporated herein by
reference. Addendum dated September 22, 1993, filed as Exhibit 10.13 to
the Annual Report on Form 10-K for the period ended December 31, 1993,
as filed with the Commission on February 14, 1994, and incorporated
herein by reference. Addendum dated March 11, 1996, as filed with the
Commission on March 24, 1997, and incorporated herein by reference.
Addendum dated June 17, 1997. Filed herewith.
10.15* Form of Indemnification agreement between the Company and Directors and
executive officers. Filed as Exhibit 10.15 to the Annual Report on Form
10-K for the period ended December 31, 1992, as filed with the
Commission on March 28, 1993, and incorporated herein by reference.
10.16+ Stock Purchase Agreement dated as of March 21, 1995 between the Company
and Boehringer Ingelheim International GmbH. Filed as Exhibit 10.16 to
the Annual Report on Form 10-K for the period ended December 31, 1994,
as filed with the Commission on March 31, 1995, and incorporated herein
by reference.
37
<PAGE> 38
10.17+ License Agreement dated as of March 21, 1995 between the Company and
Boehringer Ingelheim International GmbH. Filed as Exhibit 10.17 to the
Annual Report on Form 10-K for the period ended December 31, 1994, as
filed with the Commission on March 31, 1995, and incorporated herein by
reference.
10.18+ Amendment to Stock Purchase Agreement and License Agreement between the
Company and Boehringer Ingelheim International GmbH dated as of August
19, 1996. Filed as Exhibit 99.4 to Amendment No. 1 to the Current
Report on Form 8-K/A dated August 19, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.19+ Collaborative Research, Development and Marketing Agreement dated as of
November 20, 1996 between the Company and Vision Pharmaceuticals L.P.
Filed as Exhibit 99.1 to Amendment No. 1 to the Current Report on Form
8-K/A dated August 19, 1996, as filed with the Commission on January
29, 1997, and incorporated herein by reference.
10.2+ Stock Purchase Agreement dated as of November 20, 1996 between the
Company and Vision Pharmaceuticals L.P. Filed as Exhibit 99.2 to
Amendment No. 1 to the Current Report on Form 8-K/A dated August 19,
1996, as filed with the Commission on January 29, 1997, and
incorporated herein by reference.
10.21+ Credit Agreement dated as of November 20, 1996 between the Company and
Vision Pharmaceuticals L.P. Filed as Exhibit 99.3 to Amendment No. 1 to
the Current Report on Form 8-K/A dated August 19, 1996, as filed with
the Commission on January 29, 1997, and incorporated herein by
reference.
10.22+ Sponsored Research and Collaborative Agreement dated as of December 23,
1996 between Cambridge NeuroScience Partners, Inc. and The J. David
Gladstone Institutes. Filed as Exhibit 99.1 to Amendment No. 1 to the
Current Report on Form 8-K/A dated December 23, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.23+ Option Agreement dated as of December 23, 1996 by and among The Regents
of the University of California, Cambridge NeuroScience Partners, Inc.,
and the Company. Filed as Exhibit 99.2 to Amendment No. 1 to the
Current Report on Form 8-K/A dated December 23, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.24+ Stockholders' Rights Agreement dated as of December 23, 1996 by and
among the Company, Cambridge NeuroScience Partners, Inc., The J. David
Gladstone Institutes and The Regents of the University of California.
Filed as Exhibit 99.3 to Amendment No. 1 to the Current Report on Form
8-K/A dated December 23, 1996, as filed with the Commission on January
29, 1997, and incorporated herein by reference.
10.25* Compensatory arrangement with certain executive officers and other
members of management. Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed herewith.
24.1 Powers of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule for the year ended December 31, 1997 (for
electronic filing only).
99.1 Important Factors Regarding Forward-Looking Statements. Filed herewith.
- -------------------------------
* Identifies a management contract or compensatory plan or agreement in which
an executive officer or Director of the Company participates.
38
<PAGE> 39
+ Confidential information contained in this Exhibit has been omitted and
filed separately with the Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K
December 16, 1997: Issuance of a news release announcing that the Phase III
clinical trial of CERESTAT in stroke patients, which was temporarily suspended
in June 1997, would not restart.
39
<PAGE> 40
CAMBRIDGE NEUROSCIENCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CAMBRIDGE NEUROSCIENCE, INC.
We have audited the accompanying consolidated balance sheets of Cambridge
NeuroScience, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cambridge NeuroScience, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 12, 1998, except for
Note I, as to which date is
March 9, 1998
F-2
<PAGE> 42
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996
--------- ---------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 12,020 $ 26,664
Marketable securities 26,561 -
Prepaid expenses and other current assets 1,575 1,271
--------- --------
Total Current Assets 40,156 27,935
Equipment, Furniture and Fixtures, net 735 1,285
--------- --------
$ 40,891 $ 29,220
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,668 $ 3,789
Research and development advances 2,900 5,784
--------- --------
Total Current Liabilities 6,568 9,573
Stockholders' Equity
Preferred stock, par value $.01, 10,000
shares authorized; none issued - -
Common stock, par value $.001, 30,000
shares authorized; 17,858 shares issued
and outstanding at December 31, 1997;
15,010 at December 31, 1996 18 15
Additional paid-in capital 137,787 109,276
Accumulated deficit (103,482) (89,644)
-------- --------
Total Stockholders' Equity 34,323 19,647
--------- --------
$ 40,891 $ 29,220
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 43
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues
Research and development, net $ 3,885 $ 2,396 $ 8,155
Government grants 150 - 63
-------- -------- --------
4,035 2,396 8,218
Operating expenses
Research and development 17,650 13,978 13,850
General and administrative 2,616 2,585 2,158
-------- -------- --------
20,266 16,563 16,008
-------- -------- --------
Loss from operations (16,231) (14,167) (7,790)
Interest income 2,393 1,178 736
-------- -------- --------
Net loss $(13,838) $(12,989) $(7,054)
======== ======== ========
Basic and diluted net loss per common share $ (0.79) $ (0.93) $ (0.59)
======== ======== ========
Number of shares outstanding for purposes of
computing basic and diluted net loss per share 17,518 13,980 11,927
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 44
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 10,774 $ 11 $ 75,771 $ (69,601) $ 6,181
Sale of common stock, net of
offering costs of $730 1,200 1 8,869 8,870
Sale of common stock, net of
offering costs of $175 188 1,325 1,325
Common stock issued pursuant to a
stock purchase agreement, net of
costs of $667 1,250 1 9,332 9,333
Common stock, issued pursuant to
employee benefit plans 34 1 186 187
Exercise of options 93 686 686
Net loss (7,054) (7,054)
------- -------- -------- --------- -------
Balance at December 31, 1995 13,539 14 96,169 (76,655) 19,528
Common stock issued pursuant to
stock purchase agreements, net of
costs of $300 1,413 1 12,699 12,700
Common stock, issued pursuant to
employee benefit plans 28 243 243
Exercise of options 30 165 165
Net loss (12,989) (12,989)
------- -------- -------- --------- -------
Balance at December 31, 1996 15,010 15 109,276 (89,644) 19,647
Sale of common stock, net of
offering costs of $2,221 2,760 3 28,136 28,139
Common stock, issued pursuant to
employee benefit plans 77 321 321
Exercise of options 11 54 54
Net loss (13,838) (13,838)
------- -------- -------- --------- -------
Balance at December 31, 1997 17,858 $ 18 $137,787 $(103,482) $34,323
======= ======== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 45
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Operating Activities
<S> <C> <C> <C>
Net loss $(13,838) $(12,989) $ (7,054)
Expenses not requiring cash:
Depreciation and amortization 851 1,059 1,134
Common stock issued pursuant to an
employee benefit plan 230 194 141
-------- -------- --------
(12,757) (11,736) (5,779)
Changes in current assets and liabilities:
Prepaid expenses and other current assets (304) (764) (133)
Accounts payable and accrued expenses (121) (9) 648
Research and development advances (2,884) 4,789 995
-------- -------- --------
(3,309) 4,016 1,510
-------- -------- --------
Cash used for operating activities (16,066) (7,720) (4,269)
Investing Activities
Purchase of marketable securities (35,561) - -
Sale of marketable securities 9,000 - -
Purchase of equipment, furniture and
fixtures, net of disposals (301) (467) (323)
-------- -------- --------
Cash used for investing activities (26,862) (467) (323)
Financing Activities
Sales of common stock, net of offering
costs of $2,221 in 1997 and $905 in 1995 28,284 214 10,927
Issuance of common stock pursuant to stock
purchase agreements, net of costs of $300 in
1996 and $667 in 1995 - 12,700 9,333
-------- -------- --------
Cash provided by financing activities 28,284 12,914 20,260
-------- -------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents (14,644) 4,727 15,668
Cash and Cash Equivalents at Beginning of Year 26,664 21,937 6,269
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 12,020 $ 26,664 $ 21,937
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 46
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. Cambridge NeuroScience, Inc. (the "Company") is engaged in the
discovery, development and commercialization of proprietary pharmaceuticals to
prevent, reduce, or reverse damage caused by severe disorders of, or injuries
to, the nervous system. The Company's product candidates and programs include
(i) ion-channel blockers for the treatment and prevention of brain damage
resulting from traumatic brain injury ("TBI"), neuropathic pain, migraine and
cerebral ischemia and (ii) growth factors for the treatment of multiple
sclerosis and peripheral neuropathies. To date, the Company has funded its
operations through proceeds from public and private offerings of its equity
securities and from payments received pursuant to research and development
collaborations.
Principles of Consolidation. The consolidated financial statements include
the accounts of Cambridge NeuroScience, Inc. and its wholly-owned and
majority-owned subsidiaries. All inter-company accounts and transactions have
been eliminated in consolidation. See Note G.
Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Impact of Recently Issued Accounting Standards. In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income and its components. Statement No. 130 becomes effective
in 1998 and requires reclassification of earlier financial statements presented.
Statement No. 130 is not expected to have a material impact on the Company's
financial statements. In June 1997, the FASB also issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
changes the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
Statement No. 131 becomes effective in 1998 and is not expected to have an
impact on the Company's financial statements.
Cash and Cash Equivalents. The Company's policy regarding investments is to
ensure safety, liquidity, and capital preservation while obtaining a reasonable
rate of return. The Company considers all highly liquid instruments with a
maturity of three months or less to be cash equivalents, which are invested
primarily in high quality corporate bonds and commercial paper, U.S. Government
and agency obligations and repurchase agreements. At December 31, 1997 and 1996,
the cost of these investments approximated fair market value.
Marketable Securities. At December 31, 1997, the Company had $26.6 million
invested in marketable securities with original maturities of greater than 90
days, consisting of high quality corporate bonds, commercial paper, certificates
of deposit and variable rate insurance contracts. As the Company intends that
these investments be available for use in the Company's current operations,
these amounts are classified as "available-for-sale" and are included in current
assets. Management determines the appropriate classification of its securities
at the time of purchase and reevaluates such classification at each balance
sheet date. Available-for-sale securities are carried at fair market value and
unrealized gains or losses are reported as a separate component of stockholders'
equity. At December 31, 1997, the cost of these investments approximated fair
market value. The cost of securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortizations, interest income and
realized gains and losses are included in interest income. The cost of
securities sold is based on specific identification.
F-7
<PAGE> 47
. CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equipment, Furniture and Fixtures. Equipment, furniture and fixtures are
recorded at cost. Depreciation is provided using the straight-line method over
the following estimated useful lives:
Equipment, furniture and fixtures ................. 3 - 5 years
Leasehold improvements ................. Term of the lease
Stock Based Compensation. The Company accounts for its stock based
compensation arrangements under the provisions of APB 25, Accounting for Stock
Issued to Employees. See Note F.
Revenue Recognition. Research and development revenue is recognized as
earned and represents reimbursement of the Company's expenditures pursuant to
the terms of two collaboration agreements (see Note G). Revenue from government
grants is recorded, as earned, based on the performance requirements of the
grant. Expenses relating to the collaboration agreements and to the performance
requirements of government grants are recorded as research and development
expenses. Payments received in advance of research and development performed are
designated as research and development advances.
Income Taxes. The liability method is used to account for income taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities as well as
net operating loss carryforwards and are measured using the enacted tax rates
and laws that will be in effect when the differences reverse. Deferred tax
assets may be reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
Significant Customers. Revenue in 1997, 1996 and 1995 consisted
primarily of revenue arising from collaborative agreements (see Note G).
Net loss per share. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings Per Share (FAS 128), which was adopted
by the Company on December 31, 1997. FAS 128 requires companies to change the
method currently used to compute earnings per share and to restate all prior
periods for comparability. Net loss per share is computed using the
weighted-average number of common shares outstanding during the period. The
adoption of FAS 128 did not have any impact on the Company's earnings per share
due to the fact that the Company continues to be in a net loss position and,
consequently, common equivalent shares from stock options are excluded as their
effect is antidilutive.
NOTE B - MARKETABLE SECURITIES
The following summarizes the Company's investment in marketable securities at
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
CONTRACTUAL MATURITIES
--------------------------
LESS THAN DUE IN
ONE YEAR 1-2 YEARS
--------- ---------
<S> <C> <C>
Corporate bonds $11,569 $3,020
Certificates of deposit 5,999 -
Variable rate insurance contracts 3,000 -
Commercial paper 2,973 -
------- ------
$23,541 $3,020
======= ======
</TABLE>
F-8
<PAGE> 48
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------ ------
<S> <C> <C>
Equipment $4,586 $4,397
Furniture and fixtures 453 443
Leasehold improvements 2,264 2,264
------ ------
7,303 7,104
Less accumulated depreciation
and amortization 6,568 5,819
------ ------
Equipment, furniture and
fixtures, net $ 735 $1,285
====== ======
</TABLE>
NOTE D - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------ ------
<S> <C> <C>
Accounts payable $ 273 $ 795
Accrued research and
development expenses 2,466 1,394
Accrued other 929 1,600
------ ------
$3,668 $3,789
====== ======
</TABLE>
NOTE E - INCOME TAXES
At December 31, 1997, the Company has a potential tax benefit of
approximately $45.8 million, resulting primarily from approximately $101.0
million in net operating loss carryforwards and $4.3 million of tax credits
which expire through 2012. Since the Company has incurred only losses since
inception and due to the degree of uncertainty related to the ultimate
utilization of the loss and credit carryforwards, the Company has fully reserved
this tax benefit. Additionally, the future utilization of net operating loss
carryforwards may be subject to limitations under the change in stock ownership
rules of the Internal Revenue Code of 1986, as amended.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets
Net operating loss
carryforwards $ 41,500 $ 33,450
Tax credits 4,250 3,800
-------- --------
Total deferred tax assets 45,750 37,250
Valuation allowance (45,750) (37,250)
-------- --------
Net deferred tax assets $ - $ -
======== ========
</TABLE>
F-9
<PAGE> 49
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - STOCKHOLDERS' EQUITY
Preferred Stock. The Board of Directors is authorized to fix designations,
relative rights, preferences and limitations on the preferred stock at the time
of issuance.
Equity Incentive Plans. The Company has a 1991 Equity Incentive Plan (the
"Plan") which provides for the granting of options to purchase 2,100,000 shares
of the Company's Common Stock. The Plan provides for the issuance or award of
incentive stock options at no less than the fair market value at the date of the
grant, non-qualified stock options, stock appreciation rights, performance
shares, restricted Common Stock, and stock units at prices to be determined by
the Board of Directors. All employees and, in the case of awards other than
incentive stock options, consultants to the Company are eligible for awards
under the Plan.
In addition, the Company has a 1992 Director Stock Option Plan (the "1992
Plan") pursuant to which non-qualified stock options to purchase 20,000 shares
of the Company's Common Stock are automatically granted to outside directors at
fair market value upon their initial election to the Board of Directors.
Additional grants of options may be made to eligible Directors at the discretion
of the Board of Directors. The 1992 Plan has reserved an aggregate of 100,000
shares for this purpose. At December 31, 1997, options to purchase 78,000 shares
have been granted under the plan, of which 45,625 are exercisable.
The term of all stock options granted may not exceed ten years, and vesting
generally is over a four-year period.
The following table presents the combined activity of the two option plans
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ------ ---------- ------ ---------- ------
Outstanding at
<S> <C> <C> <C> <C> <C> <C>
beginning of year 1,493,953 $ 6.92 1,258,973 $ 6.61 1,330,080 $ 6.98
Granted 293,450 11.56 272,650 8.20 374,125 6.30
Exercised (10,684) 5.03 (29,988) 5.50 (93,368) 10.84
Canceled (113,992) 7.51 (7,682) 6.67 (351,864) 7.48
---------- ------ ---------- ------ ---------- ------
Outstanding at end of
year 1,662,727 $ 7.71 1,493,953 $ 6.92 1,258,973 $ 6.61
========== ====== ========== ====== ========== ======
Options exercisable at
year end 1,079,048 $ 7.09 822,347 $ 6.91 574,772 $ 7.18
========== ====== ========== ====== ========== ======
Weighted average fair value per
share of options granted during
the year $ 8.15 $ 4.64 $ 3.70
====== ====== ======
</TABLE>
F-10
<PAGE> 50
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ----------------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life (yrs) Exercise price Exercisable Exercise Price
- ------------------- --------------- ------------------------ ---------------- -------------- ----------------
<C> <C> <C> <C> <C> <C> <C>
$2.47 - 4.25 187,271 6.9 $ 4.12 135,505 $ 4.23
4.75 - 6.50 537,601 6.2 5.96 430,893 5.98
6.63 - 8.00 384,808 7.2 7.62 230,214 7.38
8.13 - 9.75 247,979 5.9 8.80 192,954 8.86
10.41 - 13.00 305,068 8.3 12.24 89,482 12.20
--------------- --------------
1,662,727 1,079,048
=============== ==============
</TABLE>
Employee Stock Purchase Plan. The 1993 Employee Stock Purchase Plan (the
"ESPP") provides for the grant of rights to eligible employees to purchase up to
250,000 shares of the Company's Common Stock at the lesser of 85% of the fair
market value at the beginning or the end of the established offering period. No
shares were issued under the ESPP in 1993. During 1994, 6,351 shares were issued
at $4.25 per share. During 1995, 12,620 shares were issued at $3.61 per share.
During 1996, 4,068 shares were issued at $4.99 per share and 4,118 were issued
at $7.01 per share. During 1997, 6,570 shares were issued at $6.59 per share and
13,762 were issued at $3.51 per share. At December 31, 1997, subscriptions were
outstanding for 23,065 shares at $1.67 per share.
FAS 123 Disclosures. The Company has adopted the disclosure provisions only
of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation ("FAS 123") and will continue to account for its stock
option plans in accordance with the provisions of APB 25, Accounting for Stock
Issued to Employees. Accordingly, no compensation cost has been recognized for
the stock option plans or the ESPP.
Pursuant to the requirements of FAS 123, the following are the pro forma
net loss and net loss per share for 1997, 1996 and 1995, as if the compensation
cost for the option plans and the ESPP had been determined based on the fair
value at the grant date for grants in 1997, 1996 and 1995, consistent with the
provisions of FAS 123:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss (in thousands) $ (13,838) $ (15,583) $ (12,989) $ (13,784) $ (7,054) $ (7,346)
Net loss per share $ (0.79) $ (0.89) $ (0.93) $ (0.99) $ (0.59) $ (0.62)
</TABLE>
The fair value of options and shares issued pursuant to the ESPP at the
date of grant were estimated using the Black-Scholes model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------------------------------ ------------------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) 5.2 4.5 4.7 .5 .5 .5
Interest rate 6.3% 6.6% 6.4% 5.5% 5.3% 5.9%
Volatility 83.0% 65.0% 68.0% 83.0% 65.0% 68.0%
</TABLE>
Prior to March 9, 1998, the Company had never declared nor paid dividends on any
of its capital stock. See Note I.
F-11
<PAGE> 51
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Black-Scholes model was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable.
In addition, such models require the use of subjective assumptions, including
expected stock price volatility. In management's opinion, such valuation models
do not necessarily provide a reliable single measure of the fair value of its
employee stock options. The effects on 1997, 1996 and 1995 pro forma net loss
and net loss per share of expensing the estimated fair value of stock options
and shares issued pursuant to the ESPP are not necessarily representative of the
effects on reporting the results of operations for future years as the periods
presented include only three, two and one years, respectively, of option grants
under the Company's plans.
Benefit Plans. The Company has an employee savings plan that qualifies
under Section 401(k) of the Internal Revenue Code of 1986, as amended, in which
all eligible employees may participate. For the plan years ended December 31,
1997, 1996 and 1995, the Company matched 100% of all qualified employee
contributions with Company Common Stock. Of the 200,000 shares authorized for
issuance pursuant to this plan, 162,163 were issued and outstanding at December
31, 1997.
The aggregate number of shares of Common Stock reserved and available for
issuance under all stock plans was 619,110 at December 31, 1997.
NOTE G - COLLABORATIVE AGREEMENTS
Boehringer Ingelheim International GmbH. In March 1995, the Company entered
into a license and stock purchase agreement with Boehringer Ingelheim
International GmbH ("BI") to collaborate on the development and
commercialization of the Company's product candidate, CERESTAT. On the signing
of these agreements, the Company received proceeds of $15.0 million, before
related costs of $1.0 million, consisting of $10.0 million for the purchase of
1,250,000 shares of the Company's Common Stock and $5.0 million for the
reimbursement of previously incurred CERESTAT-related costs. Pursuant to the
terms of these agreements and in connection with the commencement of the
Phase III stroke trial by BI, the Company received a milestone payment in
September 1996 of $10.0 million, before related costs of $300,000, in exchange
for 1,237,624 shares of Common Stock. The terms of the agreements generally
provide that BI will fund at least 75% of the development costs for the product
in the United States and Europe, and 100% of the development costs in Japan. In
addition, the Company may receive up to an additional $18.0 million in cash upon
the achievement of certain milestones and will receive royalties on any product
sales. The Company has retained the right to co-promote CERESTAT in the United
States and has granted BI exclusive marketing rights in other countries in
exchange for royalties on product sales. BI has an option to acquire the
worldwide manufacturing rights in exchange for increased royalty payments. BI
has certain termination rights including the right at its sole discretion to
terminate its agreement with the Company upon 90 days' written notice.
Allergan. In November 1996, the Company entered into a collaboration
agreement with Allergan Inc. ("Allergan") to develop certain NMDA ion-channel
blockers, sodium ion-channel blockers and combination ion-channel blockers for
the treatment of ophthalmic disorders, including glaucoma. Upon signing the
agreement, Allergan purchased 175,103 shares of the Company's Common Stock for
$3.0 million. Allergan will provide an additional $3.0 million in research
funding over a three-year period and has established a $2.0 million line of
credit for the Company. Under the terms of the credit agreement, a loan made to
the Company may be convertible into Common Stock of the Company. Allergan will
be responsible for the development of potential products and will bear all of
the development costs. Allergan will manufacture and market products developed
under the collaboration worldwide. The Company may receive up to an additional
$18.5 million in cash upon the achievement of certain milestones and will
receive a royalty on product sales. There can be no assurance as to when or if
these milestones will be achieved. Allergan has certain termination rights,
including the right, which is shared by the Company, to terminate the agreement
upon 90 days' prior written notice of an uncured material breach by the other
party. Pursuant to the funding agreement, Allergan had provided $1.4 million to
the Company as of December 31, 1997, of which $1.0 million and $114,000 was
included in research and development revenue in 1997 and 1996, respectively.
F-12
<PAGE> 52
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cambridge NeuroScience Partners, Inc. In December 1996, the Company entered
into a collaboration agreement with The J. David Gladstone Institutes
("Gladstone") and The Regents of the University of California (the "University")
for the development of treatments for Alzheimer's disease and other neurological
diseases, disorders or injuries. In connection with the collaboration, the
Company formed a subsidiary, Cambridge NeuroScience Partners, Inc. ("CNPI").
Cambridge NeuroScience made a $1.25 million equity investment in CNPI upon the
consummation of the collaboration and, as a result, owns 80% of the outstanding
common stock of CNPI, with Gladstone and the University owning 15% and 5%,
respectively, of the remaining outstanding shares of CNPI common stock.
Pursuant to the terms of the collaboration, Gladstone will conduct a
research program over a three-year period, for which CNPI will provide at least
$1.25 million in funding per year. Through December 31, 1997, CNPI made payments
to Gladstone totalling $1.9 million. In the event that CNPI is unable to raise
the required funds to make its research funding payments, Cambridge NeuroScience
will loan CNPI, interest-free, all amounts necessary to enable CNPI to make such
payments. Such debt will be convertible into securities of CNPI under certain
circumstances in accordance with the stockholders' rights agreement. The Company
has guaranteed CNPI's obligations with respect to the collaboration, including
CNPI's financial obligations. CNPI has a three-year option to acquire an
exclusive royalty-bearing license to intellectual property developed in the
field of research under the collaboration. Included in research and development
expense in 1997 and 1996 was expense totaling $1.4 million and $51,000,
respectively, relating to this agreement. The agreement is generally subject to
termination upon 60 days' prior written notice of an uncured material breach.
Research and development revenue. Research and development revenue pursuant
to the BI collaboration represents the excess of the Company's expenditures over
its obligations for the year (generally 25% of total spent by both parties).
Under the terms of the agreements, an accounting of annual total costs incurred
by both parties will occur 120 days after year end. Any costs incurred in excess
of one party's contractual obligation will be reimbursed by the other party. The
calculation of revenue for the years ended December 31, 1997, 1996 and 1995 was
based in part upon an estimate of costs incurred by BI during the contract
periods. Research and development revenue in 1997, 1996 and 1995 included $2.9
million, $2.3 million and $8.2 million, respectively, earned pursuant to the BI
collaboration. Revenue in 1995 included the reimbursement by BI of $5.0 million
in costs incurred prior to signing the agreement, net of related costs of
$333,000 (see discussion above), as well as $3.5 million representing the excess
of the Company's expenditures over its obligation for 1995. During 1996 and
1995, BI remitted to the Company a predetermined amount, on a quarterly basis,
in the form of advances against the estimated reimbursable costs for those
contract periods. No such advances were received in 1997. At December 31, 1997
and 1996, the difference of $2.9 million and $5.8 million, respectively, between
cash advances received and revenue recognized is recorded as research and
development advances.
In the second half of 1997, the Company and BI discontinued enrollment into
the clinical trials of CERESTAT in both stroke and traumatic brain injury (TBI).
A planned interim analysis of data collected from the stroke trial indicated the
presence of concerns about the benefit to risk ratio of drug treatment. A
planned interim analysis of the data collected from the TBI trial indicated that
continuation of the trial was not justified. The Company and BI plan to further
evaluate the data before making any decision about the potential future
development of CERESTAT. There can be no assurance that there will be a basis
for continued development of CERESTAT, nor that BI and the Company will agree on
the course of future development. If BI and the Company fail to agree on future
development, there could be a significant financial impact on the Company's
ability to develop CERESTAT, and the Company would earn no further revenue under
the collaboration agreement.
F-13
<PAGE> 53
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - COMMITMENTS
The Company leases its office and research facilities under the terms of an
agreement, which expires July 2000. The agreement contains an option to extend
the lease for an additional five-year period. Under the terms of this lease, the
Company pays the property taxes, insurance, maintenance, and expenses related to
the leased property. Minimum future obligations under the terms of the
facilities lease are (in thousands):
1998 .............................. $ 958
1999 .............................. 1,132
2000 .............................. 660
Total rent expense relating to this lease was approximately $1.1 million in each
of the years ended December 31, 1997, 1996, and 1995.
In connection primarily with the Company's guarantee of the obligations of
its majority-owned subsidiary, CNPI (see Note G), and an employment agreement
with an executive officer, the Company has total non-cancelable commitments of
approximately $2.6 million at December 31, 1997.
NOTE I - SUBSEQUENT EVENT
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount. The one-time cost associated with this
reduction in staff, consisting primarily of severance and related benefits, is
estimated to be approximately $800,000, which will be expensed in the first
quarter of 1998. On March 9, 1998, the Company's Board of Directors declared a
dividend in the amount of $1.00 per share payable on April 14, 1998 to
shareholders of record on April 2, 1998.
F-14
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 1998 CAMBRIDGE NEUROSCIENCE, INC.
By: /s/ Harry W. Wilcox, III
-------------------------------------------
Harry W. Wilcox, III
Principal Financial and Accounting Officer
POWER OF ATTORNEY
We, the undersigned Directors of Cambridge NeuroScience, Inc., hereby
severally constitute and appoint Elkan R. Gamzu, Robert N. McBurney, Harry W.
Wilcox, III and William T. Whelan and each of them singly, our true and lawful
attorneys-in-fact, with full power to them and each of them to sign for us, in
our names and in the capacity indicated below, the Annual Report on Form 10-K of
Cambridge NeuroScience, Inc., for fiscal year 1997, and any and all amendments
thereto, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission hereby
ratifying and confirming all that each of said attorneys-in-fact may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
WITNESS our hands on the dates set forth below:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Elkan R. Gamzu Principal Executive March 16, 1998
- ------------------------------ Officer and Director
Elkan R. Gamzu
/s/ Harry W. Wilcox, III Principal Financial and March 16, 1998
- ------------------------------ Accounting Officer
Harry W. Wilcox, III
/s/ Nancy S. Amer Director March 16, 1998
- ------------------------------
Nancy S. Amer
/s/ Burkhard Blank Director March 16, 1998
- ------------------------------
Burkhard Blank
/s/ Ira A. Jackson Director March 16, 1998
- ------------------------------
Ira A. Jackson
/s/ S. Joshua Lewis Director March 16, 1998
- ------------------------------
S. Joshua Lewis
/s/ Joseph B. Martin Director March 16, 1998
- ------------------------------
Joseph B. Martin
/s/ Paul C. O'Brien Director March 16, 1998
- ------------------------------
Paul C. O'Brien
54
<PAGE> 55
EXHIBIT INDEX
-------------
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation of Registrant. Filed as Exhibit
4.1 to Registration Statement on Form S-8, File No. 33-42933, and
incorporated herein by reference.
3.3 By-laws of Registrant. Filed as Exhibit 4.2 to Registration Statement
on Form S-8, File No. 33-42933, and incorporated herein by reference.
4.1 Specimen Stock Certificate for Common Stock, $.001 par value. Filed as
Exhibit 4.1 to Registration Statement on Form S-1, File No. 33-40078,
and incorporated herein by reference.
10.1 Stockholders' Agreement dated December 29, 1988 among the Company and
certain investors, as amended by Waiver and Consent dated as of
February 5, 1991. Filed as Exhibit 10.3 to Registration Statement on
Form S-1, File No. 33-40078, and incorporated herein by reference.
10.2 Scientific Advisor Agreement dated September 10, 1986 and amendment
dated December 6, 1986 between the Company and Dr. Joseph Martin.
Filed as Exhibit 10.5 to Registration Statement on Form S-1, File No.
33-40078, and incorporated herein by reference.
10.3 Form of Stockholders' Agreement dated March 19, 1987 among the Company
and certain stockholders. Filed as Exhibit 10.6 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.4 Form of Restricted Stock Purchase Agreement with a certain Director
and executive officers. Filed as Exhibit 10.8 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.5 Common Stock Purchase Warrant dated February 15, 1991 with Aeneas
Venture Corporation. Filed as Exhibit 10.9 to Registration Statement
on Form S-1, File No. 33-40078, and incorporated herein by reference.
10.6 Form of Waiver, Consent and Agreement dated as of April 22, 1991
between the Company and certain investors. Filed as Exhibit 10.10 to
Registration Statement on Form S-1, File No. 33-40078, and
incorporated herein by reference.
10.9* Letter Agreement dated June 5, 1990 between the Company and Elkan R.
Gamzu, Ph.D. Filed as Exhibit 10.13 to Registration Statement on Form
S-1, File No. 33-40078, and incorporated herein by reference.
10.11* 1991 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to the
Registration Statement on Form S-8, File No. 333-05431, as filed with
the Commission on June 7, 1996, and incorporated herein by reference.
10.12* 1992 Director Stock Option Plan, as amended. Filed herewith.
10.13 Lease for One Kendall Square dated July 16, 1992 between the Company
and the Trustees of Old Kendall Realty Trust and addendum dated as of
September 22, 1992 (the "Lease"). Filed as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1992, as filed
with the Commission on March 28, 1993, and incorporated herein by
reference. Addendum dated September 22, 1993, filed as Exhibit 10.13
to the Annual Report on Form 10-K for the period ended December 31,
1993, as filed with the Commission on February 14, 1994, and
incorporated herein by reference. Addendum dated March 11, 1996, as
filed with the Commisssion on March 24, 1997, and incorporated herein
by reference. Addendum dated June 17, 1997. Filed herewith.
55
<PAGE> 56
10.15* Form of Indemnification agreement between the Company and Directors
and executive officers. Filed as Exhibit 10.15 to the Annual Report on
Form 10-K for the period ended December 31, 1992, as filed with the
Commission on March 28, 1993, and incorporated herein by reference.
10.16+ Stock Purchase Agreement dated as of March 21, 1995 between the
Company and Boehringer Ingelheim International GmbH. Filed as Exhibit
10.16 to the Annual Report on Form 10-K for the period ended December
31, 1994, as filed with the Commission on March 31, 1995, and
incorporated herein by reference.
10.17+ License Agreement dated as of March 21, 1995 between the Company and
Boehringer Ingelheim International GmbH. Filed as Exhibit 10.17 to the
Annual Report on Form 10-K for the period ended December 31, 1994, as
filed with the Commission on March 31, 1995, and incorporated herein
by reference.
10.18+ Amendment to Stock Purchase Agreement and License Agreement between
the Company and Boehringer Ingelheim International GmbH dated as of
August 19, 1996. Filed as Exhibit 99.4 to Amendment No. 1 to the
Current Report on Form 8-K/A dated August 19, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.19+ Collaborative Research, Development and Marketing Agreement dated as
of November 20, 1996 between the Company and Vision Pharmaceuticals
L.P. Filed as Exhibit 99.1 to Amendment No. 1 to the Current Report on
Form 8-K/A dated August 19, 1996, as filed with the Commission on
January 29, 1997, and incorporated herein by reference.
10.2+ Stock Purchase Agreement dated as of November 20, 1996 between the
Company and Vision Pharmaceuticals L.P. Filed as Exhibit 99.2 to
Amendment No. 1 to the Current Report on Form 8-K/A dated August 19,
1996, as filed with the Commission on January 29, 1997, and
incorporated herein by reference.
10.21+ Credit Agreement dated as of November 20, 1996 between the Company and
Vision Pharmaceuticals L.P. Filed as Exhibit 99.3 to Amendment No. 1
to the Current Report on Form 8-K/A dated August 19, 1996, as filed
with the Commission on January 29, 1997, and incorporated herein by
reference.
10.22+ Sponsored Research and Collaborative Agreement dated as of December
23, 1996 between Cambridge NeuroScience Partners, Inc. and The J.
David Gladstone Institutes. Filed as Exhibit 99.1 to Amendment No. 1
to the Current Report on Form 8-K/A dated December 23, 1996, as filed
with the Commission on January 29, 1997, and incorporated herein by
reference.
10.23+ Option Agreement dated as of December 23, 1996 by and among The
Regents of the University of California, Cambridge NeuroScience
Partners, Inc., and the Company. Filed as Exhibit 99.2 to Amendment
No. 1 to the Current Report on Form 8-K/A dated December 23, 1996, as
filed with the Commission on January 29, 1997, and incorporated herein
by reference.
10.24+ Stockholders' Rights Agreement dated as of December 23, 1996 by and
among the Company, Cambridge NeuroScience Partners, Inc. , The J.
David Gladstone Institutes and The Regents of the University of
California. Filed as Exhibit 99.3 to Amendment No. 1 to the Current
Report on Form 8-K/A dated December 23, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.25* Compensatory arrangement with certain executive officers and other
members of management. Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed herewith.
56
<PAGE> 57
24.1 Powers of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule for the year ended December 31, 1997
(for electronic filing only).
99.1 Important Factors Regarding Forward-Looking Statements. Filed
herewith.
- ---------------------------------
* Identifies a management contract or compensatory plan or agreement in which
an executive officer or Director of the Company participates.
+ Confidential information contained in this Exhibit has been omitted and
filed separately with the Securities and Exchange Commission.
57
<PAGE> 1
EXHIBIT 10.12
CAMBRIDGE NEUROSCIENCE, INC.
1992 DIRECTOR STOCK OPTION PLAN
The purpose of the 1992 Director Stock Option Plan (the "Plan") of
CAMBRIDGE NEUROSCIENCE, INC. (the "Company") is to attract and retain highly
qualified non-employee Directors of the Company and to encourage ownership of
stock of the Company by such Directors so as to provide additional incentives to
promote the success of the Company.
1. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Board of Directors of the Company
(the "Board"). The Board shall have authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the operation of the
Plan as it shall from time to time consider advisable, and to interpret the
provisions of the Plan. The Board's decision shall be final and binding. To the
extent permissible by law, the Board may delegate to a committee consisting of
one or more Directors appointed by the Board the power to grant stock options to
Eligible Directors (defined below) pursuant to Section 6(a) hereof and to make
all determinations under the Plan with respect thereto.
2. PERSONS ELIGIBLE TO PARTICIPATE IN THE PLAN.
All Directors of the Company who are not employees of the Company or
employees of or otherwise affiliated with any corporation or entity which owns
more than five percent (5%) of the capital stock of the Company (an "Affiliated
Entity") or any subsidiary of the Company or any Affiliated Entity shall be
eligible to participate in the Plan (an "Eligible Director").
3. SHARES SUBJECT TO THE PLAN.
(a) The aggregate number of Shares of the Company which may be optioned
under this Plan is 100,000 shares. Shares issued under the Plan may consist in
whole or in part of authorized but unissued shares or treasury shares.
(b) In the event of a stock dividend, split-up, combination or
reclassification of shares, recapitalization or other similar capital change
relating to the Company's Common Stock, the maximum aggregate number and kind of
shares or securities of the Company as to which options may be granted under
this Plan and as to which options then outstanding shall be exercisable, and the
option price of such options shall be appropriately adjusted so that the
proportionate number of shares or other securities as to which options may be
granted and the proportionate interest of holders of outstanding options shall
be maintained as before the occurrence of such event.
(c) In the event of a consolidation or merger of the Company with another
corporation where the Company's stockholders do not own a majority in interest
of the surviving or resulting corporation, or the sale or exchange of all or
substantially all of the assets of the Company, or a reorganization or
liquidation of the Company, any deferred exercise period shall be automatically
accelerated and each holder of an outstanding option shall be entitled to
receive upon exercise and payment in accordance with the terms of the option the
same shares, securities or property as he would have been entitled to receive
upon the occurrence of such event if he had been, immediately prior to such
event, the holder of the number of shares of Common Stock purchasable under his
or her option; provided, however, that in lieu of the foregoing the Board may
upon written notice to each holder of an outstanding option or right under the
Plan, provide that such option or right shall terminate on a date not less than
20 days after the date of such notice unless theretofore exercised.
(d) Whenever options under this Plan lapse or terminate or otherwise become
unexercisable the shares of Common Stock which were subject to such options may
again be subjected to options under this
<PAGE> 2
Exhibit 10.12
Plan. The Company shall at all times while this Plan is in force reserve such
number of shares of Common Stock as will be sufficient to satisfy the
requirements of this Plan.
4. NON-STATUTORY STOCK OPTION.
All options granted under this Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
5. FORM OF OPTIONS.
Options granted hereunder shall be in substantially such form as the Board
or any committee appointed pursuant to Section 1 above may from time to time
determine.
6. GRANT OF OPTIONS AND OPTION TERMS.
(a) Automatic Initial Grants of Options. At each annual meeting of the
stockholders of the Company following the approval of this Plan by the
stockholders, each Director elected for the first time as a Director at that
meeting who is eligible to receive options to purchase Common Stock under this
Plan shall automatically be granted options to purchase 20,000 shares of Common
Stock under the Plan. In addition, upon the initial election of a Director who
is eligible to receive options to purchase Common Stock (whether by the Board of
Directors or the stockholders and whether to fill a vacancy or otherwise), such
Director shall automatically be granted options to purchase 20,000 shares of
Common Stock under the Plan. The "Date of Grant" for options granted under this
Section 6(a) shall be the date of election of an Eligible Director as a
Director. No options shall be granted hereunder after ten years from the date on
which this Plan was initially approved by the stockholders.
(b) Discretionary Grants of Options. Subject to the provisions of the Plan,
the Board may from time to time, in its discretion, grant options to Eligible
Directors and determine the number of shares to be covered by each such option,
subject to Section 6(c)-(h) below. The Board may impose such conditions with
respect to the exercise of options, including but not limited to conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. The "Date of Grant" for options granted under this
Section 6(b) shall be the date on which such options are granted by the Board.
No options shall be granted hereunder after ten years from the date on which
this Plan was initially approved by the stockholders.
(c) Option Price. The option price for each option granted under this Plan
shall be the last sale price for the Company's Common Stock as reported by the
National Association of Securities Dealers Automated Quotations National Market
System for the business day on the Date of Grant.
(d) Term of Option. The term of each option granted under this Plan shall
be ten years from the Date of Grant.
(e) Exercisability of Options. Options granted under this Plan shall become
exercisable with respect to twenty-five percent of the shares on the first
anniversary of the Date of Grant and as to 6.25% of the shares quarterly
thereafter.
(f) General Exercise Terms. Directors holding exercisable options under
this Plan who cease to serve as members of the Board may, during their lifetime,
exercise the rights they had under such options at the time they ceased being a
Director for the full unexpired term of such option. Any rights that have not
yet become exercisable shall terminate upon cessation of membership on the
Board. Upon the death of a Director, those entitled to do so shall have the
right, at any time within twelve months after the date of death, to exercise in
whole or in part any rights which were available to the Director at the time of
his or her death. The rights of the option holder may be exercised by the
holder's guardian or legal representative
2
<PAGE> 3
in the case of disability and by the beneficiary designated by the holder in
writing delivered to the Company or, if none has been designated, by the
holder's estate or his or her transferee on death in accordance with this Plan,
in the case of death. Options granted under the Plan shall terminate, and no
rights thereunder may be exercised, after the expiration of the applicable
exercise period. Notwithstanding the foregoing provisions of this section, no
rights under any options may be exercised after the expiration of ten years from
their Date of Grant.
(g) Method of Exercise and Payment. Options may be exercised only by
written notice to the Company at its office accompanied by payment of the full
option price for the shares of Common Stock as to which they are exercised. The
option price shall be paid in cash or by check or in shares of Common Stock of
the Company, or in any combination thereof. Shares of Common Stock surrendered
in payment of the option price shall have been held by the person exercising the
option for at least six months, unless otherwise permitted by the Board. The
value of shares delivered in payment of the option price shall be their fair
market value, as determined in accordance with Section 6(c) above, as of the
date of exercise. Upon receipt of such notice and payment, the Company shall
promptly issue and deliver to the optionee (or other person entitled to exercise
the option) a certificate or certificates for the number of shares as to which
the exercise is made.
(h) Non-transferability. Options granted under this Plan shall not be
transferable by the holder thereof otherwise than by will or the laws of descent
and distribution or as permitted by Rule 16b-3 (or any successor provision)
under the Securities Exchange Act of 1934, as amended ("Rule 16b-3").
7. LIMITATION OF RIGHTS.
(a) No Right to Continue as a Director. Neither the Plan, nor the granting
of an option or any other action taken pursuant to the Plan, shall constitute an
agreement or understanding, express or implied, that the Company will retain an
option holder as a Director for any period of time or at any particular rate of
compensation.
(b) No Stockholders' Rights for Options. A Director shall have no rights as
a stockholder with respect to the shares covered by options until the date the
Director exercises such options and pays the option price to the Company, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such option is exercised and paid for.
8. AMENDMENT OR TERMINATION.
The Board may amend or terminate this Plan at any time, provided that, to
the extent necessary to comply with Rule 16b-3, this Plan shall not be amended
more than once every six months, other than to comport with changes in the Code,
ERISA or the rules thereunder.
9. STOCKHOLDER APPROVAL.
This Plan is subject to approval by the stockholders of the Company by the
affirmative vote of the holders of a majority of the shares of Common Stock of
the Company present, or represented and entitled to vote, at a meeting duly held
in accordance with the laws of Delaware. In the event such approval is not
obtained, all options granted under this Plan shall be void and without effect.
10. GOVERNING LAW.
The Plan shall be governed by and interpreted in accordance with the laws
of the State of Delaware.
As Amended through April 28, 1997
3
<PAGE> 1
EXHIBIT 10.13
FOURTH AMENDMENT TO LEASE
LESSOR: OLD KENDALL PROPERTY LLC
LESSEE: CAMBRIDGE NEUROSCIENCE INC.
DATE OF LEASE: JULY 16, 1992;
FIRST AMENDMENT DATED SEPTEMBER 22, 1992;
SECOND AMENDMENT DATED SEPTEMBER 22, 1993;
THIRD AMENDMENT DATED MARCH 11, 1996.
PREMISES: ONE KENDALL SQUARE - BLDG. 650 AND BLDG. 700.
In consideration of Ten ($10.00) Dollars and other valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the above-described
lease is hereby amended effective June 1, 1997 as follows:
1. TERM.
The term of the lease shall be extended through July 31, 2000.
2. RENT.
Effective January 1, 1998, the Base Rent on the Leased Premises shall be
adjusted as follows:
Commencing on July 1, 1998, LESSEE agrees to pay Base Rent on the Leased
Premises as follows:
(i) $1,109,790.000 per annum ($28.50 per RSF times 38,940 RSF), (or
$92,482.50 monthly); plus
(ii) The annual fair rental value as reasonably determined by LESSOR
of LESSEE's parking spaces used in the OKS Garage ("Garage Parking").
1
<PAGE> 2
EXHIBIT 10.13
3. COMPLETION OF IMPROVEMENTS.
The Leased Premises shall be delivered to LESSEE in their current "As is"
condition.
4. BROKER.
The LESSOR and LESSEE each represent and warrant to the other that each has
had no dealings with any Brokers concerning this Third Amendment to Lease,
except ROBERT A. JONES & COMPANY and FALLON, HINES & O'CONNOR and each party
agrees to indemnify and hold the other harmless for any damages occasioned to
the other by reason of a breach of this representation and warranty. LESSOR
agrees to pay any commission due to LESSEE's broker.
5. OPTION TO EXPAND.
On or before December 31, 1997, LESSOR shall notify LESSEE whether or not
the Digital Equipment Corporation space ("Digital Space") containing 31,747
rentable square feet on the second floor of Buildings 600/650/700 will become
available on May 1, 1998. If LESSOR notifies LESSEE that the space will be
available for lease and if LESSEE is not then in default under this lease beyond
applicable notice, grace and cure periods, LESSEE shall have the option upon
written notice to LESSOR within ten (10) days of the above availability notice
to notify LESSOR that it will occupy the Digital Space on the terms and
conditions provided below. If LESSEE does not exercise its option to take the
Digital Space, all rights to said space shall cease. If LESSEE does elect to
occupy the Digital Space, the initial term shall be coterminous with this fourth
amendment through July 31, 2000. The Digital Space shall be delivered in its "as
is" condition. Thirty (30) days after delivery of the Digital Space to LESSEE,
LESSEE shall vacate and cease being obligated for any rent on all of its current
first floor space (11,642 RSF) in Bldg. 700. At that same time, Base Rent
pursuant to paragraph 2(i) above shall be changed to: $1,515,451.50 per annum
(representing $34.00 per RSF times 27,298 RSF plus $18.50 per RSF times 31,747
RSF), or $126,287.63 monthly. LESSEE shall be responsible for its pro rata share
of CAO costs and Real Estate Taxes for the Lot and Building on the Digital
Space. Upon occupancy of the Digital Space and the return of the first floor
Bldg. 700 space, LESSEE's (on 59,045 RSF) proportionate Lot share shall be 9.67%
and its Proportionate Building share shall be 26.19%.
2
<PAGE> 3
EXHIBIT 10.13
6. OPTION TO EXTEND LEASE FIVE (5) YEARS FROM AUGUST 1, 2000.
If the LESSEE is not then in default beyond applicable notice, grace and
cure periods, LESSOR does hereby grant to LESSEE the option to extend this Lease
for one (1) additional five- (5) year term, commencing on the expiration of the
term of this amendment (July 31, 2000) upon the same terms and conditions as
herein contained except the annual Base Rent set forth in Paragraph 4 hereof
shall be at the rate set forth below. The option shall be exercised by written
notice from LESSEE and received by LESSOR on or before July 31, 1999. The annual
rent for the Extended Term shall be adjusted at the commencement of the Extended
Term and shall be as set forth below.
In the event the LESSEE has decided not to occupy the Digital Space
pursuant to Paragraph 5 above, the Base Rent shall be $1,002,705 per annum
(representing $25.75 per RSF times 38,940 RSF), or $83,558.75 monthly. The space
will be delivered in its "as is" condition.
In the event the LESSEE has elected to occupy the Digital Space pursuant to
Paragraph 5 above, the Base Rent for Years 1 and 2 shall be $1,399,307.50 per
annum (representing $23.50 per RSF times 59,545 RSF) and for Years 3 through 5
shall be $1,458,852.50 per annum (representing $24.50 per RSF times 59,545 RSF).
LESSOR shall provide a $317,470 tenant improvement allowance to LESSEE for work
on the Digital Space, all work subject to LESSOR's reasonable approval.
7. ADDITIONAL OPTIONS TO EXTEND.
If the LESSEE is not then in default beyond applicable notice, grace and
cure periods, and if LESSEE has previously exercised its option under Paragraph
6 above, LESSOR does hereby grant to LESSEE the option to extend this Lease for
two (2) additional five- (5) year terms, commencing on the expiration of the
Option Term per Paragraph 6 above upon the same terms and conditions as herein
contained except the annual Base Rent set forth in Paragraph 4 hereof shall be
at the rate set forth below. The option shall be exercised by written notice
from LESSEE and received by LESSOR at least eight (8) months prior to the
expiration of the prior term. The annual rent for the Extended Terms shall be
adjusted at the commencement of each Extended Term and shall be at fair market
value as determined below.
Fair market value shall mean the then prevailing rents and charges for
comparable rental properties in Cambridge, Massachusetts, taking into account
the then condition of the Leased Premises. Within 30 days after LESSEE exercises
its option to extend, LESSOR shall notify LESSEE in writing of LESSOR'S
determination of the market rate ("LESSOR'S Rental Notice"). Upon LESSEE'S
receipt of LESSOR's Rental Notice, LESSEE may elect to nullify its exercise of
the option to extend by giving LESSOR written notice of such nullification
within ten (10) days after receipt of LESSOR'S Rental Notice; upon the giving of
such nullification notice,
3
<PAGE> 4
EXHIBIT 10.13
this lease shall automatically terminate as of the originally scheduled
expiration date of the initial Term and LESSEE shall have no right to extend the
term. If LESSEE has not so nullified its exercise of the extension option and
within thirty (30) days after the LESSEE has receive the LESSOR'S Rental Notice,
the parties cannot agree upon the market rate, then the market rate shall be
submitted to arbitration as follows: market rate shall be determined by
impartial arbitrators (who shall be qualified real estate appraisers or brokers
dealing with like types of properties), one to be chosen by the LESSOR, one to
be chosen by the LESSEE, and a third to be selected, if necessary as below
provided. The unanimous written decision of the two first chosen (without
selection and participation of the third arbitrator), or otherwise the written
decision of a majority of the three arbitrators chosen and selected as
aforesaid, shall be conclusive and binding upon LESSOR and LESSEE. LESSOR and
LESSEE shall each notify the other of its chosen arbitrator within ten (10) days
following the call for arbitration and, unless such arbitrators shall have
reached an unanimous decision within thirty (30) days after their designation,
they shall so notify the then President of the Greater Boston Real Estate Board
and request him to select an impartial third arbitrator to determine the market
rate as herein defined. Such third arbitrator and the first two chosen shall
render their decision within thirty (30) days following the date of appointment
of the third arbitrator and shall notify LESSOR and LESSEE thereof. LESSOR and
LESSEE shall share (50/50) all expenses of arbitration, regardless of the
outcome of arbitration. If the dispute between the parties as to a market rate
has not been resolved before the commencement date of LESSEE'S obligations to
pay Annual Rent based upon such market rate, LESSEE shall pay Annual Rent under
the Lease based upon the market rate designated by a LESSOR until either (i)
agreement of the parties as to the market rate, or (ii) decision of the
arbitrators, as the case may be, at which time LESSEE shall promptly pay any
underpayment of Annual Rent to LESSOR , or LESSOR shall credit the overpayment
of Annual Rent against the next installment of rental or other charges due to
LESSOR hereunder.
4
<PAGE> 5
EXHIBIT 10.13
Except as herein expressly amended, the above-captioned Lease shall remain
unaltered, in full force and effect, and is hereby reaffirmed.
WITNESS our hands and seals this 17th day of June 1997.
LESSOR:
OLD KENDALL PROPERTY LLC
BY /S/ ALLAN R. JONES /S/ TINA BORGES-DRUTH
---------------------------------------- ------------------------
NAME: ALLAN R. JONES WITNESS
OFFICE: PRESIDENT OF KENDALL F.A. INC.,
MANAGING MEMBER
HEREUNTO DULY AUTHORIZED
LESSEE
CAMBRIDGE NEUROSCIENCE, INC.
BY /S/ ELKAN R. GAMZU /S/ ROSS S. GIBSON
---------------------------------------- ------------------------
NAME: WITNESS
OFFICE: PRESIDENT
HEREUNTO DULY AUTHORIZED
BY /S/ HARRY W. WILCOX /S/ ROSS S. GIBSON
---------------------------------------- ------------------------
NAME: WITNESS
OFFICE: TREASURER
HEREUNTO DULY AUTHORIZED
5
<PAGE> 1
EXHIBIT 10.25
COMPENSATORY ARRANGEMENT
The Company has adopted a compensatory arrangement pursuant to which
certain executive officers and other members of management will be compensated
in the event of the successful completion of the sale, merger or liquidation of
the Company. The individuals covered by this arrangement are Drs. Gregory B.
Butler, Graham Durant, Elkan R. Gamzu, David Gwynne, William F. Holt and Robert
N. McBurney and Mr. Harry W. Wilcox and Mrs. Laima I. Mathews. Compensation to
be paid to these employees includes a "success bonus" based on a percentage of
the dollar value of the transaction entered into by the Company. Except as
otherwise determined by the Board of Directors, in the event that any of these
individuals voluntarily terminates his or her employment with the Company prior
to the successful completion of such a transaction, no bonus will be paid to
that individual. Additionally, in the event that the Company terminates the
employment of these individuals, he or she will receive severance payments
ranging from 25% to 100% of such individual's base salary and the continuation
for a prescribed period of all employee benefits currently provided by the
Company.
<PAGE> 1
EXHIBIT 21.1
CAMBRIDGE NEUROSCIENCE, INC.
SUBSIDIARIES
Jurisdiction of
Name Incorporation or Organization
---- -----------------------------
1. Cambridge NeuroScience Partners, Inc. Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Forms S-8 No. 33-42933, 33-76408, 33-76410, 33-76412 and 333-05431) of
Cambridge NeuroScience, Inc. of our report dated February 12, 1998, except for
Note I as to which date is March 9, 1998, with respect to the consolidated
financial statements of Cambridge NeuroScience, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 1998
<PAGE> 1
EXHIBIT 99.1
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
From time to time, Cambridge NeuroScience, Inc. (the "Company"),
through its management, may make forward-looking public statements, such as
statements concerning then expected future revenues or earnings or concerning
projected plans, performance, product development and commercialization, as well
as other estimates relating to future operations. There are certain key factors
that could cause future results to differ materially from those anticipated by
management, including, but not limited to, the following:
UNCERTAINTIES RELATED TO CLINICAL TRIALS AND FURTHER DEVELOPMENT OF CERESTAT(1)
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and effective for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
clinical trials, and there can be no assurance that clinical trials of the
Company's product candidates will demonstrate sufficient safety and efficacy to
obtain the requisite regulatory approvals or will result in marketable products.
Clinical trials are often conducted with patients that are critically ill.
During the course of treatment, these patients can die or suffer other adverse
medical effects for reasons that may not be related to the pharmaceutical agent
being tested but which can nevertheless affect clinical trial results. A number
of companies in the pharmaceutical industry have suffered significant setbacks
in advanced clinical trials, even after promising results in earlier trials.
The completion of clinical trials of the Company's product candidates
may be delayed by many factors and there can be no assurance that delays or
terminations will not occur. One such factor is the rate of enrollment of
patients, which generally varies throughout the course of a clinical trial and
which depends on the size of the patient population, the number of clinical
trial sites, the proximity of patients to clinical trial sites, the eligibility
criteria for the trial and the existence of competitive clinical trials. The
Company cannot control the rate at which patients present themselves for
enrollment, and there can be no assurance that the rate of patient enrollment
will be consistent with the Company's expectations or be sufficient to enable
clinical trials of the Company's product candidates to be completed in a timely
manner. Any significant delays in, or termination of, clinical trials of the
Company's product candidates would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's lead product candidate is CERESTAT, an ion-channel
blocker under development for the treatment of stroke and TBI. The Company
commenced Phase III clinical trials for CERESTAT in TBI in March 1996 and in
stroke in July 1996. These trials are being managed by the Company and its
collaborative partner, Boehringer Ingelheim International GmbH ("BI"). In June
1997, the Company and BI suspended patient enrollment into the stroke trial
after a planned interim analysis of the data raised concerns over the benefit to
risk ratio of drug treatment. In September 1997, the Company announced the
discontinuation of the TBI trial because a planned interim analysis of the data
showed insufficient evidence of positive clinical impact. In December 1997,
following an expanded analysis on all patients enrolled in the stroke trial as
of June 1997, the partners announced that enrollment into the stroke trial would
not resume due to insufficient evidence of positive clinical impact. At that
time, the Company announced its plan to further evaluate the data before making
any decisions about the future development of CERESTAT.
In March 1998, the Company reported that further analysis of the Phase
III data indicated that: (i) CERESTAT has an attractive safety profile in the
TBI patient population, and (ii) CERESTAT had a potential therapeutic benefit in
a subset of the stroke patient population which the Company and BI were
continuing to investigate. The Company and BI are expending additional efforts
to further evaluate the stroke findings and to determine if additional clinical
studies in the stroke indication will be pursued, either together or by the
Company independently. There can be no assurance that the results of the
analysis will lead the Company to go forward with additional development of
CERESTAT. Additionally, if the Company elects to continue development, there can
(1) CERESTAT is a registered trademark of Boehringer Ingelheim International,
GmbH.
<PAGE> 2
be no assurance that BI will concur with that decision. If the Company were to
elect to go forward with additional clinical trials of CERESTAT and BI elected
not to go forward, the Company would retain all commercial rights to CERESTAT
but would likely not have sufficient funds available to complete development of
the drug. If CERESTAT is not shown to be safe and effective in clinical trials,
the resulting delays would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's most advanced growth factor product candidate is
recombinant human Glial Growth Factor 2 ("rhGGF2"). Currently, there are no
FDA-approved glial growth factors for the treatment of multiple sclerosis
("MS"). There can be no assurance that significant effects on the outcome
measures being used by the Company in preclinical trials for rhGGF2 or in
preclinical or clinical trials for any of the Company's other product
candidates will be acceptable to regulatory authorities, including the FDA, as
the basis for marketing approval. In addition, clinical trials may be
terminated at any time for safety reasons or if little or no efficacy is
demonstrated on an interim basis.
There can be no assurance that regulatory authorities will permit
additional clinical trials for CERESTAT or clinical trials for the Company's
other product candidates. Additional animal studies could be required to obtain
additional safety data prior to commencing clinical trials of NMDA ion-channel
blockers for indications that are less life-threatening than TBI or stroke. If
trials are conducted, there can be no assurance that any of the Company's
product candidates will prove to be safe and efficacious or will receive
regulatory approvals.
HISTORY OF LOSSES; UNCERTAINTY OF CONTINUED OPERATIONS AND FUTURE PROFITABILITY
As of December 31, 1997, the Company had an accumulated deficit of
$103.5 million. The Company anticipates that it will incur substantial losses in
the future, potentially greater than losses incurred in prior years. There can
be no assurance that the Company's product candidates will be successfully
developed or that its products, if successfully developed, will generate
revenues sufficient to enable the Company to earn a profit. Cambridge
NeuroScience expects to incur substantial additional operating expenses over the
next several years to the extent that its research, development and clinical
trial activities increase. To the extent that the Company is unable to obtain
additional third-party funding for expenses, the Company expects that increased
expenses will result in increased losses from operations. The Company's ability
to achieve profitability depends in part on the ability of the Company to enter
into agreements for the development and commercialization of the Company's
products. There can be no assurance that Cambridge NeuroScience or its strategic
partners will obtain required regulatory approvals and successfully identify,
test, manufacture and market any product candidates, or that the Company will
ever achieve product revenues or profitability. Cambridge NeuroScience does not
expect to generate revenues from the sale of products, if any, for several
years.
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount from 60 to 30 staff members. The one-time
cost associated with this reduction in staff, consisting primarily of severance
and related benefits, is estimated to be approximately $800,000, which will be
expensed in the first quarter of 1998. Following this reduction in headcount,
the Company intends to sub-lease approximately half of its existing laboratory
and office facilities space. The Company is continuing to evaluate alternatives
for maximizing shareholder value, which may include the sale of some or all of
the Company's technology assets. On March 9, 1998, the Company's Board of
Directors declared a dividend in the amount of $1.00 per share payable on April
14, 1998 to shareholders of record on April 2, 1998. The total dividend payable
is expected to be approximately $18 million, based upon the number of common
shares outstanding at February 28, 1998. At February 28, 1998, the Company had
cash and cash equivalents of $11.8 million and investments in marketable
securities of $24.6 million. Although the Company believes that, following
payment of the dividend, it will have adequate resources to pursue the
development of CERESTAT with BI, if warranted, this reduction in headcount and
dividend payment will result in fewer resources being devoted to the Company's
other research and development programs.
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTIES
All of the Company's product candidates are in the research or
development stage, and all revenues to date have been generated from
collaborative research agreements, government grants and financing activities,
or from interest income earned on these funds. No revenues have been generated
from product sales. There can be no
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<PAGE> 3
assurance that product revenues can be realized on a timely basis, if ever.
Cambridge NeuroScience has not yet requested or received regulatory
approval for any product from the FDA or any other regulatory authority. There
can be no assurance that Cambridge NeuroScience or its strategic partners will
succeed in the development and marketing of any therapeutic product. To achieve
profitable operations, the Company must, alone or with others, successfully
identify, develop, introduce and market proprietary products. If potential
products are identified, they will require significant additional investment,
development, preclinical testing and clinical trials prior to potential
regulatory approval and commercialization. The Company is devoting its efforts
to the research and development of potential products based on NMDA ion-channel
blockers and other technology platforms. Neither the Company, nor to its
knowledge any other company, has successfully obtained marketing approval for a
product based on NMDA ion-channel blockers to treat either TBI or stroke.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Potential products may be found to be ineffective or cause harmful
side effects during preclinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale,
be uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. CERESTAT has not been
proven safe and effective in humans. There can be no assurance that the
Company's product development efforts will be successfully completed, that
required regulatory approvals can be obtained or that any products, if
introduced, will be successfully marketed or achieve customer acceptance.
Commercial availability of any Cambridge NeuroScience products is not expected
for a number of years, if at all. The Company recently announced the
discontinuation of enrollment in Phase III clinical trials for its lead product
candidate, CERESTAT. See "-- Uncertainties Related to Clinical Trials and
Future Development of CERESTAT."
DEPENDENCE ON STRATEGIC ALLIANCES; POTENTIAL CONFLICTS OF INTEREST
The Company's strategy for research, development and commercialization
of its product candidates includes the establishment of various corporate
collaborations, licensing agreements and other arrangements. In some cases, the
Company will be dependent upon these outside parties to conduct preclinical
testing and clinical trials and to provide adequate funding for the Company's
development programs. The Company has entered into collaborative arrangements
with Boehringer Ingelheim International GmbH ("BI") for the development and
commercialization of CERESTAT and with Allergan for the development of NMDA
ion-channel blockers, sodium ion-channel blockers and combination ion-channel
blockers for the treatment of ophthalmic diseases, including glaucoma. A
substantial portion of the payments to be received by the Company from BI and
Allergan are dependent on the Company achieving certain program development
milestones. There can be no assurance that such milestones will be achieved on a
timely basis, if ever. There can be no assurance that the Company will be able
to maintain existing collaboration agreements, negotiate collaborative
arrangements in the future on acceptable terms, if at all, or that any such
collaborative arrangements will be successful. To the extent that the Company is
not able to maintain or establish such arrangements, the Company would be
required to undertake product development and commercialization activities at
its own expense, which would increase the Company's capital requirements or
require the Company to limit the scope of its development and commercialization
activities. In addition, the Company may encounter significant delays in
introducing its products into certain markets or find that the development,
manufacture or sale of its products in such markets is adversely affected by the
absence of such collaborative agreements. While the Company believes that BI,
Allergan and other potential strategic partners will have an economic motivation
to succeed in performing their obligations under collaboration arrangements with
the Company, the amount and timing of funds and other resources to be devoted
under such arrangements will be controlled by such other parties and would be
subject to financial or other difficulties that may befall such other parties.
The Company cannot control the amount and timing of resources which its
strategic partners devote to the Company's programs or potential products, which
may vary because of factors unrelated to the potential products. If any of the
Company's strategic partners breach or terminate their agreements with the
Company or otherwise fail to conduct their collaborative activities in a timely
manner, the preclinical or clinical development or commercialization of product
candidates or research programs may be delayed, and the Company will be required
to devote additional resources to product development and commercialization or
terminate certain development
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<PAGE> 4
programs. Under the Company's collaboration agreement with BI, BI has certain
termination rights including the right in its sole discretion to terminate its
agreement upon 90 days written notice. Allergan may also terminate its agreement
with the Company for breach and under certain other circumstances upon six
months notice. The termination of the BI or Allergan agreement or of other
collaborative arrangements which the Company may in the future enter into would
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that disputes will not
arise in the future with respect to the ownership of rights to any technology
developed with third parties. These and other possible disagreements between
collaborators and the Company could lead to delays in the collaborative
research, development or commercialization of certain product candidates or
could require or result in litigation or arbitration, which would be
time-consuming and expensive, and would have a material adverse effect on the
Company's business, financial condition and results of operations.
Cambridge NeuroScience's strategic partners may develop, either alone
or with others, products that compete with the development and marketing of the
Company's products. Competing products, either developed by the strategic
partners or to which the strategic partners have rights, may result in the
Company's partners withdrawing research, development or marketing support with
respect to all or a portion of the Company's technology, which would have a
material adverse effect on the Company's business, financial condition and
results of operation.
The Company and BI have discontinued enrollment in the Phase III trials
for CERESTAT, the Company's lead product candidate. The Companies are expending
additional efforts to further evaluate the stroke findings and to determine if
additional clinical studies in the stroke indication will be pursued, either
together or by CNSI independently. There can be no assurance that clinical
trials for CERESTAT will be resumed or that, if resumed, such trials will be for
therapeutic indications for which significant market opportunities exist or can
be developed. In addition, there can be no assurance that BI will elect to
continue the collaboration with the Company for CERESTAT or any other product
candidate. If the Company were to elect to go forward with additional clinical
trials of CERESTAT and BI elected not to go forward, the Company would retain
all commercial rights to CERESTAT but would likely not have sufficient funds
available to complete development of the drug.
NEED FOR FUTURE FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company is currently evaluating alternatives for maximizing
shareholder value, which may include the sale of some or all of the Company's
technology assets. If the Company continues to engage in ongoing operations,
it will require substantial additional funding in order to continue research,
product development, preclinical testing and clinical trials of its product
candidates. The Company will also require additional funding for operating
expenses, the pursuit of regulatory approvals for its product candidates and to
establish marketing and sales capabilities. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in its research and development programs, the size and complexity of
these programs, progress with preclinical testing and clinical trials, the time
and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting and enforcing patent claims, competing technological and
market developments, the establishment of additional collaborative
arrangements, the cost of manufacturing arrangements, commercialization
activities and the cost of product in-licensing and strategic acquisitions, if
any. There can be no assurance that the Company's cash reserves and other
liquid assets and funding that may be received from the Company's strategic
partners and interest income earned thereon, will be adequate to satisfy its
capital and operating requirements.
To the extent the Company requires subtantial additional funding, it
may seek such funding through arrangements with strategic collaborators and
through public or private sales of the Company's securities, including equity
securities. There can be no assurance, however, that additional funding will be
available on reasonable terms, if at all. Any additional equity financings
would be dilutive to the Company's stockholders. If adequate funds are not
available, Cambridge NeuroScience may be required to curtail significantly or
terminate one or more of its research and development programs and/or obtain
funds through arrangements with collaborative partners or others that may
require Cambridge NeuroScience to relinquish rights to certain of its
technologies or product candidates.
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<PAGE> 5
INTENSE COMPETITION AND RISK OF TECHNOLOGICAL CHANGE
The fields in which Cambridge NeuroScience is involved are
characterized by rapid technological progress. New developments are expected to
continue at a rapid pace in both industry and academia. There are many
companies, both public and private, including large pharmaceutical companies,
chemical companies and specialized genetic engineering companies, engaged in
developing products competitive with products under development by the Company.
Many of these companies have greater capital, human resources and research and
development, manufacturing and marketing experience than Cambridge NeuroScience.
Such companies may succeed in developing products that are more effective or
less costly than any that may be developed by Cambridge NeuroScience and may
also prove to be more successful than Cambridge NeuroScience in production and
marketing. Competition may increase further as a result of potential advances in
the commercial applicability of biotechnology and greater availability of
capital for investment in these fields. In addition, academic, government and
industry-based research is intense, resulting in considerable competition in
obtaining qualified research personnel, submitting patent filings for protection
of intellectual property rights and establishing corporate strategic alliances.
There can be no assurance that research, discoveries and commercial developments
by others will not render any of the Company's programs or potential products
noncompetitive.
In July 1996, the FDA approved the use of tPA for the treatment of
patients who had suffered a stroke within the preceding three hours and for whom
a CT scan showed no evidence of hemorrhage. Intravenous tPA acts by dissolving
blood clots that might have led to stroke. In addition, a number of companies
are developing other drugs to treat TBI and/or stroke. The Company believes that
the most significant competition for CERESTAT will come from other inhibitors of
responses mediated via specific ion channels. For instance, Novartis is
conducting a Phase III clinical trial in Europe of D-CPPene, which is being
developed for TBI only, and acts through a mechanism similar to, but distinct
from, that of CERESTAT. A New Drug Application (NDA) for the use of Lubeluzole
(Janssen Pharmaceutical, N.V., a subsidiary of Johnson & Johnson) in stroke was
submitted in 1997 and was accepted for filing by the U.S. Food and Drug
Administration (FDA). However, the Company believes that further regulatory
action will not be taken until results are available from an ongoing subsequent
Phase III clinical trial. There are ongoing Phase III clinical trials for
Fosphenytoin (Warner-Lambert Company) in stroke and SNX-111 (Neurex Corporation
for TBI. Lubeluzole, Fosphenytoin and SNX-111 have actions on ion channels and
are claimed to be neuroprotective, but act through mechanisms other than the
NMDA ion-channel complex. Some compounds under development act at different
stages in the nerve cell death cascade. In 1997, Interneuron Pharmaceuticals,
Inc. submitted an NDA to the U.S. FDA for CerAxon (citicoline sodium) to treat
patients with ischemic stroke. The Company believes that CerAxon does not act on
ion channels but on other aspects of the nerve cell death cascade. The Company
believes that, even if these compounds prove to be efficacious, those that act
at other stages in the cascade will be synergistic, rather than competitive with
CERESTAT.
The Company is aware of three therapeutics currently being marketed to
treat M.S. Betaseron(R) (Chiron Corporation/Schering AG), Avonex(R) (Biogen,
Inc.) and Copaxone(R) (Teva Pharmaceuticals Industries Ltd./Hoechst Marion
Roussel Ltd.) are all based on an immunosuppression approach to the disease,
rather than the growth factors approach being pursued by the Company. There can
be no assurance that the introduction of these or other products that the
Company is unaware of will not have an adverse effect on the Company's business,
financial condition and results of operations.
The Company will, for the foreseeable future, rely on its strategic
partners for certain preclinical evaluation and clinical development of its
product candidates and manufacturing and marketing of any products. In addition,
the Company relies on its strategic partners, in part, for support in its drug
discovery operations. Generally, the Company's agreements with its strategic
partners do not prohibit the strategic partners from engaging in competitive
activities with the Company. The pharmaceutical companies with which the Company
has collaborations are in some cases attempting to develop other products to
treat diseases within the fields of the collaborations with the Company. Any
product candidate of the Company, therefore, may be subject to competition with
a potential product under development by the pharmaceutical company with which
the Company is collaborating in connection with such product candidate.
Biotechnology and related pharmaceutical technology have undergone
rapid and significant change. The
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<PAGE> 6
Company expects the technology associated with the Company's research and
development will continue to develop rapidly, and the Company's future success
will depend in large part on its ability to maintain a competitive position with
respect to this technology. Rapid technological development by the Company or
others may result in compounds, products or processes becoming obsolete before
the Company recovers any expenses it incurs in connection with developing such
products.
PATENT AND LICENSE UNCERTAINTIES
Proprietary rights relating to the Company's products will be protected
from unauthorized use by third parties only to the extent that they are covered
by valid and enforceable patents or are maintained as trade secrets, and to the
extent that the Company diligently enforces its rights against infringement of
its patent rights and against misappropriation of its trade secrets and
proprietary information. The biotechnology and pharmaceutical industries place
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes, and the Company's success will depend, in
part, on its ability to obtain patent protection for its products and
manufacturing processes, preserve its trade secrets and operate without
infringing the proprietary rights of third parties. Some of the technology that
may be used in the Company's products may not covered by any patent or patent
application. In instances where the Company's products are not covered by valid
and enforceable patents, there can be no assurance that third parties will not
be able to market similar or related products, nor can there be any assurance
that patent or other proprietary rights held by the Company with respect to
these products will afford commercially significant protection. In addition,
there can be no assurance that confidentiality arrangements to which the Company
is a party will be effective in protecting the Company's confidential
information or trade secrets.
There can be no assurance that any patent applications relating to the
Company's products will be filed in the future or that any currently pending
applications will issue on a timely basis, if ever. Since patent applications in
the United States are maintained in secrecy until patents issue and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, the Company cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or
that it was the first to file patent applications for such inventions. Even if
patents are issued, the degree of protection afforded by such patents will
depend upon the scope, validity, enforceability of the claims obtained in such
patents and the Company's willingness and financial ability to enforce and/or
defend them. The patent position of biotechnology and pharmaceutical firms is
often highly uncertain and usually involves complex legal and factual questions.
Moreover, no consistent policy has emerged in the United States and in many
other countries regarding the breadth of claims allowed in biotechnology
patents. The Company could incur substantial costs in defending itself in suits
brought against it by others or in suits in which the Company may assert its
patents against others. If the outcome of any such litigation is adverse to the
Company, the Company's business, financial condition and results of operations
could be adversely affected. If competitors of the Company prepare and file
patent applications in the United States that claim technology also claimed by
the Company, the Company may be required to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to the
Company. Patents granted to the Company in certain foreign countries may be
subject to opposition proceedings brought by third parties. The Company may
incur substantial costs defending such proceedings. There can be no assurance
that the Company would prevail in any such proceedings or that such proceedings
would not result in a material adverse effect on the Company's business,
financial condition or results of operations. In addition, patents blocking the
Company's manufacture, use or sale of its products could be issued to third
parties in the United States or foreign countries. The issuance of blocking
patents or an adverse outcome in an interference or opposition proceeding could
subject the Company to significant liabilities to third parties and require the
Company to license disputed rights from third parties or cease using the
technology. There can be no assurance that such license would be available on
commercially acceptable terms, if at all.
There are patents held by third parties that relate to the manufacture,
development and use of the Company's product candidates for which the Company
has licenses. There can be no assurance that the Company will not in the future
require licenses to additional patents, that such licenses will be available on
commercially reasonable terms, if at all, that existing or future licenses will
not be terminated or that any such termination or failure to obtain a license
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
- 6 -
<PAGE> 7
The Company is also aware of third-party patent and pending patent
applications in the United States and corresponding patent applications pending
in some foreign countries that, if issued and valid, may be construed to cover
aspects of the Company's rhGGF2 product candidates. There can be no assurance
that the claims of the issued U.S. patents are not infringed, and that the
claims of future patents issuing from the patent applications, if any, will not
be infringed by the Company's proposed manufacture, use or sale of products
based on the rhGGF2 technology. Furthermore, there can be no assurance that
Cambridge NeuroScience would prevail in any legal action seeking damages or
injunctive relief for infringement of the existing patent or any patent that
might issue from such applications or that any license required under any such
patent would be available or, if available, would be available on commercially
reasonable terms. Failure to obtain a required license or to successfully
establish non-infringement of, or the invalidity or unenforceability of, such
third-party patents could preclude the manufacture, marketing, sale and use of
the Company's products based on such rhGGF2 technology.
NO MANUFACTURING EXPERIENCE; RELIANCE ON THIRD-PARTY MANUFACTURING
The Company has no experience in manufacturing products for commercial
purposes and does not have manufacturing facilities. Consequently, the Company
is dependent on contract manufacturers for the production of products for
development and commercial purposes. In the event that the Company is unable to
obtain or retain third-party manufacturing arrangements, it will not be able to
commercialize its products as planned which would have a material adverse effect
on the Company's business, financial condition and results of operations. The
manufacture of the Company's products for clinical trials and commercial
purposes is subject to current Good Manufacturing Practices ("GMP") regulations
promulgated by the FDA. There can be no assurance that the Company will be able
to enter into agreements for the manufacture of future products with
manufacturers whose facilities and procedures comply with GMP and other
regulatory requirements. The Company does not intend to develop or acquire
facilities for the manufacture of drug products for clinical trials or
commercial purposes, and has been, and will remain, dependent on its strategic
partners or third parties for the manufacture of product candidates for
preclinical, clinical and commercial purposes.
Under the terms of its collaboration agreement for CERESTAT with BI,
the Company has retained worldwide manufacturing rights, subject to BI's option
to acquire such rights in exchange for increased royalty payments. Although the
Company has an agreement with a third-party manufacturer to provide quantities
of CERESTAT sufficient to complete the development program for this product, the
Company currently has no agreement for the manufacture of CERESTAT for
commercial purposes. The Company's current dependence upon others for the
manufacture of its products may adversely affect its profit margin, if any, on
the sale of future products and the Company's ability to develop and deliver
products on a timely and competitive basis.
UNCERTAINTIES RELATED TO MARKETING AND SALES
Under its collaboration agreement for CERESTAT with BI, the Company has
granted exclusive marketing rights to BI in Europe and other geographic regions
in return for royalties on product sales. If BI terminates the agreement or
fails to market CERESTAT successfully, the Company's business, financial
condition and results of operations will be adversely affected.
Under its agreement with BI, Cambridge NeuroScience has an option to
co-promote CERESTAT in the United States. The Company has notified BI of its
intent to exercise this option. Co-promotion of CERESTAT would require the
Company to develop its own sales force to promote CERESTAT or make arrangements
with a third party to do so. Cambridge NeuroScience currently has no experience
in marketing or selling pharmaceutical products. In order to achieve commercial
success for any approved product, Cambridge NeuroScience must either develop a
marketing and sales force or, where appropriate or permissible, enter into
arrangements with third parties to market and sell its products. There can be no
assurance that Cambridge NeuroScience will successfully develop marketing and
sales experience or that it will be able to enter into marketing and sales
agreements with others on acceptable terms, if at all. If the Company develops
its own marketing and sales capability, it will compete with other companies
that currently have experienced and well funded marketing and sales operations.
To the extent that the Company enters into co-promotion or other sales and
marketing arrangements with other companies, any revenues to be received by
Cambridge NeuroScience will be dependent on the efforts of others and there can
be no assurance that their efforts will be successful. When the Company and BI
terminated enrollment into the Phase III
- 7 -
<PAGE> 8
trials of CERESTAT, the Companies agreed to delay the negotiation of a
co-promotion agreement until such time as the development pathway of CERESTAT
becomes known.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Prior to marketing, any product developed by the Company must undergo
an extensive regulatory approval process. This regulatory process, which
includes preclinical testing and clinical trials, and may include
post-marketing surveillance, of each compound to establish its safety and
efficacy can take many years and require the expenditure of substantial
resources. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. In addition, delays or rejections may be encountered based
upon changes in FDA policy for drug approval during the period of product
development and FDA regulatory review of each submitted new drug application
("NDA"). Similar delays may also be encountered in foreign countries. There can
be no assurance that regulatory approval will be obtained for any products
developed by the Company. The Company recently announced the discontinuation of
enrollment in Phase III clinical trials for its lead product candidate,
CERESTAT. See "-- Uncertainties Related to Clinical Trials and Future
Development of CERESTAT."
Moreover, regulatory approval may entail limitations on the indicated
uses of the drug. Further, even if regulatory approval is obtained, a marketed
product and its manufacturer are subject to continuing review. Discovery of
previously unknown problems with a product or manufacturer may have a material
adverse effect on the Company's business, financial condition and results of
operations, including withdrawal of the product from the market. Violations of
regulatory requirements at any stage of the regulatory process may result in
various adverse consequences, including the FDA's delay in approving or its
refusal to approve a product, withdrawal of an approved product from the market
and the imposition of criminal penalties against the manufacturer and NDA-
holder. The Company has not had any product approved for commercialization in
the United States or elsewhere. No assurance can be given that the Company will
be able to obtain FDA approval for any products. Failure to obtain requisite
regulatory-approvals or failure to obtain approvals of the scope requested will
delay or preclude the Company or its licensees or strategic partners from
marketing the Company's products or limit the commercial use of the products and
will have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The Company's successful commercialization of its pharmaceutical
products will depend in part on the extent to which reimbursement for the costs
of such products and related treatments will be available from government health
administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and third-party payors are increasingly
challenging the prices charged for medical products and services. There can be
no assurance that any third-party insurance coverage will be available to
patients for any products developed by the Company. Government and other
third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products, and by refusing, in some cases, to provide coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. In particular, the Company anticipates that a large
percentage of patients who receive CERESTAT for the treatment of stroke will be
covered by Medicare and be subject to limitations on reimbursement. If adequate
coverage and reimbursement levels are not provided by government and third-party
payors for the Company's products, the market acceptance of these products would
be adversely affected, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
- 8 -
<PAGE> 9
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control. In addition, an increasing emphasis on
managed care in the United States has and will continue to put pressure on
pharmaceutical pricing. Such initiatives and proposals, if adopted, could
decrease the price that the Company receives for any products it may develop and
sell in the future and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. Further, to the extent
that such proposals or initiatives have a material adverse effect on other
pharmaceutical companies that are collaborators or prospective collaborators for
certain of the Company's potential products, the Company's ability to
commercialize its potential products may be adversely affected.
POTENTIAL PRODUCT LIABILITY; UNCERTAINTIES RELATED TO INSURANCE
The use of any of the Company's potential products in clinical trials
and the sale of any approved products, including the testing and
commercialization of CERESTAT, may expose the Company to liability claims
resulting from the use of products or product candidates. These claims might be
made directly by consumers, pharmaceutical companies or others. The Company
maintains product liability insurance coverage for claims arising from the use
of its products in clinical trials in the amount of $5.0 million per occurrence
and $5.0 million in aggregate. No assurance can be given that the Company will
be able to maintain insurance at a reasonable cost or in sufficient amounts to
protect the Company against losses due to liability that could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to obtain
commercially reasonable product liability insurance for any product approved for
marketing in the future or that insurance coverage and the resources of the
Company would be sufficient to satisfy any liability resulting from product
liability claims. A successful product liability claim or series of claims
brought against the Company would have a material adverse effect on its
business, financial condition and results of operations.
VOLATILITY OF COMMON STOCK PRICE
The market prices for securities of biotechnology and pharmaceutical
companies, including Cambridge NeuroScience, have historically been highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new therapeutic products
by the Company or others, clinical trial results, developments concerning
agreements with collaborators, governmental regulation, developments in patent
or other proprietary rights, public concern as to the safety of products
developed by the Company or others, future sales of substantial amounts of
Common Stock by existing stockholders and general market conditions can have an
adverse effect on the market price of the Common Stock. The realization of any
of the risks described in these "Risk Factors" could have a dramatic and adverse
impact on market price.
CONCENTRATION OF OWNERSHIP
Directors, officers and stockholders affiliated with members of the
Board of Directors of the Company beneficially own approximately 31% of the
outstanding Common Stock. These stockholders effectively would be able to
significantly influence the election of the Company's Board of Directors and
other corporate actions.
DEPENDENCE ON QUALIFIED PERSONNEL
Because of the specialized scientific nature of the Company's business,
Cambridge NeuroScience is highly dependent upon its ability to continue to
attract and retain qualified scientific and technical personnel. There is
intense competition for qualified personnel in the areas of the Company's
activities and there can be no assurance that Cambridge NeuroScience will be
able to continue to attract and retain the qualified personnel necessary for the
development of its business. Loss of the services of, or failure to recruit, key
scientific and technical personnel
- 9 -
<PAGE> 10
would be significantly detrimental to the Company's product development
programs, and could have a material adverse effect on the Company's business,
financial condition and results of operations. On March 9, 1998, the Company
implemented a cost reduction plan which included a reduction in headcount from
60 to 30 staff members. See "-- History of Losses; Uncertainty of Continued
Operations and Future Profitability."
ANTITAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation authorizes the
Board of Directors to issue, without stockholder approval, up to 10,000,000
shares of preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of preferred stock or rights to purchase
preferred stock could be used to discourage an unsolicited acquisition proposal.
In addition, the possible issuance of preferred stock could discourage a proxy
contest, make more difficult the acquisition of a substantial block of the
Company's Common Stock or limit the price that investors might be willing to pay
for shares and the Company's Common Stock. In addition, certain provisions of
the Delaware corporate law may have the effect of deterring hostile takeovers or
delaying or preventing changes in the control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over the then current market prices.
ABSENCE OF DIVIDENDS
Prior to March 9, 1998, the Company had never declared nor paid cash dividends
on any of its capital stock. On March 9, 1998 the Company's Board of Directors
declared an extraordinary dividend on its capital stock of $1.00 per share of
outstanding Common Stock, payable on April 14, 1998 to holders of record as of
April 2, 1998. Future cash dividends, if any, will be paid at the discretion of
the Company's Board of Directors and will depend, among other things, upon the
Company's future operations, capital requirements, general financial condition
and such other factors as the Board of Directors may deem relevant.
- 10 -
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
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<SECURITIES> 26,561
<RECEIVABLES> 0
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<TOTAL-REVENUES> 4,035
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<OTHER-EXPENSES> 20,266
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (13,838)
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