<PAGE> 1
================================================================================
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, 1998 COMMISSION FILE NUMBER 0-19193
-------
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
------------------- ---------------------
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, 1999, was $9,798,920. At February 28, 1999,
there were issued and outstanding 18,099,785 shares of Common Stock, par value
$.001 per share.
A list of all Exhibits to this Form 10-K begins on page 29.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
OVERVIEW
Cambridge NeuroScience, Inc. (the "Company") is a biopharmaceutical company
engaged in the discovery and development of proprietary pharmaceuticals to
prevent or treat severe disorders of, or injuries to, the nervous system. The
Company has not been profitable since inception and expects to continue to incur
operating losses for at least the next several years. To date, the Company has
funded its operations primarily through proceeds from public and private
offerings of equity securities, from payments received pursuant to
collaborations with pharmaceutical companies and from government grants.
Research and development revenue in 1998 was earned pursuant to the terms of
four collaborations agreements, each of which comprised more than 10% of total
revenue. Revenue earned pursuant to one collaborative agreement totaled 27% of
revenue in 1998, 71% in 1997 and 95% in 1996. Revenue earned pursuant to another
collaborative agreement totaled 23% and 25% of revenue in 1998 and 1997,
respectively. See "--Strategic Alliances." The Company has not received any
revenue from the sale of products. Research and development expenses were $6.0
million, $17.7 million and $14.0 million for the years ended December 31, 1998,
1997 and 1996, respectively. Research and development expenses represented 80%
of total operating expenses, excluding restructuring costs, in 1998, and
represented 87% and 84%, respectively, of total operating expenses in 1997 and
1996.
The Company is focused in two areas of research and development: (i)
ion-channel blockers to prevent or treat brain damage resulting from stroke and
other forms of brain ischemia, as well as for the treatment or prevention of
neuropathic pain, glaucoma, spinal cord injury, Parkinson's disease, multiple
sclerosis ("MS") and peripheral neuropathies, and (ii) growth factors for the
treatment of MS and peripheral neuropathies.
The Company's ion-channel blocker programs include aptiganel hydrochloride
("aptiganel"), formerly known as CERESTAT(R), for the treatment of stroke; CNS
5161 for the treatment and management of pain; a collaboration with Allergan for
the treatment of ophthalmic disorders; and an early-stage program which focuses
on the discovery of potassium-channel blockers for the treatment of
neuropathies, MS and spinal cord injury. In late 1997, the Company and its
collaborative partner, Boehringer Ingelheim International, GmbH ("BI")
discontinued enrollment into the clinical trials of aptiganel for stroke and
traumatic brain injury ("TBI") and, in November 1998, terminated the
collaboration agreement which began in March 1995. See "Strategic Alliances."
Based on the Company's review and analysis of the trial data and input from an
independent panel of stroke experts, which convened in October 1998, the Company
remains committed to the continued development of aptiganel for stroke. To that
end, the Company is pursuing options for funding such development through a new
corporate partnership and/or government funding and has collaborated with two
leading stroke research groups to design a new Phase III clinical trial for
aptiganel focused on a subset of the stroke patient population. However, there
can be no assurance that such funding will be available or that further
development of aptiganel will occur.
In November 1996, the Company entered into a collaboration with Allergan
for the development of NMDA ion-channel blockers, sodium-channel blockers and
combination ion-channel blockers, for the treatment of ophthalmic disorders,
including glaucoma. The Company is actively pursuing the possibility of
extending the term of this partnership, the initial term of which expires in
November 1999. The Company is also developing CNS 5161, an NMDA ion-channel
blocker compound, which has completed two Phase I clinical trials, including one
trial in a pain model, and may consider its development for certain chronic
neurodegenerative disorders, such as Parkinson's disease and MS. In conjunction
with a leading drug delivery company, the Company is exploring formulations of
CNS 5161 suitable for sustained drug administration. The Company is currently
seeking a partner to support the clinical development of CNS 5161 and the
Company's early-stage drug discovery efforts in novel analgesics. In 1997 the
Company also received a Phase I Small Business Innovation Research ("SBIR")
grant from the National Institutes of Health ("NIH") for the Company's project
to discover novel potassium ion-channel blockers to treat peripheral
___________________
CERESTAT is a registered trademark of Boehringer Ingelheim International, GmbH.
2
<PAGE> 3
neuropathies and intends to submit a Phase II SBIR grant application to the NIH
in 1999 for continued support of this drug discovery project.
The Company's growth factor product candidate is recombinant human
Glial Growth Factor 2 ("GGF2"). In December 1998, the Company entered into a
licensing and research collaboration agreement with Bayer AG ("Bayer") for the
development of GGF2 for the treatment of MS and other neurodegenerative
diseases. The Company and Bayer will work together to accomplish the tasks
associated with preclinical development, with Bayer providing financial support
for this work. While Bayer will continue the clinical development of GGF2, the
Company expects that its research activity in the protein growth factor area
will decline to a low level when GGF2 enters the clinic. See "Strategic
alliances."
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount by 34 employees, consisting of 22 research,
four drug development and eight administrative and support employees. The
Company's Board of Directors declared an extraordinary dividend of $1.00 per
share, or $17.9 million, which was paid in April 1998. The Company does not
contemplate paying dividends in 1999. Following the reduction in headcount, in
June 1998, the Company entered into an agreement with a third party to sub-lease
approximately half of the Company's office and laboratory facilities, thereby
reducing facilities-related operating expenses.
The Company continues to explore opportunities to maximize shareholder
value. To that end, the Company has implemented cost containment measures to
manage its use of cash, is focusing its resources on its later-stage programs,
and is seeking opportunities for funding its programs through corporate
collaborations and government grants. The Company remains committed to the
further development of aptiganel in stroke and is actively pursuing funding for
this effort. The Company is continuing its earlier-stage research efforts in the
ion-channel blocker area, to the extent that funding is available from third
party sources, including the collaborative relationship with Allergan. The
Company may consider the sale of some or all of its technology assets. In
December 1998, the Company entered into a technology licensing agreement with
Creative Biomolecules, Inc. ("CBMI") whereby CBMI acquired the exclusive rights
to Growth/Differentiation Factor-1 ("GDF-1") in exchange for an up front
licensing fee and future royalties on sales. See "Strategic Alliances."
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 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
electrical signals, and glial cells, which provide nutrition and support
functions to nerve cells.
Nerve cells and glial cells communicate with one another through a wide
range of electrical and chemical signals to accomplish the normal development
and function of the nervous system. Disorders of the nervous system are
characterized by a change (usually a reduction) in an individual's ability to
perform normal voluntary or involuntary functions. These disorders result from
acute or chronic damage to nerve or glial cells or by abnormalities in the
electrical or chemical communication within and amongst nerve cells or glial
cells.
Ion channels are proteins found in nerve and glial cell membranes that
generate electrical signals in response to chemical signals received from other
cells or to chemical or electrical changes within a single cell. Drugs which
stimulate, enhance, reduce or suppress the activity of specific ion channels
have potential as treatments for nervous system disorders because they can
eliminate potentially damaging overstimulation of nerve cells or correct
dysfunctions in the processes of generating electrical signals in the nervous
system.
Acute damage to the central nervous system, such as occurs in stroke and
traumatic injuries to the head and spine, often results from a reduction in
blood flow (ischemia) to, and the premature death of, nerve cells and leads to
permanent disorders. Nerve cell death following an ischemic event in the brain
is triggered by the excessive
3
<PAGE> 4
release of a particular chemical signaling molecule, the excitatory
neurotransmitter, glutamate, from damaged nerve terminals. In the ischemic
brain, glutamate predominantly activates a receptor site on an ion channel known
as the N-methyl D-aspartate ("NMDA") ion channel. Activation of the NMDA ion
channel permits the massive entry of calcium into nerve cells. Overloading
nerve cells with calcium ions activates a number of processes that ultimately
result in cell death. In animal models of stroke and TBI, drugs that can inhibit
the activity of the NMDA ion channel have been shown to limit the extent of
brain damage and loss of function when administered after the onset of cerebral
ischemia.
Chronic degenerative disorders of the nervous system, such as MS and
peripheral neuropathies, also result from the death of nerve or glial cells.
Chronic nerve cell death does not necessarily result from ischemia but can
result from other metabolic causes, including the actions of endogenous and
exogenous toxic substances, some of which can mimic the effects of
overstimulation of NMDA ion channels ("excitotoxins"). Chronic nerve and glial
cell death can also result from inflammatory processes in the nervous system,
including the autoimmune destruction of oligodendrocytes (a type of glial cell)
that is the hallmark of MS.
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.
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>
- ---------------------------------------------------------------------------------------------------
DEVELOPMENT COMMERCIAL
PRODUCT CANDIDATE INDICATIONS STATUS(1) RIGHTS
- ---------------------- ------------------------------------ ------------- ------------
<S> <C> <C> <C>
ION-CHANNEL BLOCKERS
Aptiganel Stroke Phase III (2) CNSI (3)
CNS 5161 Neuropathic pain Phase I (4) CNSI
NMDA, sodium, Ophthalmic disorders, including Preclinical Allergan (5)
potassium and glaucoma
combination
ion-channel blockers Brain or spinal cord ischemia; brain Research CNSI
or spinal cord trauma; pain;
peripheral neuropathies; Parkinson's
disease; Multiple Sclerosis
PROTEIN GROWTH FACTORS
GGF2 Multiple sclerosis Pre-IND Bayer (6)
Diabetic neuropathy; Preclinical Bayer (6)
chemotherapy-induced neuropathy
- ---------------------------------------------------------------------------------------------------
</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. "Phase I"
4
<PAGE> 5
refers to smaller-scale trials in human volunteers designed to provide
information about safety and dosage. "Phase III" refers to large-scale
clinical trials designed to provide statistically valid proof of efficacy
and safety in the target population. See "Government Regulation."
(2) The Phase III clinical trials were discontinued in mid-1997. The Company
and BI terminated their collaboration agreement for this product candidate
in November 1998. The Company remains committed to the continued
development of aptiganel for stroke and is pursuing options for funding
such development. See "Drug Discovery and Development - Ion-Channel
Blockers - Aptiganel: Stroke."
(3) Upon termination of the collaboration agreement with BI, in November 1998,
all rights to aptiganel were returned to the Company, in exchange for a
small royalty on future sales.
(4) The Company has completed two Phase I trials of CNS 5161. The first trial
was an escalating dose safety study. The second trial involved volunteers
who were exposed to placebo, morphine and two doses of CNS 5161 in a pain
model.
(5) 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."
(6) Pursuant to the collaboration agreement signed in December 1998, Bayer has
acquired the worldwide manufacturing and marketing rights for GGF2. See
"Strategic Alliances."
DRUG DISCOVERY AND DEVELOPMENT
The Company is concentrating 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. With the out-licensing of GDF-1 to CBMI
and the commencement of a collaboration agreement with Bayer for GGF2, the
Company's drug discovery and development efforts will focus more on its
ion-channel blocker programs and less in the area of protein growth factors. See
"--Protein Growth Factors."
ION-CHANNEL BLOCKERS
The Company synthesizes and evaluates small organic molecules, known as
ion-channel blockers, that directly block passage of ions through the ion
channels, which control the activity of nerve cells. Ion-channel blocking
compounds have potential as novel drugs to treat a wide variety of acute and
chronic disorders of the nervous system through the inhibition of nerve cell
death caused by excessive amounts of glutamate or other excitotoxins or through
the correction of abnormal electrical signaling in the nervous system.
The Company's assets in its ion-channel blockers program include:
* Aptiganel, a treatment to limit the extent of brain damage in stroke and
other forms of acute brain ischemia;
* a collaboration funded by Allergan for the discovery of an ion-channel
blocker to treat ophthalmic disorders, including glaucoma;
* CNS 5161, a drug candidate which has completed two Phase I clinical trials,
including one trial in a pain model, for the treatment of chronic
neuropathic pain and, possibly, certain chronic neurodegenerative
disorders;
* a drug discovery project in potassium channel blockers for neuropathies,
multiple sclerosis and spinal cord injury;
* a patent portfolio, including 37 issued US patents and 30 pending US patent
applications plus corresponding foreign patents or applications;
* an ion-channel focused chemical library of approximately 2,000 molecules,
containing compounds designed to alter the activity of NMDA, sodium or
potassium channels; and,
* CNS 1261, a SPECT-imaging agent (a research tool) currently in clinical
trials for visualizing activated NMDA ion channels in the human brain.
As mentioned above, in brain and spinal cord ischemia, over-stimulation of
glutamate-activated NMDA ion channels is primarily responsible for flooding
nerve cells with calcium ions, which results in cell death. The
5
<PAGE> 6
Company is developing ion-channel blockers to selectively block the NMDA ion
channel and limit nerve cell death during acute cerebral ischemia as treatments
for stroke and other acute injuries to the nervous system.
Aptiganel: Background and Clinical Trial Status
Aptiganel, 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 scheduled interim analyses of the data in each trial. The development of
aptiganel was managed by the Company and its collaborative partner, BI until
November, 1998, when the parties terminated the agreements and all rights were
returned to the Company, subject to the Company's agreement to pay BI a royalty
on any future product sales. See "Strategic Alliances." The Company remains
committed to the continued development of aptiganel for stroke. Any further
clinical trial will require outside funding, either through a corporate
collaboration or a government grant.
A coordinated series of Phase I and Phase II clinical trials was undertaken
to ascertain the safety of aptiganel 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 that is associated with
the limitation of brain damage in animal models of cerebral ischemia. In TBI
patients, two studies were conducted to determine a dosing regimen that would
produce a plasma level of aptiganel three times the target plasma level.
Following the first study in which aptiganel 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 aptiganel equivalent to, or greater
than, the target plasma level. The first was used to determine the safety of
escalating doses of aptiganel over a four-hour treatment period. The second was
a dose-response trial. In the dose-response 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 with aptiganel in TBI in
March 1996 and in stroke in July 1996.
In June 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. On December 16, 1997 the Company and BI announced that
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 aptiganel 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 than 500 patients
enrolled as of September 16, 1997.
In March 1998, the Company reported that further analysis of the Phase III
data indicated that aptiganel had: (i) an attractive safety profile at
relatively high doses in the TBI patient population, and (ii) a potential
therapeutic benefit in a subset of the stroke patient population. Based on input
from an independent panel of stroke experts, which convened in October 1998, and
the Company's review and analysis of the trial data, the Company remains
committed to the continued development of aptiganel for stroke. To that end, the
Company is pursuing options for funding such development and has collaborated
with two leading stroke research groups to design a new Phase III
6
<PAGE> 7
clinical trial for aptiganel focused on a subset of the stroke patient
population. However, there can be no assurance that such funding will be
available or that further development of aptiganel will occur.
Aptiganel: 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
$40.6 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. 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.
The Company believes that aptiganel has the potential to improve outcome
for stroke victims by preventing glutamate-induced nerve cell death through the
blockade of the NMDA ion channel. In stroke patients, the central nervous system
side effects of aptiganel include sedation, paresthesias (numbness) and
occasional episodes of altered sensorium, including hallucinations. Increases in
blood pressure have also been observed and have been controlled, when necessary.
The Company believes that these side effects are transitory and manageable.
CNS 5161: Neuropathic Pain and Other Neuropathic Disorders
Despite the availability of a variety of therapeutic approaches to pain
relief, certain disorders are characterized by persistent pathological pain that
is refractory to conventional treatments. Persistent pain associated with
peripheral nerve trauma, neuropathies secondary to diabetes or acquired immune
deficiency syndrome ("AIDS"), amputations and shingles is classified as
neuropathic pain. Drug treatments for neuropathic pain represent a significant
area of unmet medical need and a growing market opportunity. Glutamate
(particularly NMDA) receptors have been implicated in the induction and
maintenance of neuropathic 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 designed and
synthesized by the Company's chemists to be chemically distinct from aptiganel.
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 currently seeking a partner to support the clinical development of
CNS 5161 and the Company's early-stage drug discovery efforts in novel
analgesics and is unlikely to advance CNS 5161 in clinical trials until a
partnership agreement is reached. In conjunction with a leading drug delivery
company, the Company is exploring formulations of CNS 5161 suitable for
sustained drug administration. With a suitable formulation for chronic drug
administration in hand, and with support from a corporate partner, the Company
will be in a position to commence further clinical trials of CNS 5161, not only
in patients suffering from neuropathic pain but also in patients suffering from
chronic neurological disorders such as Parkinson's disease and MS.
7
<PAGE> 8
Ion-Channel Blockers for Ophthalmic Disorders
Glaucoma is the second leading cause of preventable blindness in the world,
with almost four 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. In November 1996,
the Company entered into a collaboration with Allergan, a pharmaceutical company
specializing in ophthalmology. 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. In
this collaboration, the Company's molecules which block NMDA ion channels,
sodium ion channels or both ion channels simultaneously, are being evaluated for
their ability to prevent vision loss in animal models of retinal and optic nerve
degeneration which occurs in glaucoma. See "Strategic Alliances."
Other Ion-Channel Blockers for Nervous System Disorders
The Company has applied its expertise in discovering and developing NMDA
ion-channel blockers to the synthesis and testing of compounds that block other
ion channels, such as sodium and potassium ion channels, which can contribute to
nerve cell death or abnormal nerve cell electrical activity. The Company
believes that such molecules may have therapeutic utility in a number of acute
and chronic neurological disorders, including glaucoma, spinal cord injury,
Parkinson's disease, MS and peripheral neuropathies.
To discover new treatments for preventing disorders of the central nervous
system which arise from brain or spinal cord ischemia and trauma, 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 and traumatic damage
and can exert other beneficial effects, such as reducing responses to painful
stimuli and limiting the consequences of damage to nerve fiber bundles. 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, brain and spinal cord injury and pain.
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
In 1997 the Company received a Phase I Small Business Innovative Research
("SBIR") grant from the National Institutes of Health ("NIH") for the Company's
project to discover novel potassium ion-channel blockers to treat peripheral
neuropathies and intends to submit a Phase II SBIR grant application to the NIH
in 1999 for continued support of this drug discovery project.
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.
Recombinant human Glial Growth Factor 2 ("GGF2") is 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 GGF2 and, in collaboration with Bayer AG
("Bayer"), is currently
8
<PAGE> 9
focusing its investigation on the potential use of GGF2 as a therapeutic
intervention in the pathological processes involved in MS. See "Strategic
Alliances." Although the Company is actively participating in the pre-IND
development of GGF2 with Bayer, it is management's expectation that its research
activity in the protein growth factor area will decline to a low level when GGF2
enters the clinic. Pursuant to the collaboration agreement, Bayer has received
exclusive worldwide manufacturing and marketing rights to GGF2 and will be
responsible for all development activities and all associated costs.
The Company has also conducted research on other novel protein growth
factors. Growth/Differentiation Factor-1 ("GDF-1") is a nervous-system-specific
member of the Transforming Growth Factor-(beta) ("TGF-(beta)") protein family.
The Company believes that GDF-1 is likely to play a role in responses to injury,
ischemia and demyelination. The Company has shown that GDF-1 enhances the
neurite outgrowth activity of another known growth factor and also proliferated
cerebellar granule cells. 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. On December 31, 1998, the Company entered into a technology licensing
agreement with Creative Biomolecules, Inc., ("CBMI") whereby the Company
licensed its rights in GDF-1 to CBMI in exchange for an upfront licensing fee
and future royalties on sales. See "--Strategic Alliances." The Company also has
an option to license technology related to Cerebellum Derived Growth Factor
(also known as Neuregulin 2) from Harvard University. The technology licensed
from Harvard University will in all likelihood receive a low level of support
until a corporate partner is identified.
GGF2: 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 four therapeutics currently being marketed to treat MS.
Betaseron(R) (Chiron Corporation/Schering AG), Avonex(R) (Biogen, Inc.),
Copaxone(R) (Teva Pharmaceutical Industries Ltd./Hoechst Marion Roussel Ltd.)
and Rebif (Serono) are all based on an immunosuppression approach to the
disease, rather than the growth factor approach being pursued by the Company.
Rebif has been excluded from the U.S. market until 2003.
GGF2 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
developed a manufacturing process for producing GGF2 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, GGF2 significantly reduced and delayed the clinical symptoms. In the
chronic, relapsing-remitting phase of EAE, GGF2 significantly reduced the
clinical effects of the disease as well as the number of observed relapses. In
December 1998, the Company entered into a collaborative agreement with Bayer AG
for the development of GGF2 for multiple sclerosis and peripheral neuropathies.
See "Strategic Alliances."
A series of pre-IND studies has been initiated, including toxicity studies
and other work required by the FDA to file an IND. Successful completion of
these studies will allow the Company and its collaborative partner to initiate
clinical trials. There can be no assurance, however, that GGF2 will not
demonstrate adverse toxicological effects in the planned studies, which results
could cause the partners to decide not to proceed with clinical trials.
GGF2: Peripheral Neuropathies
The Company believes that GGF2 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, diabetes, chemotherapy, 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
9
<PAGE> 10
of this population are those with diabetic neuropathies and those with
chemotherapy-induced 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 has tested GGF2 in animal models of peripheral neuropathies,
such as cancer-chemotherapy-induced neuropathy. In two different experimental
paradigms (cisplatin-induced and vincristine-induced neuropathies), GGF2
administration protected peripheral nerves from the effects of these
chemotherapies. The Company believes that GGF2 may also be a potential treatment
of other degenerative diseases of the peripheral nerves.
STRATEGIC ALLIANCES
The Company has formed collaborations with pharmaceutical companies to
assist in the development of its product candidates, provide capital for such
development and share development risk. The Company is actively pursuing
discussions with additional 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 that would
be favorable to the Company.
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 disorders, including
glaucoma. Upon signing the agreement, Allergan purchased 175,103 shares of
Common Stock from the Company for $3.0 million. Allergan is providing an
additional $3.0 million in research funding over a three-year period, through
1999, subject to certain provisions. A Research Management Committee, with equal
representation from both parties, supervises this collaboration. 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 royalties 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 Company is actively pursuing the possibility of
extending the term of this partnership, the initial term of which expires in
November 1999. There can be no assurance, however, that the Company will
successfully negotiate an extension of this agreement.
10
<PAGE> 11
Bayer AG
In December 1998, the Company entered into a collaborative agreement with
Bayer for the development of GGF2 for the treatment of neurodegenerative
diseases such as MS. In exchange for the exclusive worldwide manufacturing and
marketing rights to the compound, the Company received an up front licensing fee
of $1.0 million and will receive reimbursement of up to $1.0 million of the
Company's research costs for GGF2 pursuant to a protocol covered by the
agreement. The Company may receive up to $24.0 million in milestone payments, as
well as royalties on sales of GGF2 products. There can be no assurance, however,
as to when or if these milestones will be met. Bayer will provide all material
needed in the conduct of the research and development activities and shall be
responsible for all associated costs. Either party may terminate this agreement
at any time for cause. Bayer may terminate this agreement at any time, upon 120
days written notice.
The J. David Gladstone Institutes
In December 1996, the Company, 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 focuses 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 this collaboration, in 1996 the Company formed a
subsidiary, Cambridge NeuroScience Partners, Inc. ("CNPI"). The Company
purchased 80% of the outstanding common stock of CNPI and made a capital
contribution of $1.25 million in CNPI. The University and Gladstone own 5% and
15%, respectively, of the outstanding shares of CNPI common stock.
Gladstone is conducting a research program over a three-year period, for
which CNPI is providing funding of at least $1.25 million per year, through
1999. In the event that CNPI is unable to raise the required funds to make its
research funding payments, the Company loans CNPI, interest-free, all amounts
necessary to enable CNPI to make such payments. Such 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 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. The Company 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. As a result of
the restructuring implemented in March 1998 and a shift in focus in the
Company's research and development activities to later-stage or funded programs,
it is unlikely that the Company will continue to provide future funding
following the expiration of the agreement in 1999. CNPI is currently engaged in
a business development effort to out license its rights under the Gladstone
agreement or to find a collaboration to provide funding for further work in this
area. There can be no assurance, however, that such funding will be available.
11
<PAGE> 12
Creative Biomolecules, Inc.
On December 31, 1998, the Company entered into technology licensing
agreement with Creative Biomolecules, Inc. ("CBMI") whereby CBMI has acquired
the exclusive rights to GDF-1 in exchange for a cash payment and future
royalties on product sales. Either party may terminate this agreement upon a
material breach which is not cured within 60 days of written notice of such
breach.
Boehringer Ingelheim International GmbH
In March 1995, Cambridge NeuroScience and BI entered into agreements to
collaborate on the worldwide development and commercialization of aptiganel.
Under the terms of the agreements, BI was obligated to fund 75% of the
development costs for aptiganel in the United States and Europe and all of the
development costs in Japan. Upon signing the agreements, 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 and BI conducted two Phase III trials of aptiganel. In
the second half of 1997, the companies announced the discontinuation of patient
enrollment into both trials after interim analyses indicated that continuation
of the trials was not justified. See "Drug Discovery and Development -
Ion-Channel Blockers - Aptiganel: Background and Clinical Trial Status." In
November 1998, the Company and BI terminated the collaboration and licensing
agreements for aptiganel and all rights were returned to the Company, subject to
a royalty of 3% of direct sales or 10% to 20% of royalties received from sales
by third parties. Pursuant to the termination agreement, BI retained the
trademark CERESTAT and the Company's lead ion-channel blocker compound is now
referred to as aptiganel.
MARKETING AND SALES
The Company does not currently sell any products and therefore has no
marketing, sales, or distribution organization. Cambridge NeuroScience believes
that, in the case of stroke, ion-channel blocker treatments would be
administered in the context of emergency medicine. Because these drug treatments
would be hospital-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 much larger sales force needed to sell products
directly to physicians.
MANUFACTURING
The Company 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 companies 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. Such program will include a set of standard operating procedures
designed not only to assure that the Company's products are manufactured in
accordance with Good Manufacturing Practices ("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. Pursuant to the
research collaboration and licensing agreement for the development of GGF2,
Bayer will manufacture all material needed in the conduct of the development
activities and shall be responsible for all associated costs. Pursuant to the
termination of the collaboration agreements with BI, the Company has the right
to purchase 56kg of aptiganel from BI within two years from the date of the
termination agreement.
COMPETITION
The fields in which the Company 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,
12
<PAGE> 13
manufacturing and marketing experience than the Company. 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 rt-PA (Genentech Inc.) for the
treatment of patients who have suffered a stroke within the preceding three
hours and for whom a CT scan shows no evidence of hemorrhage. Intravenous rt-PA
dissolves blood clots that might have caused a stroke by blocking arteries
supplying brain tissue with oxygen and nutrients. Other drug treatments that
have the potential to restore blood flow to the brain and are in Phase III
clinical trials, are Ancrod(R) (Knoll AG) and Abbokinase(R) (Abbott
Laboratories). In addition, a number of companies are developing other drugs to
limit the extent of brain damage resulting from a stroke by protecting nerve
cells from the biochemical processes which are responsible for cell death. In
animal studies, these "neuroprotective" drugs have been shown to limit brain
damage even when blood supply to brain tissue is not restored. The Company
believes that the most significant competition for aptiganel will come from
neuroprotective drugs that limit nerve cell death by inhibiting responses
mediated via specific ion channels. There are ongoing Phase III clinical trials
in stroke patients for fos-phenytoin (Warner-Lambert Company) and GV150526
(Glaxo-Wellcome). Fos-phenytoin has actions on ion channels and is claimed to be
neuroprotective, but acts through mechanisms other than the NMDA ion-channel
complex. GV150526 is an antagonist of responses mediated via the NMDA
ion-channel complex, but acts through a mechanism distinct from the mechanism of
action of aptiganel. The Company believes that aptiganel is the only
neuroprotective drug candidate at its stage of development for stroke that acts
by directly blocking the ion channel of the NMDA ion-channel complex. In 1997,
Interneuron Pharmaceuticals, Inc. submitted an NDA to the U.S. FDA for CerAxon
(citicoline sodium) to treat patients with ischemic stroke. In 1998, Interneuron
withdrew its application and commenced an additional clinical trial of CerAxon
in ischemic stroke. The Company believes that CerAxon does not act on ion
channels but on other biochemical mechanisms of nerve cell death or recovery
from injury. The Company believes that, if approved for marketing, aptiganel
will be used in conjunction with tPA, or other approved drugs that can restore
tissue blood flow. Furthermore, even if other neuroprotective compounds prove to
be efficacious and are approved for marketing, those that act on mechanisms of
cell death other than inhibition of responses mediated by the NMDA ion-channel
complex will be used in conjuction with, rather than as alternatives to
aptiganel.
The Company is aware of four therapeutics currently being marketed to treat
MS. Betaseron(R) (Chiron Corporation/Schering AG), Avonex(R) (Biogen, Inc.),
Copaxone(R) (Teva Pharmaceuticals Industries Ltd./Hoechst Marion Roussel Ltd.)
and Rebif(R) (Serono) are all based on an immunosuppression approach to the
disease, rather than the growth factor remyelination approach being pursued by
the Company. Rebif has been excluded from the U.S. market until 2003. There can
be no assurance that these products or the introduction of 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 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.
13
<PAGE> 14
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, 1998, Cambridge NeuroScience had licensed or owned rights in 49
issued U.S. patents. Research and development efforts by the Company and its
collaborators led to the issuance of nine U.S. patents and the allowance of four
others in 1998. In addition, four U.S. patent applications were filed in 1998 on
behalf of the Company and its collaborators, bringing the total number of
pending U.S. applications to 56. These U.S. filings have corresponding patent
filings in other countries as well. Of the 12 issued U.S. patents covering the
NMDA ion-channel blockers and their use, none will expire prior to 2007. In the
U.S., the last issued patent covering the therapeutic use of aptiganel will
expire in 2015. 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 or that such licenses will be available
on commercially reasonable terms, if at all. In addition, there can be no
assurance 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 GGF2, which are
covered by eight 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. However, 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 GGF2
product candidates. There can be no assurance that the Company will not
infringe any such issued US third-party patents, 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 GGF2 technology. There can be no assurance that the Company 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
GGF2 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
14
<PAGE> 15
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. 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 by 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
that apply to the preclinical testing and clinical trials, as well as to the
manufacture and marketing of pharmaceutical products. Pharmaceutical
manufacturing facilities are also subject to the regulations of 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 in
the United States. 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 the Company 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 that 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. In late 1997, the Company and its collaborative partner
BI discontinued enrollment into the Phase III clinical trials for its lead
product candidate aptiganel and, in November 1998, terminated the collaboration
agreement. See "--Drug Discovery and Development - Ion-Channel Blockers -
Aptiganel: 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,
15
<PAGE> 16
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.
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. In some cases, such
payors are refusing 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 aptiganel 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, 1998, the Company had 17 full-time employees, of whom 11 were
engaged in research and development and 6 in administration and finance.
Doctorates or other advanced degrees are held by 9 of the Company's 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. Due to the small number of
employees at the Company, the loss of several employees could have an adverse
affect on the Company's ability to meet its obligations to its collaborative
partners and on the progress of its own scientific programs.
16
<PAGE> 17
ITEM 1 (a). EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Harry W. Wilcox, III 44 President; Chief Executive Officer;
Director
Robert N. McBurney 51 Senior Vice President, Research; Chief
Scientific Officer
David I. Gwynne 47 Vice President, Biotechnology and
Business Development
Laima I. Mathews 51 Vice President, Drug Development
Glenn A. Shane 36 Controller; Treasurer; Chief
Accounting Officer
HARRY W. WILCOX, III, joined the Company as Senior Vice President,
Finance and Business Development and Chief Financial Officer in December 1995
and was named President and Chief Executive Officer and Director of the Company
in May 1998. Prior to joining the Company, 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.
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.
DAVID I. GWYNNE, PH.D. joined the Company in 1991 as Director,
Biotechnology and became Senior Director of Biotechnology in 1996. In May 1998
he was named Vice President of Biotechnology and Business Development. Dr.
Gwynne leads the Company in the development of growth factors for the treatment
of neurological disorders. Prior to joining the Company, Dr. Gwynne served as
Director of Scientific Affairs at Allelix Biopharmaceuticals, Inc. where he led
the development effort for growth factors in the treatment of inflammatory
disorders and tissue repair. Dr. Gwynne earned a B.Sc. and an M.Sc. in biology
from the University of Toronto. He completed a Ph.D. in molecular biology at
McGill University and conducted post-doctoral studies at the University of
California, Davis in the area of regulation of gene expression.
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.
17
<PAGE> 18
GLENN A. SHANE joined the Company as Accounting Manager in April 1992
and served in that capacity until May 1998, at which time he was appointed
Controller and Treasurer of the Company. Prior to joining the Company, Mr. Shane
was the Accounting Manager at Boston Business Group from 1989 to 1991. From 1985
to 1989, Mr. Shane was employed by Deloitte & Touche LLP. Mr. Shane earned a
Bachelors of Business Administration from the University of Massachusetts,
Amherst and is a Certified Public Accountant.
ITEM 2. PROPERTIES
The Company's sole facility is located in Cambridge, Massachusetts, where
it leases approximately 41,000 square feet of space. In June 1998, the Company
entered into an arrangement with a third party whereby the Company sub leased
approximately half of the space in its facility to such third party. The Company
currently occupies approximately 20,000 square feet of space, including
approximately 13,000 square feet of laboratory space. The description of the
lease terms is incorporated by reference from Note I to the Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiary 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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective January 22, 1999, the Company's Common Stock, $.001 par value
("Common Stock"), began trading on the OTC Bulletin Board ("OTC") under the
symbol "CNSI." Prior to that date, the Company's common stock was traded on the
Nasdaq National Market System ("Nasdaq"). The following table sets forth the
high and low sales prices for the Company's Common Stock for the periods
indicated:
<TABLE>
<CAPTION>
High Low
------- --------
<S> <C> <C>
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
January 1 - March 31, 1998 2-5/8 1-5/8
April 1 - June 30, 1998 2-1/2 19/32
July 1 - September 30, 1998 1-3/16 13/32
October 1 - December 31, 1998 2 3/8
</TABLE>
There were approximately 175 holders of record of Common Stock and
approximately 4,100 beneficial owners as of December 31, 1998. 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, which was paid on April 14, 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.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA (1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- --------- -------- ---------
STATEMENT OF OPERATIONS DATA: (in thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $ 4,303 $ 4,035 $ 2,396 $ 8,218 $ 299
Operating expenses:
Research and development 5,984 17,650 13,978 13,850 12,722
General and administrative 1,472 2,616 2,585 2,158 2,863
Restructuring costs 921 -- -- -- --
-------- --------- --------- -------- ---------
Total operating expenses 8,377 20,266 16,563 16,008 15,585
-------- --------- --------- -------- ---------
Loss from operations (4,074) (16,231) (14,167) (7,790) (15,286)
Interest income, net 1,180 2,393 1,178 736 401
-------- --------- --------- -------- ---------
Net loss $ (2,894) $ (13,838) $ (12,989) $ (7,054) $ (14,885)
======== ========= ========= ======== =========
Net loss per share (2) $ (0.16) $ (0.79) $ (0.93) $ (0.59) $ (1.46)
======== ========= ========= ======== =========
Weighted average shares
outstanding 17,976 17,518 13,980 11,927 10,230
======== ========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 4,863 $ 12,020 $ 26,664 $ 21,937 $ 6,269
Marketable Securities 7,037 26,561 -- -- --
Working capital 13,353 33,588 18,362 17,651 3,493
Total assets 15,617 40,891 29,220 24,321 9,330
Total liabilities 1,887 6,568 9,573 4,793 3,149
Accumulated deficit (106,376) (103,482) (89,644) (76,655) (69,601)
Stockholders' equity 13,730 34,323 19,647 19,528 6,181
</TABLE>
- --------------------------------------------------------------------------------
(1) The selected financial data set forth above 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.
(2) See Note B of Notes to the Consolidated Financial Statements.
19
<PAGE> 20
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, revenue has been derived from collaborations with
pharmaceutical companies and from government grants. The Company 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.
The Company has financed its operations through proceeds from an initial
public offering in 1991 and follow-on public offerings in 1991 and 1997, and
various private placements of preferred equity securities prior to the initial
public offering. In addition, the Company completed a private placement of the
Company's common stock to institutional investors in 1994 and two directed
public offerings in 1995. The Company has also received funding pursuant to its
research and development collaborations, research grants and from investment
income earned on its cash and short-term investments.
In November 1998, the Company and Boehringer Ingelheim International GmbH,
("BI") terminated the collaboration for the development and commercialization of
aptiganel, formerly known as CERESTAT, which commenced in 1995. All rights to
aptiganel were returned to the Company, subject to a royalty on future sales.
Pursuant to the terms of the collaboration, the Company was obligated to fund
approximately 25% of the development costs for aptiganel in the United States
and Europe. BI was obligated to pay the remaining 75% of such costs and all of
the development costs in Japan. The Company and BI collaborated on two Phase III
trials of aptiganel. In the second half of 1997, the Company and BI announced
the discontinuation of patient enrollment into both trials after interim
analyses indicated that continuation of the trials was not justified.
Revenue earned pursuant to the BI agreements represents reimbursement by BI
of expenditures by the Company in excess of its contractual obligations, subject
to an annual reconciliation of costs for each contract year. The agreements
provided that BI would advance cash to the Company in the event that the
Company's expenditures were expected to exceed its contractual obligation. The
Company received such advances in 1995 and 1996. The advances received through
1996 exceeded the actual reimbursable amounts as of December 31, 1996 and 1997
and the excess amounts were accounted for as research and development advances
and included in current liabilities at those dates. Therefore, no advances were
received in 1997 and revenue was recognized in 1997, as earned, thereby reducing
the accrual for research and development advances. As of December 31, 1997, the
Company had $2.7 million of research and development advances included in
current liabilities, representing advances received from BI in excess of revenue
recognized pursuant to the collaboration agreement. Upon termination of the
collaboration agreements, the Company and BI reached a final settlement of costs
subject to the collaboration and, in 1998, the Company repaid to BI $1.5 million
in excess advances received in prior years. The Company recognized $1.2 million
of revenue earned, representing the remainder of excess advances received in
prior periods. The Company will recognize no further revenue pursuant to this
collaboration.
In March 1998, the Company reported that further analysis of the Phase III
data indicated that aptiganel had: (i) an attractive safety profile in the TBI
patient population, and (ii) a potential therapeutic benefit in a subset of the
stroke patient population. Based on input from an independent panel of stroke
experts, which convened in October 1998, and the Company's review and analysis
of the trial data, the Company remains committed to the continued development of
aptiganel for stroke. To that end, the Company is pursuing options for funding
such development, including corporate partnership arrangements or government
funding. However, there can be no assurance that further development of
aptiganel will continue or that the Company will succeed in finding a source of
funding for such development.
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
20
<PAGE> 21
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. Pursuant to this agreement, Allergan is providing an
additional $3.0 million in research funding over a three-year period, through
1999. 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 entered into a collaboration with the J.
David Gladstone Institutes ("Gladstone") and the Regents of the University of
California, for the development of treatments for Alzheimer's disease and other
neurological disorders. In connection with this collaboration, the Company
formed a subsidiary, Cambridge NeuroScience Partners, Inc. ("CNPI"). Pursuant to
the terms of the collaboration, Gladstone is conducting a research program over
a three-year period, through 1999, for which CNPI provides funding of at least
$1.25 million 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's Board of Directors declared an
extraordinary dividend in the amount of $1.00 per share, or $17.9 million, which
was paid on April 14, 1998. As a result of the setback in the clinical
development of Aptiganel, in March 1998 the Company implemented a cost reduction
plan that included a reduction in headcount by 34 employees, consisting of 22
research, four drug development and eight administrative and support employees.
Included in operating expenses for the year ended December 31, 1998 is a
one-time restructuring cost of $921,000, consisting primarily of severance and
related benefits associated with this reduction in staff which were paid in full
in 1998. In June 1998, the Company entered into an agreement with a third party
to sub-lease approximately half of the Company's office and laboratory
facilities, thereby reducing facilities-related operating expenses.
In December 1998, the Company entered into a collaborative agreement with
Bayer AG ("Bayer") for the development of recombinant human Glial Growth Factor
2 ("GGF2") for the treatment of neurodegenerative diseases such as multiple
sclerosis ("MS"). In exchange for the exclusive worldwide manufacturing and
marketing rights to the compound, the Company received an up front licensing fee
of $1.0 million and will receive reimbursement of up to $1.0 million for costs
incurred pursuant to a research protocol covered by the agreement. The Company
may also receive up to $24.0 million in milestone payments and will receive
royalties on sales of GGF2 products. There can be no assurance, however, as to
when or if these milestones will be met. Bayer will be responsible for all
development costs. In 1998, the Company recognized revenue pursuant to this
agreement of $1.6 million, representing the up front licensing fee and
reimbursable research costs incurred in 1998. This amount was included as a
receivable from collaboration agreements at December 31, 1998. In January 1999,
the Company received $1.5 million from Bayer and will receive reimbursement for
the remaining reimbursable research costs.
.
On December 31, 1998, the Company entered into a technology licensing
agreement with Creative Biomolecules, Inc. ("CBMI") whereby CBMI acquired the
exclusive rights to GDF-1 in exchange for an up front cash payment and future
royalties on product sales.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
Research and development revenue increased to $4.3 million for the year
ended December 31, 1998, compared to $3.9 million in the same period in 1997.
This increase was due to the recognition of revenue in the fourth quarter of
1998 relating to the agreements signed in December 1998 with Bayer and CBMI.
Offsetting in part the revenue recognized in 1998 under these two new
agreements, revenue earned pursuant to the BI agreement decreased to $1.2
million, compared to $2.9 million in 1997. The Company will recognize no further
revenue or expense pursuant to the BI agreement, which was terminated in
November 1998. See "--Overview." Revenue recognized under the Allergan agreement
was $1.0 million in each of 1998 and 1997.
21
<PAGE> 22
In 1998, the Company earned $50,000 from a government grant which expired
in the first quarter of 1998. In 1997, the Company had $150,000 of revenue from
two government grants, which expired in 1997 and the first quarter of 1998.
Operating Expenses
Operating expenses decreased by $11.9 million to $8.4 million in 1998,
compared to $20.3 million in 1997. This decrease reflects the discontinuation of
the clinical trials of aptiganel in the second half of 1997 and the impact of
the restructuring plan that was implemented in March 1998. Research and
development expenses decreased by $11.7 million to $6.0 million in 1998,
compared to $17.7 million in 1997. General and administrative expenses decreased
by $1.1 million, to $1.5 million in 1998, compared to $2.6 million in 1997.
These decreases reflect a $7.7 million reduction in costs associated with the
discontinuation of the clinical trials of aptiganel and a decrease of $5.1
million in other operating costs as a result of the workforce reduction and
other cost containment measures implemented in March 1998 as part of the
restructuring plan. See "--Liquidity and Capital Resources." Operating expenses
in 1998 also included a one-time restructuring cost of $921,000, consisting of
salaries and benefits relating to the reduction in workforce in March 1998,
which were paid in full in 1998.
Interest Income
The Company had interest income in 1998 of $1.2 million, compared to $2.4
million in 1997. Interest income decreased in 1998 due to a decrease in the
funds available for investment during the year, primarily as a result of the
payment of the dividend totaling $17.9 million in April 1998, as well as the use
of funds for operating purposes during the year, including the repayment to BI
of excess advances received of $1.5 million.
Net Loss per Share
For the year ended December 31, 1998, the Company had a net loss of $2.9
million, or ($0.16) per share, compared to $13.8 million or ($0.79) per share
for the year ended December 31, 1997. This decrease in net loss and net loss per
share reflects the decrease in total operating expenses in 1998, as a result of
the discontinuation of the clinical trials of aptiganel in the second half of
1997 and the restructuring plan implemented in March 1998.
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. 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 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 aptiganel 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.
22
<PAGE> 23
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.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash, cash equivalents and
investments in marketable securities of $11.9 million, compared to $38.6 million
at December 31, 1997. The Company had cash and cash equivalents of $26.7 million
at December 31, 1996. The decrease in cash and investments in 1998 is due
primarily to the payment, in April 1998, of an extraordinary dividend of $1.00
per share, totaling $17.9 million. In addition, the Company used $8.9 million
for operating purposes in 1998, including the repayment to BI of $1.5 million of
excess advances received in prior years, upon the termination of the
collaboration agreement in November 1998. In January 1999, the Company received
$1.5 million from Bayer as payment for the up front licensing fee and a portion
of reimbursable costs incurred in 1998 pursuant to the collaboration agreement.
At February 28, 1999, the Company had cash, cash equivalents and investments in
marketable securities of $12.7 million.
Following the discontinuation of the clinical trials in the second half of
1997, in November 1998, the Company and BI terminated the collaboration
agreements for the development of aptiganel. Upon the termination of the
collaboration agreements, the Company and BI reached a final settlement of costs
subject to the collaboration. (See "--Overview.") As of December 31, 1997, the
Company had $2.7 million of research and development advances included in
current liabilities, representing advances received from BI in excess of revenue
recognized pursuant to the collaboration agreement. Upon the final settlement of
costs in connection with the termination of the collaboration agreement, the
Company repaid to BI $1.5 million in excess advances received in prior periods
and recognized $1.2 million of revenue earned, representing the remainder of
excess advances received. The Company will not receive any additional funding
and will recognize no further revenue or expense pursuant to this collaboration.
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. Through December 31, 1998, the Company had received $2.4
million pursuant to this funding arrangement, of which $1.0 million was
recognized as revenue in each of 1998 and 1997 and $114,000 was recognized in
1996. 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.
23
<PAGE> 24
Pursuant to the collaboration agreement between CNPI and Gladstone, CNPI
will provide funding of at least $1.25 million per year over three years,
through 1999. Through December 31, 1998, CNPI made payments to Gladstone
totaling $3.1 million. The Company owns 80% of the outstanding stock of CNPI and
has guaranteed CNPI's obligations with respect to its collaboration with
Gladstone. To-date, the minority shareholders have not made equity investments
in the subsidiary. As a result, the entire net loss from CNPI has been
attributed to the Company.
On December 31, 1998, the Company entered into a technology licensing
agreement with CBMI whereby CBMI acquired the exclusive rights to GDF-1 in
exchange for an up front cash payment and future royalties on product sales.
In January 1999, pursuant to the collaboration agreement with Bayer, the
Company received $1.5 million, including an up front licensing fee of $1.0
million and reimbursement for costs incurred in 1998 pursuant to the covered
research protocol. The up front licensing fee and reimbursable costs incurred in
1998 of $580,000 were recognized as revenue in 1998 and included as a receivable
from research and development collaborations at December 31, 1998. Pursuant to
the agreement, the Company will receive up to a total of $1.0 million for
reimbursable research costs. Bayer will be responsible for all development costs
and will manufacture all GGF2 to be used in the conduct of the development
activities. The Company may receive up to $24.0 million in milestone payments,
and will receive royalties on sales of GGF2 products. There can be no assurance,
however, as to when or if these milestones will be achieved.
The Company believes that cash and cash equivalents and investments in
marketable securities at February 28, 1999, will be sufficient to maintain
operations through 2000. The Company's primary expenditures are expected to be
in the areas of research and development and general and administrative
expenses. Based on input from an independent panel of stroke experts, which
convened in October 1998, and the Company's review and analysis of the trial
data, the Company remains committed to the continued development of aptiganel
for stroke. To that end, the Company is pursuing options to fund such
development, including corporate partnership arrangements or government funding.
However, there can be no assurance that further development of aptiganel will
continue or that the Company will succeed in finding a source of funding for
such development. The Company may require substantial additional funds to
further its research and product development programs and for other operating
activities.
In March 1998, the Company implemented a series of cost containment
measures, including a reduction in headcount by 34 employees, or approximately
half. In June 1998, the Company entered into an agreement with a third party to
sub-lease approximately half of the Company's office and laboratory facilities,
thereby reducing the facilities-related operating expenses. The Company is
continuing to evaluate alternatives for maximizing shareholder value by focusing
resources on its later-stage programs, and validating and funding these programs
through collaborative agreements with third parties, grants or out-licensing
arrangements. Despite the potential future milestone payments under the Bayer
and Allergan agreements, adequate funds for these purposes may not be available
when needed on terms acceptable to the Company. The reduction in workforce in
March 1998 and the dividend payment in April 1998 have resulted in fewer
resources being devoted to the Company's 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 to third
parties the rights to commercialize products or technologies that the Company
might otherwise undertake itself. At December 31, 1998, the Company did not have
any material commitments for capital expenditures.
On January 22, 1999, the Company's common stock was delisted from the
Nasdaq National Market System due to a failure to maintain a minimum bid price
per share of $1.00. Immediately following the delisting, the Company began
trading on the Over the Counter Bulletin Board ("OTCBB"). The delisting of the
Company's stock could have an adverse effect on the liquidity of the common
stock held by investors and on the Company's ability to raise equity in the
future.
At December 31, 1997, the Company had cash, cash equivalents and
investments in marketable securities of $38.6 million, compared to cash and cash
equivalents of $26.7 million at December 31, 1996. This increase was due to the
receipt of $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
February 1997. In 1997, the Company used $16.1 million for operating purposes
and $301,000 for the purchase of equipment, furniture and fixtures. In mid-1997,
following the receipt of proceeds from the public offering in February 1997, the
Company invested approximately
24
<PAGE> 25
$35.6 million in marketable securities. Prior to December 31, 1997, the Company
sold approximately $9.0 million of its investments in marketable securities to
fund operating activities.
At December 31, 1996, the Company had cash and cash equivalents of $26.7
million, compared to $21.9 million at December 31, 1995. Pursuant to the
collaboration agreement with BI and in connection with the commencement of the
Phase III stroke trial by BI in 1996, 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 the Company's common stock. In November 1996,
upon signing the collaboration agreement with Allergan, the Company received
$3.0 million in exchange for 175,103 shares of the Company's common stock.
During 1996, the Company received $6.8 million in advances against reimbursable
expenses pursuant to the BI collaboration agreement, of which $2.3 million was
recognized as research and development revenue in 1996. The Company received
$364,000 pursuant to the collaboration agreement with Allergan, of which
$114,000 was recognized as revenue in 1996. The difference between the cash
received pursuant to these two agreements and revenue recognized was recorded as
research and development advances and included in current liabilities at
December 31, 1996. During 1996, the Company used $7.7 million for operating
purposes and $467,000 for the purchase of equipment, furniture and fixtures.
The Company does not believe that inflation has had a material impact on
its results of operations.
YEAR 2000 READINESS
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 and its service providers' hardware and
software ("Information Technology" or "IT"), and computer-aided systems
("Non-IT") that have time-sensitive operating data may recognize a date of "00"
as the year 1900 rather than the year 2000, resulting in system failures or
miscalculations.
Internal Systems: The Company's internal IT and Non-IT systems are as follows:
-Accounting and administrative software and hardware
-Computer-aided laboratory equipment
-Office equipment, telephones and security systems
Service Providers: The Company's main service providers that utilize IT and
Non-IT systems are as follows:
-Banks and financial institutions
-Administrative services - Transfer agent, payroll agency, shareholder
services
-Utility services - Electricity, heat, water and phone and data services
-External research and development
STATE OF READINESS
The following paragraphs address the Company's state of readiness
relating to the year 2000 issue, including the Company's plan to address the
year 2000 issues associated with the Company's and its service providers' IT and
Non-IT systems, and the status of each phase in the Company's plan. The
Company's plan to evaluate and resolve the year 2000 problem encompasses three
phases: inventory and assessment; remediation; and testing and implementation.
Inventory and Assessment:
The inventory and assessment phase of this process involves the
identification of all of the Company's IT and Non-IT systems and the
determination of which systems may be impacted by the year 2000 problem. This
entails testing each system and/or contacting each manufacturer and service
provider, obtaining and reviewing any written documentation about the year 2000
problem and plan for resolution, and identifying which systems require upgrade,
repair or replacement to become compliant.
At December 31, 1998, the Company was approximately 90% complete with
this phase of the year 2000 project. The Company has completed the inventory of
its accounting and administrative software, its computer-
25
<PAGE> 26
aided office equipment and software, telephones and security systems,
administrative service providers, banks and financial institutions and utility
services. The Company has completed an inventory and has essentially completed
the assessment of its computer-aided laboratory equipment. The inventory and
assessment of all systems is expected to be completed by March 31, 1999, with
the exception of certain third party service providers which assessment is
expected to be completed by the third quarter of 1999. (See "--Third Party
Service Providers," below.)
Remediation:
Upon completion of the assessment of these systems, the Company will
adopt a formal plan to address internal year 2000 problems and to obtain
assurance of compliance from all IT and Non-IT service providers. Remediation of
any year 2000 problems identified may include the upgrade of computer operating
systems, the upgrade or replacement of certain software programs and the
replacement of equipment. The Company has begun the remediation phase for
certain of its in-house systems by scheduling upgrades or replacements. The
Company expects to have completed the remediation phase of its internal systems
by June 1999, and to have assurance of compliance from its service providers by
September 1999.
The Company believes, by reference to vendor information and by conducting
testing in-house, that all desk-top computers currently in use by the Company
are year 2000 compliant. In some instances, non-compliant versions of office
software have been noted to be in use. The upgrade of such software, at minimal
cost to the Company, will be completed as part of the remediation phase of this
project. The Company has identified two pieces of equipment used in the conduct
of its research activities for which the vendor is not yet able to provide
information about compliance. For one of these pieces of equipment, the Company
has determined that an inability to recognize the year 2000 as a valid date will
not impact the functionality of the software or the attached equipment. In the
event that the program cannot produce the correct dating and the problem is not
resolved before the year 2000, alternative acceptable methods for dating data
produced are available.
Testing and implementation:
This plan will include testing all repaired, replaced and new internal
systems and software, to ensure that they are working properly and adequately
address the year 2000 issues identified. The Company expects to have completed
testing of its internal systems and software and have all systems fully
operational by September 1999.
Third-Party Service Providers:
To evaluate the readiness of its third-party service providers, including
utility providers, financial institutions, vendors and other service providers,
the Company is in the process of phoning, writing and/or reviewing written
literature from each provider to ascertain whether the services they provide are
at risk of being non-compliant, whether the providers are addressing this issue
and what their plans are for resolving this issue. To date, the Company has
completed the assessment of approximately 90% of these third-party service
providers, but is still awaiting letters of compliance from some. The Company
expects to complete this initial assessment of its third-party providers by
March 1999 and will monitor the progress of each service provider during 1999.
The identification of alternative vendors of services will be considered in the
course of this process and in the development and implementation of a
contingency plan.
COSTS
Based on the assessment to date of existing systems, which is approximately
90% complete, the Company does not expect to incur material costs to evaluate
and resolve any year 2000 problems. The Company may contract with outside
consultants at various times during this process to ensure the timely completion
of the project. The Company expects to upgrade or replace certain systems
supporting the administrative functions and facilities and may have to replace
some of the software or equipment used in its research operations. Based on
information available at this time, the Company estimates that it will spend
between $25,000 and $50,000 to complete the process of resolving the year 2000
problem. These expenditures will be funded from existing cash resources and will
not have a material impact on the amount of funds available for other operating
purposes. The Company has not incurred any outside costs to date related to
repairing, upgrading or replacing equipment to become compliant. The actual
costs to be incurred by the Company will depend on a number of factors which
cannot be accurately
26
<PAGE> 27
predicted, including the availability and cost of consultants and the extent and
difficulty of the remediation and other work to be done.
RISKS
In the event that the Company does not complete any additional tasks
relating to the year 2000 issue, the Company will experience interruptions or
inaccuracies in the processing of financial information. The Company's
accounting software is not currently year 2000 compliant. The Company has
scheduled an upgrade of this software for the second quarter of 1999, at a
minimal cost to the Company. The Company would have to rely on manual and less
efficient means of accumulating and recording data and would experience delays
in processing financial data. In the event that no further progress is made on
the remediation of any year 2000 problems, the Company may experience
interruptions in the processing of certain data generated by the Company's
research activities. The Company is aware of certain pieces of computer-aided
research and discovery equipment that are not, or may not be compliant, which
could cause the Company to revert to manual laboratory testing procedures and/or
the outsourcing of automated procedures. Certain of the Company's personal and
network computers may fail, resulting in the need to abandon those systems,
which could potentially adversely impact the Company's ability to operate its
internal computer network. However, the Company believes, by reference to vendor
information and by conducting testing in-house, that all desk-top computers
currently in use by the Company are year 2000 compliant. In some instances,
non-compliant versions of office software have been noted to be in use. The
upgrade of such software, at minimal cost to the Company, will be completed as
part of the remediation phase of this project
The Company expects to have completed all phases of this project before the
end of 1999 and does not believe that the existence of significant unresolved
year 2000 problems will result in the prolonged and material interruption of its
daily operations, including the conduct of its research and development
activities. However, there can be no assurance that the Company will complete
the remediation of any year 2000 problems on a timely basis or that any
unresolved problems would not have an adverse impact on the Company's ability to
continue operations and fulfill its obligations pursuant to research and
development collaboration agreements.
The Company has certain relationships with third parties, including utility
providers, financial institutions, vendors and other service providers. The
Company believes that with the exception of its utility providers, its
relationships with vendors and service providers are not exclusive or material.
Consequently, the Company believes that, in the event of a failure on the part
of these third parties to become year 2000 compliant on a timely basis, the
Company would be able to continue to maintain operations, including the conduct
of most of its research and development activities, utilizing alternative
vendors where necessary. An interruption of the Company's utility services could
materially affect the Company's research, development and administrative
operations until such time that those utility services are resumed. There can be
no assurance that any third party service provider engaged by the Company will
achieve year 2000 compliance on a timely basis, or that any lack of compliance
on the part of such provider will not materially affect the Company's
operations. The identification of alternative vendors of services and supplies
will be considered in the course of this process and in the development and
implementation of a contingency plan.
CONTINGENCY PLAN
The determination of the necessity for a contingency plan will be made once
the assessment and remediation phases of this project have been completed. Any
contingency plan implemented would include, to the extent deemed necessary, the
identification of alternative third-party service providers and vendors, the
availability of equipment to enable the Company to continue operations and the
availability of vendors for outsourcing research and development activities. The
Company expects to have identified and resolved any year 2000 problems by
September 1999 and to have established and tested a formal contingency plan, to
the extent deemed necessary, before the end of 1999.
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
27
<PAGE> 28
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 conduct and
completion of clinical trials of the Company's product candidates, particularly
with respect to aptiganel; 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 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; uncertainties as to the extent of future government regulation of
the Company's business; and potential year 2000 problems. 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
that may be made to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is not provided as the disclosure
requirements are not applicable to the Company pursuant to Item 305(e) of
Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is contained on pages F-2 through F-15
of this Report on Form 10-K.
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, and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the caption "Election of Directors" in the Company's definitive Proxy Statement
relating to the 1999 Annual Meeting of Stockholders (the "1999 Proxy
Statement"), to be filed with the Securities and Exchange Commission not later
than April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Principal Stockholders" in the
1999 Proxy Statement.
28
<PAGE> 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the
discussion responsive thereto under the captions "Employment Agreements" and
"Compensatory Arrangements" in the 1999 Proxy Statement.
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 Statements 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.
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.
29
<PAGE> 30
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 as exhibit 10.12 to
the Annual Report on Form 10-K for the period ended December 31, 1997,
as filed with the Commission on March 30, 1998, and incorporated
herein by reference.
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 as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1997, as filed
with the Commission on March 30, 1998 and incorporated herein by
reference.
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
30
<PAGE> 31
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 as Exhibit 10.25 to the Annual Report on
Form 10-K for the period ended December 31, 1997, filed with the
Commission on March 30, 1998 and incorporated herein by reference.
10.26 Termination agreement, dated November 4, 1998, between the Company and
Boehringer Ingelheim International, GmbH. Filed as exhibit 10.28 to the
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
as filed with the Commission on November 12, 1998, and incorporated
herein by reference.
10.27+ Research Collaboration and License Agreement dated as of December 23,
1998 between the Company and Bayer AG. Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed herewith.
31
<PAGE> 32
24.1 Powers of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule for the year ended December 31, 1998
(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.
(b) REPORTS ON FORM 8-K
December 21, 1998: Issuance of a news release announcing that the Company had
entered into an agreement with Bayer AG to develop the
Company's recombinant Glial Growth Factor 2 ("GGF2") for the
treatment of neurodegenerative diseases such as Multiple
Sclerosis.
32
<PAGE> 33
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 Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE> 34
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 10, 1999
F-2
<PAGE> 35
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
---------- ----------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 4,863 $ 12,020
Marketable securities 7,037 26,561
Receivables from collaboration agreements 2,080 --
Prepaid expenses and other current assets 1,260 1,575
---------- ----------
Total Current Assets 15,240 40,156
Equipment, Furniture and Fixtures, net 377 735
---------- ----------
Total Assets $ 15,617 $ 40,891
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,637 $ 3,668
Research and development advances 250 2,900
---------- ----------
Total Current Liabilities 1,887 6,568
Stockholders' Equity
Preferred stock, par value $.01, 10,000
shares authorized; none issued -- --
Common stock, par value $.001, 30,000
shares authorized; 18,085 and 17,858 shares issued and
outstanding at December 31, 1998 and 1997, respectively 18 18
Additional paid-in capital 120,088 137,787
Accumulated deficit (106,376) (103,482)
---------- ----------
Total Stockholders' Equity 13,730 34,323
---------- ----------
Total Liabilities and Stockholders' Equity $ 15,617 $ 40,891
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 36
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Revenues:
Research and development $ 4,253 $ 3,885 $ 2,396
Government grants 50 150 --
-------- --------- ---------
4,303 4,035 2,396
Operating expenses:
Research and development 5,984 17,650 13,978
General and administrative 1,472 2,616 2,585
Restructuring costs 921 -- --
-------- --------- ---------
8,377 20,266 16,563
-------- --------- ---------
Loss from operations (4,074) (16,231) (14,167)
Interest income 1,180 2 ,393 1,178
-------- --------- ---------
Net loss $ (2,894) $ (13,838) $ (12,989)
======== ========= =========
Basic and diluted net loss per common share $ (0.16) $ (0.79) $ (0.93)
======== ========= =========
Shares used in computing basic and diluted
net loss per share 17,976 17,518 13,980
======== ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 37
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS 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, 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 stock 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 stock options 11 -- 54 -- 54
Net loss -- -- -- (13,838) (13,838)
------ ---- --------- ---------- ---------
Balance at December 31, 1997 17,858 18 137,787 (103,482) 34,323
Common stock issued pursuant to
employee benefit plans 227 -- 208 -- 208
Cash dividend ($1.00 per share) -- -- (17,907) -- (17,907)
Net loss -- -- -- (2,894) (2,894)
------ ---- --------- ---------- ---------
Balance at December 31, 1998 18,085 $ 18 $ 120,088 $ (106,376) $ 13,730
====== ==== ========= ========== =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 38
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net loss $ (2,894) $ (13,838) $ (12,989)
Items not requiring cash:
Gain on sale of equipment, furniture and fixtures (38) -- --
Depreciation and amortization 337 851 1,059
Common stock issued pursuant to an
employee benefit plan 151 230 194
-------- --------- ---------
(2,444) (12,757) (11,736)
Changes in current assets and liabilities:
Receivables from collaboration agreements (2,080) -- --
Prepaid expenses and other current assets 315 (304) (764)
Accounts payable and accrued expenses (2,031) (121) (9)
Research and development advances (2,650) (2,884) 4,789
-------- --------- ---------
(6,446) (3,309) 4,016
-------- --------- ---------
Cash used for operating activities (8,890) (16,066) (7,720)
Investing Activities
Sales of marketable securities 33,194 9,000 --
Purchases of marketable securities (13,670) (35,561) --
Purchases of equipment, furniture and fixtures (18) (301) (467)
Disposals of equipment, furniture and fixtures 77 -- --
-------- --------- ---------
Cash provided by (used for) investing activities 19,583 (26,862) (467)
Financing Activities
Dividends paid (17,907) -- --
Sales of common stock, net of offering
costs of $2,221 in 1997 57 28,284 214
Issuance of common stock pursuant to stock
purchase agreements, net of costs of $300 in 1996 -- -- 12,700
-------- --------- ---------
Cash (used for) provided by financing activities (17,850) 28,284 12,914
-------- --------- ---------
Net (Decrease) Increase in Cash and
Cash Equivalents (7,157) (14,644) 4,727
Cash and Cash Equivalents at Beginning of Year 12,020 26,664 21,937
-------- --------- ---------
Cash and Cash Equivalents at End of Year $ 4,863 $ 12,020 $ 26,664
======== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 39
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BUSINESS
Cambridge NeuroScience, Inc. (the "Company") is a
biopharmaceutical company engaged in the discovery and development of
proprietary pharmaceuticals to prevent or treat severe disorders of, or injuries
to, the nervous system. The Company is focused in two areas of research and
development: (i) ion-channel blockers to prevent or treat brain damage resulting
from stroke and other forms of brain ischemia, as well as for the treatment or
prevention of neuropathic pain, glaucoma, spinal cord injury, Parkinson's
disease, multiple sclerosis ("MS") and peripheral neuropathies, and (ii) growth
factors for the treatment of MS and peripheral neuropathies. To date, the
Company has funded its operations primarily through proceeds from public and
private offerings of equity securities and from payments received pursuant to
research and development collaborations. The Company has not been profitable
since inception and has not received any revenue from the sale of products.
On March 9, 1998, the Company announced the implementation of a cost
reduction plan that included a reduction in headcount by 34 employees,
consisting of 22 research, four drug development and eight administrative and
support employees. Included in operating expenses for the year ended December
31, 1998, is a one-time cost of $921,000 associated with this reduction in
staff, consisting primarily of severance and related benefits which were paid in
full in 1998. Following the reduction in headcount, in June 1998, the Company
entered into an agreement with a third party to sub-lease approximately half of
the Company's office and laboratory facilities, thereby reducing
facilities-related operating expenses.
On March 9, 1998, the Company's Board of Directors declared an
extraordinary dividend on its Common Stock of $1.00 per share of outstanding
stock, or $17.9 million. This dividend, which was paid on April 14, 1998,
represented a return of capital to shareholders. Prior thereto, the Company had
never declared nor paid dividends on any of its capital stock. Future cash
dividends will be paid at the discretion of the 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. The Company does not contemplate paying dividends
in 1999.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements
include the accounts of Cambridge NeuroScience, Inc. and its wholly-owned and
majority-owned subsidiaries. To date, the minority shareholders have not made
equity investments in the subsidiary. As a result, the entire net loss from the
majority-owned subsidiary has been attributed to the Company. All inter-company
accounts and transactions have been eliminated in consolidation. See Note H.
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.
Adoption of New Accounting Principle. 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. On January 1, 1998, the Company
adopted FAS 130. The adoption of FAS 130 had no 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 at the date of purchase 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, 1998 and 1997, the cost of these investments
approximated fair market value.
Marketable Securities. At December 31, 1998 and 1997, the Company had
$7.0 million and $26.6 million, respectively, invested in marketable securities
with original maturities of greater than 90 days, consisting of high quality
F-7
<PAGE> 40
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
corporate bonds, commercial paper, certificates of deposit and variable rate
insurance contracts (see Note C). 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, based on quoted
market prices, and unrealized gains or losses are reported as a separate
component of stockholders' equity. 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. At December 31, 1998 and 1997, the adjusted cost of these
investments approximated fair market value. The cost of securities sold is based
on specific identification. Gross realized gains or losses for the years ended
December 31, 1998, 1997 and 1996 were not material.
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 Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations (see Note G).
Revenue Recognition. Research and development revenue is recognized as
earned and represents payments received pursuant to a technology licensing
agreement and reimbursement of the Company's expenditures pursuant to the terms
of its collaboration agreements. Research and development revenue is earned when
all obligations of the Company relating to the revenue have been met, the
amounts are not refundable irrespective of whether the research efforts are
unsuccessful and the Company is not obligated to meet future milestones. For
further discussion of the Company's revenue recognition policies pursuant to
these agreements, see Note H. 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 pursuant to the Company's research
and development agreements are designated as research and development advances
and are included in current liabilities.
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 are expected to reverse.
Deferred tax assets may be reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
Significant Customers. Revenue in 1998, 1997 and 1996 consisted
primarily of revenue arising from collaborative agreements. Revenue from these
sources in 1998 was earned pursuant to agreements with four companies, each of
which comprised more that 10% of total revenue. Revenue earned pursuant to one
collaborative agreement totaled 27% of such revenue in 1998, 71% in 1997 and 95%
in 1996. Revenue earned pursuant to another collaboration agreement totaled 23%
and 25% of revenue in 1998 and 1997, respectively (see Note H).
Net loss per share. Net loss per share is based on the weighted-average
number of common shares outstanding during each of the periods presented. Due to
the fact that the Company continues to be in a net loss position, common
equivalent shares from stock options are excluded as their effect is
antidilutive
F-8
<PAGE> 41
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - MARKETABLE SECURITIES
Investments in marketable securities consist of the following at December 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
CONTRACTUAL MATURITIES
---------------------------------------
1998 1997
-------- -----------------------
LESS LESS DUE IN
THAN THAN 1-2
ONE YEAR ONE YEAR YEARS
-------- -------- -------
<S> <C> <C> <C>
Corporate bonds $ 6,037 $ 11,569 $ 3,020
Certificates of deposit 1,000 5,999 --
Variable rate insurance contracts -- 3,000 --
Commercial paper -- 2,973 --
------- -------- -------
$ 7,037 $ 23,541 $ 3,020
======= ======== =======
</TABLE>
NOTE D - EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Equipment $ 4,181 $ 4,586
Furniture and fixtures 151 453
Leasehold improvements 2,264 2,264
------- -------
6,596 7,303
Less accumulated depreciation and amortization 6,219 6,568
------- -------
Equipment, furniture and fixtures, net $ 377 $ 735
======= =======
</TABLE>
NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Accounts payable $ 454 $ 273
Accrued salaries and benefits 293 289
Accrued research and development expense 290 2,466
Accrued professional fees 150 219
Sublease advances 234 --
Accrued other 216 421
------- -------
$ 1,637 $ 3,668
======= =======
</TABLE>
NOTE F - INCOME TAXES
At December 31, 1998, the Company has a potential tax benefit of
approximately $43.8 million, resulting primarily from approximately $103.1
million in net operating loss carryforwards and $4.2 million of tax credits,
which expire through 2013. 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
F-9
<PAGE> 42
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. During 1998, the valuation allowance decreased by
approximately $2.0 million due primarily to the expiration of state net
operating loss carryforwards
Significant components of the Company's deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 39,600 $ 41,500
Tax credits 4,175 4,250
--------- ---------
Total deferred tax assets 43,775 45,750
Valuation allowance (43,775) (45,750)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
</TABLE>
NOTE G - 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
"Director 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 Director Plan has reserved an
aggregate of 100,000 shares for this purpose. At December 31, 1998, options to
purchase 78,000 shares have been granted under the plan, of which 58,875 are
exercisable.
The term of all stock options granted may not exceed ten years, and
vesting generally is over a four-year period.
F-10
<PAGE> 43
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the combined activity of the two option
plans for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,662,727 $ 7.71 1,493,953 $ 6.92 1,258,973 $ 6.61
Granted 432,000 0.84 293,450 11.56 272,650 8.20
Exercised -- -- (10,684) 5.03 (29,988) 5.50
Canceled (911,471) 7.72 (113,992) 7.51 (7,682) 6.67
--------- ------- --------- ------- --------- -------
Outstanding at end of
year 1,183,256 $ 5.20 1,662,727 $ 7.71 1,493,953 $ 6.92
========= ======= ========= ======= ========== ======
Exercisable at year end 686,204 $ 6.87 1,079,048 $ 7.09 822,347 $ 6.91
========= ======= ========= ======= ========= =======
Weighted average grant date fair
value per share of options granted
during the year $ 0.66 $ 8.15 $ 4.64
======= ======= =======
</TABLE>
The following table presents weighted average price and life
information about significant option groups outstanding at December 31, 1998:
<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>
$ 0.84 - 0.84 429,375 9.4 $ 0.84 54,000 $ 0.84
3.13 - 6.13 243,057 5.4 5.36 222,275 5.36
6.50 - 8.00 230,574 5.6 7.27 192,475 7.13
8.13 - 9.75 174,000 4.8 8.72 157,125 8.75
11.25 - 13.00 106,250 6.9 12.22 60,329 12.12
--------- -------
1,183,256 686,204
========= =======
</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. 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. During 1998, 23,065 shares were
issued at $1.67 per share and 37,222 were issued at $0.50 per share. At December
31, 1998, subscriptions were outstanding for 14,313 shares at $0.50 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 accounts for its stock option plans in
accordance with the provisions of APB 25, Accounting for Stock Issued to
Employees. The exercise price of grant awards made under the Company's stock
option plans is equal to the fair market value at the date of grant.
F-11
<PAGE> 44
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to APB 25, the Company applies the intrinsic value method to grant
awards. Accordingly, no compensation cost has been recognized in relation to 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 1998, 1997 and 1996, 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 1998, 1997 and 1996, consistent
with the provisions of FAS 123:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ---------------------- ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss (in thousands) $ (2,894) $ (2,777) $ (13,838) $ (15,583) $ (12,989) $ (13,784)
Net loss per share $ (0.16) $ (0.16) $ (0.79) $ (0.89) $ (0.93) $ (0.99)
</TABLE>
The 1998 impact of the pro forma adjustment to reflect compensation
cost under FAS 123 was to reduce the net loss and net loss per share. This
occurred primarily as a result of the cancellation of options to purchase
911,471 shares due to the reduction of the Company's workforce during 1998.
Outstanding options held by terminated employees which are not exercised are
forfeited upon termination.
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
-------------------- --------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) 6.5 5.2 4.5 .5 .5 .5
Interest rate 5.6% 6.3% 6.6% 5.4% 5.5% 5.3%
Volatility 90.0% 83.0% 65.0% 92.0% 83.0% 65.0%
</TABLE>
Prior to April 1998, the Company had never declared nor paid dividends
on any of its common stock. Future cash dividends will be paid at the discretion
of the 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. For the
purposes of calculating fair value pursuant to FAS 123, the Company has assumed
that no dividends will be paid.
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 and 1996 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 and two years, respectively,
of option grants under the Company's plans.
Benefit Plan. 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,
1998, 1997 and 1996, the Company matched 100% of all qualified employee
contributions with Company Common Stock. As of December 31, 1998, the Board of
Directors had authorized 300,000 shares of common stock for issuance pursuant to
this plan. On January 5, 1999, the Board of Directors of the Company voted to
increase the number of shares available for issuance under this plan to 330,000.
At December 31, 1998 329,115 shares were issued and outstanding pursuant to this
plan.
F-12
<PAGE> 45
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate number of shares of Common Stock reserved and available for
issuance under all stock plans was 1,024,407 at December 31, 1998.
NOTE H - COLLABORATIVE AGREEMENTS
The Company has collaborative agreements with certain strategic
partners. These arrangements are as follows:
Allergan. In November 1996, the Company entered into a collaboration
agreement with Allergan Inc. ("Allergan") to develop certain of the Company's
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 is providing an additional
$3.0 million in research funding over a three-year period, through 1999.
Allergan also established a $2.0 million line of credit for the Company, which
expired in May 1998. 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 $2.4 million to the Company as of December 31, 1998, of
which $1.0 million was included in Research and development revenue in each of
1998 and 1997 and $114,000 was included in research and development revenue in
1996. The Company is not obligated to meet future milestones under this
agreement to earn this revenue and the funds received and recognized as revenue
are not refundable in the event that research efforts are not successful.
Bayer AG. In December 1998, the Company entered into a collaborative
agreement with Bayer AG ("Bayer") for the development of recombinant Glial
Growth Factor 2 ("GGF2") for the treatment of neurodegenerative diseases such as
multiple sclerosis ("MS"). In exchange for exclusive worldwide manufacturing and
marketing rights to the compound, the Company received an up front licensing fee
of $1.0 million and will receive reimbursement for costs relating to a research
protocol covered by the agreement of up to $1.0 million. The up front licensing
fee and reimbursable costs incurred in 1998 of $580,000 were recognized as
revenue in 1998 and were included in receivables from collaboration agreements
at December 31, 1998. Bayer will be responsible for all development costs, will
provide all material needed in the conduct of the development activities and
shall be responsible for all associated costs. The Company may receive up to
$24.0 million in milestone payments, and will receive royalties on sales of GGF2
products. There can be no assurance, however, as to when or if these milestones
will be achieved. Either party may terminate this agreement at any time for
cause. Bayer may terminate this agreement at any time, upon 120 days written
notice.
Boehringer Ingelheim International, GmbH. In March 1995, the Company
entered license and stock purchase agreements with Boehringer Ingelheim
International GmbH ("BI") to collaborate on the development and
commercialization of the Company's product candidate, aptiganel, formerly known
as 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 aptiganel-related
costs. There are no future obligations relating to this reimbursement of
previously incurred costs, which was recognized as revenue in 1995. 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. Pursuant to the terms of the agreements,
the Company was obligated to fund approximately 25% of the development costs for
aptiganel in the United States and Europe. BI was obligated to pay the remaining
75% of such costs and all of the development costs in Japan. The Company and BI
collaborated on two Phase III trials of aptiganel. In the second half of 1997,
the partners announced the
F-13
<PAGE> 46
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
discontinuation of patient enrollment into both trials after interim analyses
indicated that continuation of the trials was not justified. In November, 1998,
the Company and BI terminated the collaboration and licensing agreements for
aptiganel and all rights were returned to the Company, subject to a royalty on
future sales.
Revenue earned pursuant to the BI agreement represents reimbursement by
BI of expenditures by the Company in excess of its contractual obligations
(generally, 25% of total spent by both parties). Under the terms of the
agreements, an accounting of annual total costs incurred by both parties was to
take place 120 days after the end of each contract year. Any costs incurred in
excess of one party's contractual obligation was reimbursed by the other party.
The calculation of revenue recognized by the Company for the years ended
December 31, 1997 and 1996 was based in part upon an estimate of costs incurred
by BI during the related contract periods. The Company estimated costs incurred
by BI based upon the budget provided for that year and periodic discussions with
BI as to patient enrollment in the clinical trials and the associated costs. At
each year-end, the Company confirmed with BI the reasonableness of the estimated
total costs incurred by BI for the year. Immaterial differences between the
estimated revenue recognized and the actual reimbursable expenses resulting from
the annual reconciliation were either included in current liabilities as
research and development advances or recognized in the period in which they were
determined. Research and development revenue in 1997 and 1996 included $2.9
million and $2.3 million, respectively, earned pursuant to the BI collaboration.
The agreements provided that BI would advance cash to the Company in
the event that the Company's expenditures were expected to exceed its
contractual obligation. Such advances were received by the Company in 1995 and
1996. The advances received through 1996 exceeded the actual reimbursable
amounts as of December 31, 1996 and 1997 and were accounted for as research and
development advances and included in current liabilities at those dates. At
December 31, 1997 and 1996, the difference between cash advances received and
revenue recognized of $2.9 million and $5.8 million, respectively, was recorded
as research and development advances. Therefore, no advances were received in
1997 and revenue was recognized in 1997, as earned, thereby reducing the accrual
for research and development advances. In November 1998, the two companies
signed a termination agreement and reached a final settlement of costs subject
to the collaboration. As a result, in 1998, the Company repaid to BI $1.5
million in excess advances received in prior years. The Company recognized $1.2
million of revenue earned, representing the remainder of excess advances
received in prior periods. The Company is not obligated to meet future
milestones to earn this revenue. The Company will recognize no further revenue
pursuant to these agreements.
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 is conducting a
research program over a three-year period, for which CNPI provides funding of at
least $1.25 million per year. Through December 31, 1998, CNPI made payments to
Gladstone totaling $3.1 million. In the event that CNPI is unable to raise the
required funds to make its research funding payments, Cambridge NeuroScience
loans 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. Expenses relating to this agreement
included in research and development expense totaled $1.4 million in 1998 and
1997 and $51,000 in 1996. The agreement is generally subject to termination upon
60 days' prior written notice of an uncured material breach.
F-14
<PAGE> 47
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Creative Biomolecules, Inc. On December 31, 1998, the Company entered
into a technology licensing agreement with Creative Biomolecules, Inc. ("CBMI")
whereby CBMI has acquired the exclusive rights to GDF-1 in exchange for an up
front cash payment and future royalties on product sales. Either party may
terminate this agreement upon a material breach which is not cured within 60
days of written notice of such breach.
NOTE I - 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. Rent expense relating to this lease was
approximately $1.3 million in the year ended December 31, 1998 and approximately
$1.1 million in each of the years ended December 31, 1997 and 1996.
In June 1998, the Company entered into an agreement with a third party
to sub-lease approximately half of its office and laboratory facilities. Under
the terms of the sub-lease agreement, which expires in July 2000, the sub-lessee
pays a pro-rata amount of the insurance, maintenance, utilities and other
operating expenses relating to the facilities in addition to a minimum base rent
amount. Offsetting, in part, rent expense in 1998, the Company received $392,000
in minimum sub-lease rentals pursuant to this agreement.
Minimum future obligations and rentals under the terms of the facilities lease
and sub-lease agreement are (in thousands):
<TABLE>
<CAPTION>
Future Future
Minimum Lease Minimum
Obligations Rentals
------------- -------
<S> <C> <C>
1999 $1,129 $ 864
2000 658 504
====== =======
Total $1,787 $ 1,368
====== =======
</TABLE>
In connection primarily with the Company's guarantee of the obligations
of its majority-owned subsidiary, CNPI (see Note H), the Company has total
non-cancelable commitments of approximately $700,000 at December 31, 1998.
F-15
<PAGE> 48
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 19, 1999 CAMBRIDGE NEUROSCIENCE, INC.
By: /s/ HARRY W. WILCOX
------------------------------------------
Harry W. Wilcox, III
President and Chief Executive Officer
By: /s/ GLENN A. SHANE
------------------------------------------
Glenn A. Shane
Principal Accounting Officer
POWER OF ATTORNEY
We, the undersigned Directors of Cambridge NeuroScience, Inc., hereby
severally constitute and appoint 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 1998, 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/ HARRY W. WILCOX President, Principal March 19, 1999
- -------------------------- Executive Officer and Director
Harry W. Wilcox, III
/s/ NANCY S. AMER Director March 19, 1999
- --------------------------
Nancy S. Amer
/s/ BURKHARD BLANK Director March 19, 1999
- --------------------------
Burkhard Blank
/s/ Ira A. Jackson
- -------------------------- Director March 19, 1999
Ira A. Jackson
/s/ JOSEPH B. MARTIN Director March 19, 1999
- --------------------------
Joseph B. Martin
/s/ PAUL C. O'BRIEN Director March 19, 1999
- --------------------------
Paul C. O'Brien
48
<PAGE> 49
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 as exhibit 10.12 to
the Annual Report on Form 10-K for the period ended December 31, 1997,
as filed with the Commission on March 30, 1998, and incorporated
herein by reference.
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 as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1997, as filed
with the Commission on March 30, 1998 and incorporated herein by
reference.
49
<PAGE> 50
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.
50
<PAGE> 51
10.25* Compensatory arrangement with certain executive officers and other
members of management. Filed as Exhibit 10.25 to the Annual Report on
Form 10-K for the period ended December 31, 1997, filed with the
Commission on March 30, 1998 and incorporated herein by reference.
10.26 Termination agreement, dated November 4, 1998, between the Company and
Boehringer Ingelheim International, GmbH. Filed as exhibit 10.28 to the
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
as filed with the Commission on November 12, 1998, and incorporated
herein by reference.
10.27+ Research Collaboration and License Agreement dated as of December 23,
1998 between the Company and Bayer AG. 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, 1998 (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.
51
<PAGE> 1
Exhibit 10.27
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
RESEARCH COLLABORATION
and
LICENSE AGREEMENT
between
BAYER AG
AND
CAMBRIDGE NEUROSCIENCE, INC.
<PAGE> 2
TABLE OF CONTENTS
1. DEFINITIONS...............................................................1
1.1 Meaning.............................................................1
1.2 Affiliates..........................................................1
1.3 CNSI Know How.......................................................1
1.4 CNSI Patent Rights..................................................2
1.5 CNSI Technology.....................................................2
1.6 Competitive Product.................................................2
1.7 Cost of Research....................................................2
1.8 Data................................................................2
1.9 Decision Point......................................................3
1.10 Effective Date......................................................3
1.11 Field...............................................................3
1.12 Improvements........................................................3
1.13 Launch..............................................................3
1.14 Licensed Technology.................................................3
1.15 Major Market........................................................3
1.16 Market Approval.....................................................3
1.17 Net Sales...........................................................3
1.18 Phase I Study.......................................................3
1.19 Phase III Study.....................................................3
1.20 Primary Indication..................................................4
1.21 Product.............................................................4
1.22 Research Steering Committee.........................................4
1.23 Research Protocol...................................................4
1.24 Territory...........................................................4
2. RESEARCH AND DEVELOPMENT..................................................4
2.1 Research Steering Committee.........................................4
<PAGE> 3
2.1.1 Formation..................................................4
2.1.2 Membership.................................................4
2.1.3 Voting Powers..............................................4
2.1.4 Meetings...................................................5
2.1.5 Functions and Authority....................................5
2.1.6 Expenses...................................................6
2.1.7 Dispute Resolution.........................................6
2.1.8 Disbanding.................................................6
2.2 CNSI Research.......................................................6
2.2.1 Representation.............................................6
2.2.2 Scope of Research..........................................6
2.2.3 Payment....................................................6
2.2.4 Records and Audits.........................................6
2.2.5 Subcontracting.............................................7
2.2.6 Subcontractee Improvements.................................7
2.2.7 Independent Contractor.....................................7
2.2.8 Technology Transfer........................................7
2.2.9 Research Warranty..........................................8
2.2.10 Records and Reports........................................8
2.2.11 Rights in DATA.............................................8
2.3 BAYER Research and Development......................................8
2.3.1 Scope of Research..........................................8
2.3.2 Development Studies........................................8
2.3.3 Contracted Clinical Trials.................................8
2.3.4 Regulatory Filings.........................................8
2.3.5 Assistance.................................................9
2.3.6 Costs......................................................9
2.3.7 Reporting..................................................9
2.3.8 Diligence..................................................9
<PAGE> 4
2.4 Research Publications...............................................9
3. LICENSE GRANT
3.1 CNSI Grant of Patent Rights........................................10
3.2 Term of Grant......................................................10
3.3 Reservation of Rights CNSI.........................................10
3.4 CNSI Grant of Rights in Know How...................................10
3.5 CNSI Funded Research...............................................10
3.6 Term of Grant......................................................11
3.7 BAYER Grant of Rights..............................................11
3.8 Bankruptcy or Insolvency...........................................11
4. LICENSE FEE, MILESTONES AND ROYALTIES....................................11
4.1 Consideration for License Granted..................................11
4.2 Milestone Payments.................................................11
4.3 Royalty Payments...................................................12
4.3.1 Royalties for Patent Rights...............................12
4.3.2 Royalties for Know How....................................13
4.3.3 CNSI Royalties............................................14
4.3.4 Default on Third Party Contract...........................14
4.3.5 License to Third Party Patent Rights......................14
4.3.6 Cap on Royalties..........................................14
4.4 Accounting Records and Procedures..................................14
4.4.1 Royalties Payments........................................14
4.4.2 Currency..................................................15
4.4.3 Records and Audits........................................15
4.4.4 Confidentiality of Financial Reports......................15
4.4.5 Payment of Taxes..........................................15
4.4.6 Sublicensees..............................................15
4.4.7 Non-Product Related Sublicenses...........................16
5. SUPPLY OF MATERIAL
<PAGE> 5
5.1 Research Material..................................................16
5.2 Other Material.....................................................16
5.3 BAYER Cost of Manufacture..........................................16
6. PRODUCT COMMERCIALIZATION................................................16
6.1 Right to Commercialize.............................................16
6.2 Co-Promotion.......................................................16
6.3 Cost of Commercialization..........................................16
6.4 Product Liability..................................................17
6.5 Trade Marks........................................................17
7. CONFIDENTIALITY..........................................................17
7.1 Definition.........................................................17
7.2 Obligations........................................................17
7.3 Exceptions.........................................................17
7.4 Term of Confidentiality............................................18
7.5 Return of Information..............................................18
7.6 Business Publications..............................................18
8. INVENTIONS AND PATENTS...................................................18
8.1 Rights In Inventions...............................................18
8.2 Sole Inventions....................................................18
8.3 Joint Inventions...................................................19
8.4 Invention Disclosure...............................................19
8.5 Know-how...........................................................19
8.6 CNSI Patent Maintenance............................................19
8.7 BAYER Patent Maintenance...........................................19
8.8 BAYER/CNSI Patents.................................................19
8.9 Assignment of Rights...............................................19
8.10 No Waiver..........................................................19
8.11 Cost of CNSI Patents...............................................19
8.12 Reimbursement of Costs.............................................20
<PAGE> 6
8.13 No Further Interest in Patents/Applications........................20
9. PATENT INFRINGEMENT......................................................20
9.1 Infringement by Third Parties......................................20
9.1.1 Notification..............................................20
9.1.2 Initiating Proceedings....................................20
9.1.3 Distribution of Awards....................................20
9.1.4 Voluntary Disposition.....................................21
9.2 Claims Against Licensed Technology.................................21
9.2.1 Notice....................................................21
9.2.2 Damages...................................................21
9.2.3 Patent Indemnification....................................21
10. TERM AND TERMINATION.....................................................22
10.1 Term and Expiration................................................22
10.2 Termination by CNSI................................................22
10.3 Termination by BAYER...............................................22
10.3.1 Upon Written Notice.......................................22
10.3.2 Duty to Mitigate..........................................22
10.3.3 Without Cause.............................................23
10.3.4 With Cause................................................23
10.3.5 Termination Upon Reorganization...........................23
10.4 Disposition of Inventory...........................................23
11. REPRESENTATIONS AND WARRANTIES...........................................24
11.1 Corporate Existence and Power......................................24
11.2 Authorization and Enforcement of Obligations.......................24
11.3 Consents...........................................................24
11.4 No Conflict........................................................24
11.5 Authorization of Obligations.......................................24
11.6 CNSI Representations...............................................24
11.7 Certain Covenants of CNSI and BAYER................................25
<PAGE> 7
12. MISCELLANEOUS............................................................25
12.1 Indemnification....................................................25
12.1.3 Force Majeure.............................................26
12.1.4 Survival..................................................26
12.1.5 Notice....................................................26
12.2 Waivers............................................................26
12.3 Applicable Law.....................................................26
12.4 Dispute Resolution.................................................27
12.5 Assignment.........................................................27
12.6 Severability.......................................................27
12.7 Integration Clause.................................................27
12.8 Amendment of Agreement.............................................27
APPENDICES
Appendix 1 CNSI KNOW HOW.................................................29
Appendix 2 CNSI PATENT RIGHTS............................................37
Appendix 3 RESEARCH PROTOCOL.............................................39
Appendix 4 CNSI THIRD PARTY CONTRACTS....................................47
Appendix 5 CNSI SUBCONTRACTEES AND PROPOSED BUDGET............................55
<PAGE> 8
RESEARCH COLLABORATION
AND LICENSE AGREEMENT
This Agreement is between Cambridge NeuroScience, Inc., a Delaware
corporation, with offices located at One Kendall Square, Building 700,
Cambridge, MA 02139 ("CNSI"), and Bayer AG, a German corporation, on behalf of
its Pharmaceutical Division, with offices located at D-51368 Leverkusen, Germany
("BAYER").
WHEREAS CNSI owns or is the exclusive licensee, through
the*******************************************************, of certain
technology and patent rights relating to glial growth factor 2 ("GGF2"), its
manufacture and use for the treatment of multiple sclerosis and other
pharmaceutical indications;
WHEREAS CNSI and BAYER are interested in forming a collaboration
concerning the research, development, manufacture and commercialization of GGF2
product(s) where, generally, CNSI would license certain patent rights
exclusively to BAYER, CNSI and BAYER both would collaborate on GGF2 research,
and BAYER could develop, manufacture and commercialize GGF2 product(s)
worldwide.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained and intending to be legally bound hereby, the Parties
hereto agree as follows:
Article 1
DEFINITIONS
1.1 Meaning: Whenever a term is written in this Agreement with capital
letters, it shall have the following meaning.
1.2 AFFILIATES. shall mean any business entity which directly or indirectly
controls, is controlled by, or is under common control with either
Party to this Agreement. A business entity shall be deemed to "control"
another business entity if it owns, directly or indirectly, more than
fifty percent of the outstanding voting securities, capital stock, or
other comparable equity or ownership interest of such business entity.
If the laws of the jurisdiction in which such entity operates prohibit
ownership by a Party or more than fifty percent (50%) , control shall
be deemed to exist at the maximum level of ownership allowed by such
jurisdiction.
1.3 CNSI KNOW HOW: shall mean all information and data including but not
limited to formulae, protocols, techniques and results of
experimentation and testing, which, except for published patent
applications which are also included within this definition, is
generally not known to the public, and in which CNSI holds rights, and
which provides or may provide a competitive advantage in relation to
research, development, manufacture, use and/or sale of PRODUCT. CNSI
KNOW HOW includes that information which exists at the EFFECTIVE DATE
and in which CNSI has either ownership or licensed rights such as those
which arise directly out of CNSI's conduct, or out of its contract
service providers conduct under previous agreements between CNSI and
other parties (see Appendix 4, CNSI Third Party Contracts). CNSI KNOW
HOW also includes all IMPROVEMENTS which arise after the EFFECTIVE DATE
either out of CNSI's or its contract service providers conduct under
this Agreement. CNSI KNOW HOW includes that information which is not
the subject of any patent application, as well as that information
which is the subject of a patent application that has not yet issued.
Such patent applications that have not issued as of the EFFECTIVE DATE
are included in Appendix 1, which is incorporated herein. Appendix 1
shall be updated periodically to include CNSI KNOW HOW embodied in
patent applications arising after the EFFECTIVE DATE and during the
<PAGE> 9
term of this Agreement, and CNSI KNOW HOW that is the subject of a
patent application shall be deemed to be and shall be transferred from
Appendix 1 to Appendix 2 (CNSI PATENT RIGHTS) upon grant.
1.4 CNSI PATENT RIGHTS: shall mean all rights held by CNSI in any of the
following patents: any patent issuing on any patent application
identified in Appendix 1, as well as any patent issuing from any
continuing applications of the patents listed in Appendix 2, such
applications including any divisions, continuations, and
continuation-in-part applications, as well as any patents issuing on
any reissue and/or reexamination application, and including any Patent
Term Restoration of any such patents. CNSI PATENT RIGHTS also includes
any foreign patents which correspond to or are generally equivalent to
those described above, and includes any patents in which CNSI holds
rights that claim IMPROVEMENTS. This definition includes CNSI's
interest in any patent rights CNSI may have in any joint invention with
BAYER or a third party, and includes any third party patent rights
licensed by CNSI that relate to CNSI TECHNOLOGY and (a) that exist at
the EFFECTIVE DATE and (b) that arise after the EFFECTIVE DATE (i.e.,
IMPROVEMENTS). CNSI PATENT RIGHTS that exist as of the EFFECTIVE DATE
are listed in Appendix 2, which is attached hereto and incorporated
herein. The Parties intend that Appendix 2 include all CNSI patent
rights that relate to CNSI TECHNOLOGY in the FIELD and are in existence
at the EFFECTIVE DATE, as well as all CNSI patent rights arising under
this Agreement. If at any time it is discovered that such CNSI PATENT
RIGHTS are not but should be included in Appendix 2, the Parties agree
to amend Appendix 2 accordingly, and such amendment will be
incorporated herein and shall supersede any previous Appendix 2.
1.5 CNSI TECHNOLOGY: shall mean GGF2 , neuregulin-1, DNA sequences,
protein(s) and other related materials covered by CNSI PATENT RIGHTS or
CNSI KNOW HOW, any modification and fraction thereof, including any
preparation containing GGF2, and/or any modification and/or fraction
thereof, as well as all materials relating to the manufacture, use
and/or delivery (including gene delivery) of GGF2, modifications and/or
fractions thereof. This definition includes the following : cDNA,
genomic DNA, vectors, cell lines and probes which relate to GGF2, any
modification and/or fraction thereof that CNSI owns or otherwise holds
rights in as of the EFFECTIVE DATE. This definition includes any and
all IMPROVEMENTS. *********************************.
1.6 COMPETITIVE PRODUCT : shall mean any drug product(s) that promotes the
growth and differentiation of glial cells and is used for the treatment
of a PRIMARY INDICATION or other indication contemplated hereunder,
that is sold by one or more third party which is not a Bayer
sublicensee or Affiliate, and the individual or cumulative sales or
other distribution of such third party product(s), in a given calendar
year in the applicable country, are equivalent to ******************or
more of NET SALES of PRODUCT in such country,
1.7 COST OF RESEARCH: shall mean actual costs incurred by CNSI for
conducting research hereunder calculated by adding (a) all out of
pocket costs incurred in a calendar year that are directly related to
research conducted by CNSI hereunder, as verified by itemized invoices
therefor, and (b) the cost of CNSI personnel who actively conduct
research in a calendar year hereunder at the annualized rate of
*************per full-time personnel for either Ph.D. or technical
personnel, calculated as a percent of the full time rate, depending on
what percent of time was actually spent conducting research hereunder
in a calendar year. The sum of (a) and (b) includes all direct and
indirect costs of CNSI hereunder.
1.8 DATA: is defined in Article 2.2.10 (Records and Reports).
2
<PAGE> 10
1.9 DECISION POINT: is not a defined term in this Agreement.
1.10 EFFECTIVE DATE: The date of the last signature required below or the
date of any required United States governmental approval or
registration of this transaction, whichever is later.
1.11 FIELD : shall mean all uses of the CNSI TECHNOLOGY in animals,
including humans, including but not limited to all therapeutic,
prophylactic, and diagnostic uses, except this definition does not
include the field of *************
1.12 IMPROVEMENTS: shall mean any information and/or material including, not
by way of limitation, know-how, discoveries, technology and information
of any type whatsoever, compositions, methods, processes, techniques
and the uses thereof, whether patented or not, that arise after the
EFFECTIVE DATE out of conduct by CNSI and/or its subcontractees as a
result of conduct under this Agreement. IMPROVEMENTS include any sole
CNSI IMPROVEMENT, and any CNSI IMPROVEMENT held jointly with BAYER or
with any subcontractee, as well as any subcontractee IMPROVEMENT in
which CNSI has or may obtain rights during this Agreement.
1.13 LAUNCH: shall mean the date of the first invoice for the sale of
PRODUCT in a MAJOR MARKET after receipt of governmental approval to
sell PRODUCT in that market.
1.14 LICENSED TECHNOLOGY: shall mean that CNSI TECHNOLOGY, the use of which,
but for the licenses granted hereunder, would infringe CNSI PATENT
RIGHTS or misappropriate CNSI KNOW HOW.
1.15 MAJOR MARKET: shall mean the United States, United Kingdom, Germany, or
France.
1.16 MARKET APPROVAL: shall mean, for each country in which sales of PRODUCT
is contemplated, the date upon which the last of all governmental
approvals required for the sale of PRODUCT in that country has been
granted.
1.17 NET SALES: shall mean the invoiced sales price billed to third party
customers by BAYER, its AFFILIATES and sublicensees less (a) actual
credits, allowances, discounts (including trade, cash, and quantity
discounts), and rebates to (including documented price reduction
programs) and charge backs from the account of such third party
customer for spoiled, damaged, out-dated, recalled or returned PRODUCT;
(b) amounts equivalent to five percent (5%) of the invoiced sales price
for PRODUCT as an allowance for transportation and insurance costs, and
(c) all direct taxes including sales, value-added and other direct
taxes incurred, as well as all customs fees, duties, surcharges and
other governmental charges incurred in connection with the exportation
or importation of PRODUCT for sale as far as they are not charged
separately to third party customers.
1.18 PHASE I STUDY: shall mean the first study designed for introduction of
a PRODUCT into humans for the primary purpose of determining the safety
of the PRODUCT.
1.19 PHASE III STUDY: shall mean the first study designed for administration
of PRODUCT to a number of human patients adequate to produce
statistically significant evidence of efficacy and designed for the
primary purpose of proving the efficacy of PRODUCT in order to obtain
approval of the Biological License Application therefor, or any
equivalent approval in any MAJOR MARKET.
3
<PAGE> 11
1.20 PRIMARY INDICATION: shall mean therapeutic or prophylactic uses
relating to multiple sclerosis and/or peripheral neuropathy. This
definition does not include any reference to diagnostic uses of
LICENSED TECHNOLOGY.
1.21 PRODUCT: shall mean that LICENSED TECHNOLOGY that is advanced for
development and/or sold by or on behalf of BAYER under this Agreement.
1.22 RESEARCH STEERING COMMITTEE: shall mean the committee comprising
representatives of CNSI and BAYER as defined in Article 2.1.
1.23 RESEARCH PROTOCOL: shall mean the program of research as described in
Appendix 3, which is incorporated herein, as revised from time to time
as authorized in this Agreement. The RESEARCH PROTOCOL is designed to
acquire sufficient efficacy and safety information to enable BAYER to
determine whether recombinant human GGF2 (rhGGF2) should be nominated
for clinical development. A series of preclinical experiments including
in vitro studies as well as animal models of Multiple Sclerosis and/or
other indications will be conducted. Identification of potential target
cells and issues of toxicity including the induction of hyperplasia and
potential carcinogenic effects will be determined. This work will
include an initial, scaleable manufacturing process for rhGGF2. Except
for the above description, if there is any material conflict between
the terms of Appendix 3 (Research Protocol) and the terms of the rest
of this Agreement, then the Parties agree that the rest of the
Agreement, and not Appendix 3, shall control.
1.24 TERRITORY: shall mean all countries in the world.
Article 2
RESEARCH AND DEVELOPMENT
2.1 RESEARCH STEERING COMMITTEE
2.1.1 Formation: Promptly after the EFFECTIVE DATE, the Parties
shall form a RESEARCH STEERING COMMITTEE for the purpose of
overseeing and managing research conducted by both Parties
under the RESEARCH PROTOCOL, up to completion of conduct
required to be conducted by CNSI and funded by BAYER
hereunder.
2.1.2 Membership: The RESEARCH STEERING COMMITTEE shall be composed
of up to three (3) representatives of CNSI and three (3)
representatives of BAYER. One (1) of each party's three
representatives shall serve as co-chair of the COMMITTEE. Each
co-chair shall be authorized by her/his company to make
decisions with respect to matters within the scope of the
RESEARCH STEERING COMMITTEE's functions and power as described
in Article 2.1.5 (Functions and Authority). The initial
members of the RESEARCH STEERING COMMITTEE shall be:
for CNSI for BAYER
co-chair: ******** co-chair: ********
member: ********** member: **********
member: **********
2.1.3 Voting Powers: Unless specifically stated to the contrary in
this Article 2.1 (Research Steering Committee), Bayer shall
have one vote and CNSI shall have one vote regarding any
action to be taken by the RESEARCH STEERING COMMITTEE. Each
Party's vote shall be given by each Party's respective co-
4
<PAGE> 12
chair. Any action authorized by the RESEARCH STEERING
COMMITTEE must be authorized by unanimous vote of both
co-chairs and shall be recorded in the meeting minutes
following the authorization.
2.1.4 Meetings: The RESEARCH STEERING COMMITTEE shall meet not less
than once a quarter during the term of BAYER's funding of CNSI
research hereunder, on such dates and at such times and places
as are agreed to by the RESEARCH STEERING COMMITTEE.
Responsibility for arranging the meetings, including, at
least, providing notice and an agenda and providing minutes of
the meeting, shall alternate between the Parties. The first
meeting will take place as soon as practicable after the
EFFECTIVE DATE, but in no event later than forty-five (45)
days after the EFFECTIVE DATE, and will be organized by BAYER.
Meetings may be conducted in person or by telephone
conference, and the RESEARCH STEERING COMMITTEE may act
without a meeting if, prior to such action, a written consent
thereto is signed by each co-chair. Except for Article 2.1.3.
(Voting Powers), the RESEARCH STEERING COMMITTEE may amend or
expand upon the foregoing procedures for its internal
operation by co-chair agreement.
2.1.5 Functions and Authority:
2.1.5.1 The RESEARCH STEERING COMMITTEE shall manage and coordinate
research conducted by each Party under the RESEARCH PROTOCOL.
2.1.5.2 Each Party shall provide the RESEARCH STEERING COMMITTEE with
a copy of DATA it generates under the RESEARCH PROTOCOL. The
COMMITTEE shall treat this DATA as confidential under the
terms of Article 7 (Confidentiality) of this agreement and
shall be used for the sole purpose of furthering the purpose
of this Agreement. The RESEARCH STEERING COMMITTEE has the
authority to review DATA submitted by each Party and amend the
RESEARCH PROTOCOL as described in Article 2.1.5.3 on the basis
of that DATA and/or other information, if necessary, according
to its best judgment.
2.1.5.3 To be authorized, any amendment to the RESEARCH PROTOCOL shall
be in writing, signed and dated by each co-chair. The RESEARCH
STEERING COMMITTEE shall retain copies of all such amended
signed versions of the RESEARCH PROTOCOL generated during the
term of this Agreement, and each shall become incorporated
herein by reference as of the date of last signature required
thereto.
2.1.5.4 The RESEARCH STEERING COMMITTEE does not have the authority to
amend the RESEARCH PROTOCOL in a manner
**************************************************************
**************************************************************
**************************************************************
**************************************************************
2.1.5.5 The RESEARCH STEERING COMMITTEE has the sole authority to
authorize transfer of any material that incorporates and/or
includes LICENSED TECHNOLOGY to any third party during the
term of the RESEARCH STEERING COMMITTEE. Such authorization
shall be through the RESEARCH STEERING COMMITTEE's approval of
appropriate research, material transfer, or other agreements
hereunder. After the RESEARCH STEERING COMMITTEE disbands
5
<PAGE> 13
according to Article 2.1.8 (Disbanding) and during
the term of the Agreement, BAYER shall have the sole
right to transfer any material that is LICENSED
TECHNOLOGY.
2.1.5.6 The RESEARCH STEERING COMMITTEE shall have further
functions and authority as are stated in Article
2.2.5 (Subcontracting).
2.1.6 Expenses: Each Party shall be responsible for its own RESEARCH
STEERING COMMITTEE members' expenses.
2.1.7 Dispute Resolution: In the event of a dead-lock regarding any
issue within the RESEARCH STEERING COMMITTEE's powers, the
RESEARCH STEERING COMMITTEE shall present the issue to the
President of Bayer AG's Pharmaceutical Division and to the
President of Cambridge NeuroScience, Inc. who shall attempt to
resolve the deadlock in good faith. If no resolution is
reached between these two individuals, then BAYER's decision
shall control.
2.1.8 Disbanding: On or before sixty (60) days after CNSI's
completion of the research funded by BAYER hereunder, the
RESEARCH STEERING COMMITTEE shall disband and have no further
duties or authority. Upon the disbanding of the RESEARCH
STEERING COMMITTEE, each Party may keep all DATA, meeting
minutes and authorized RESEARCH PROTOCOL amendments received
during RESEARCH STEERING COMMITTEE membership, as long as such
information is treated according to Articles 2.2.11 (Rights in
Data) and Article 7 (Confidentiality).
2.2 CNSI RESEARCH
2.2.1 Representation: CNSI represents that it has the expertise,
facilities and personnel to carry out and/or monitor third
party research described in the RESEARCH PROTOCOL in a manner
that is safe and that protects the confidentiality of the
research conducted hereunder and the results generated
therefrom in a manner that is consistent with the terms of
this Agreement.
2.2.2 Scope of Research: CNSI shall conduct and/or monitor third
party research generally in the area of efficacy studies
relating to PRODUCT. CNSI's specific responsibilities
regarding such research are described in the RESEARCH PROTOCOL
which is attached hereto as Appendix 3, and incorporated
herein.
2.2.3 Payment: BAYER will pay CNSI its COST OF RESEARCH not to
exceed one million dollars ($1,000,000) for CNSI to complete
the purpose and procedures for which it is responsible,
according to the RESEARCH PROTOCOL. CNSI will pay third party
subcontractees that perform services under this Agreement out
of this one million dollar payment generally as described in
Appendix 5 (CNSI Subcontractees and Proposed Budget). On or
before January 11, 1999, BAYER shall pay CNSI five hundred
thousand dollars ($500,000) of the maximum one million dollar
payment for research already committed to or conducted by CNSI
prior to the EFFECTIVE DATE. Starting April 1, 1999, CNSI
shall invoice BAYER quarterly for COST OF RESEARCH incurred
during the previous quarter, and BAYER shall pay the invoice
amount within thirty (30) days of receipt of the invoice.
2.2.4 Records and Audits: CNSI will maintain accounting records in
such form and detail as to substantiate CNSI's accounting of
COST OF RESEARCH. CNSI
6
<PAGE> 14
shall make those records available for audit by a mutually
agreeable nationally recognized accounting firm at BAYER's
written request and expense. CNSI shall preserve its records
for any calendar year for a period of three years or until the
period for completion of tax audits for any calendar year has
expired, whichever is longer.
2.2.5 Subcontracting: Prior to the RESEARCH STEERING COMMITTEE's
being disbanded under Article 2.1.8 (Disbanding), either Party
may contract with, manage, and be responsible for certain
subcontractees performance of the respective Party's research
obligations, in whole or in part, under the RESEARCH PROTOCOL.
Such subcontracting by CNSI shall be funded under the research
payments in Article 2.2.3 (Payment). Any and all such
subcontract(s) are subject to the RESEARCH STEERING
COMMITTEE's prior approval of the subcontractee as well as of
the actual written agreement that shall control such
subcontract transaction, and are subject to the
subcontractee's agreement to assume all applicable obligations
of this Agreement relating to research conducted hereunder.
Approval of any particular subcontractee (except that
subcontractees listed in Appendix 5 (CNSI Subcontractees) are
already deemed approved), and of terms of any particular
agreement shall be made in a timely manner in a writing signed
by both co-chairs of the RESEARCH STEERING COMMITTEE or
his/her respective delegate.
2.2.6 Subcontractee Improvements:
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
2.2.7 Independent Contractor: Execution of CNSI's responsibilities
under the RESEARCH PROTOCOL is solely under the direction and
control of CNSI as an independent contractor, and not as an
employee of BAYER. CNSI will provide whatever is necessary for
completion of the RESEARCH PROTOCOL except for any material to
be provided by BAYER which is specifically identified in the
RESEARCH PROTOCOL or elsewhere in this Agreement as such.
2.2.8 Technology Transfer: BAYER's representatives may consult
informally with CNSI personnel and/or subcontractees at
reasonable times during the term of this Agreement. Except for
supply of MATERIAL, which is controlled by Article 5 (Supply
of Material), CNSI shall, at BAYER's request, deliver to BAYER
reasonable quantities of representative materials developed by
CNSI under the RESEARCH PROTOCOL, and also provide timely
technical assistance to BAYER to ensure transfer of any
technology developed under this Agreement in
7
<PAGE> 15
sufficient detail to enable BAYER to readily practice any
license or right granted in this Agreement.
2.2.9 Research Warranty: CNSI warrants that no materials, ideas,
reagents, methods, or supplies proprietary to any entity other
than CNSI shall be used in the course of CNSI's conduct of its
responsibilities under the RESEARCH PROTOCOL without the
express written consent of BAYER, unless CNSI shall first
obtain those rights from said entity and include such rights
in its grant of CNSI PATENT RIGHTS and/or CNSI KNOW HOW of
Article 3 (License Grant).
2.2.10 Records and Reports: Each Party shall keep complete, accurate
and authentic accounts, notes, technical reports, raw data,
IMPROVEMENTS, information and records of the work performed by
that Party or its subcontractee(s) under the RESEARCH PROTOCOL
(collectively, "DATA") and shall provide the RESEARCH STEERING
COMMITTEE with quarterly reports thereof promptly after the
end of each quarter. Each Party shall also submit to the
RESEARCH STEERING COMMITTEE a comprehensive final report
within ninety (90) days after expiration or termination of the
research period.
2.2.11 Rights in DATA:
**************************************************************
CNSI shall treat all DATA as confidential according to Article
7 (Confidentiality). If BAYER terminates this Agreement under
Article 10.3.3 (Without Cause), then, except where this
Agreement is to the contrary, BAYER may grant or share
ownership of DATA with CNSI, and BAYER's granting or sharing
of such rights to DATA will not be unreasonably withheld.
2.3 BAYER Research and Development
2.3.1 Scope of Research: BAYER shall conduct research generally in
the area of process and product development of PRODUCT.
BAYER's specific responsibilities regarding such research are
described in the RESEARCH PROTOCOL which is incorporated
herein. BAYER shall be responsible for its costs of research
hereunder.
2.3.2 Development Studies: BAYER also has the right to and will be
solely responsible for conducting, or having conducted, all
studies relating to the clinical development of PRODUCT for
commercialization. BAYER will provide whatever is necessary
for conducting such development studies, including PRODUCT
manufactured by BAYER.
2.3.3 Contracted Clinical Trials: During development of PRODUCT, if
BAYER, at its sole discretion, decides to contract out any
clinical trial(s) of PRODUCT, and, if CNSI demonstrates that
it has the personnel and experience necessary, in BAYER's
opinion, to conduct such work in a competent, timely and
cost-effective manner, then BAYER will consider contracting
with CNSI to perform such trials, in part or in their
entirety, on behalf of BAYER. Any such agreement, to be
binding and enforceable, shall be the subject of a separate
written contract.
2.3.4 Regulatory Filings: BAYER shall be responsible for the
preparation, submission and prosecution of all regulatory
authority filings and applications required to obtain all
necessary marketing and pricing approvals to commercially sell
and use PRODUCT in each country in the TERRITORY in which
BAYER will sell
8
<PAGE> 16
PRODUCT. BAYER shall be the owner and party of record for all
such filings and applications.
2.3.5 Assistance: CNSI agrees to provide timely assistance as
requested by BAYER and as reasonably necessary in preparation
and prosecution of such filings and applications as described
in Article 2.3.4 (Regulatory Filings).
2.3.6 Costs: BAYER shall be responsible for its costs associated
with preparation, submission and prosecution of all filings
and applications required. BAYER shall reimburse CNSI for any
reasonable expenses pre-approved by BAYER and actually
incurred by CNSI as a result of CNSI's providing such
assistance as is described in Article 2.3.5 (Assistance).
2.3.7 Reporting: At least in January and July of each year during
the term of this Agreement until all PRODUCT approvals
hereunder are obtained, BAYER shall provide CNSI with a
written summary report which shall describe the progress of
the following: the clinical development and testing of PRODUCT
in clinical trials, all regulatory filings and submissions
made, and all approvals obtained. Such reports and information
shall be received by CNSI subject to the obligations of
Article 7 (Confidentiality).
2.3.8 Diligence: BAYER shall diligently proceed with the
development, manufacture and sale of any and all PRODUCTS that
are approved for advancement and/or commercialization by
BAYER's management according to BAYER's standard business
practice for similar products of similar indication in similar
sized markets in the MAJOR MARKETS, and, as development
progresses, that are approved for commercialization by
appropriate regulatory agencies.
2.3.9 Excused Performance: In addition to the terms of Article 12.2
(Force Majeure), BAYER's diligent development, manufacture
and/or sale of PRODUCT is expressly conditioned upon the
continuing absence of any adverse condition relating to the
safety or efficacy of PRODUCT which, in BAYER's opinion,
materially limits, reverses or restricts the development
and/or marketing of PRODUCT. BAYER's obligations to diligently
develop any PRODUCT that demonstrates such an adverse
condition shall be delayed or suspended so long as any such
condition exists.
2.4 Research Publications: Subject to the restrictions of confidentiality
and restricted use set forth in this Agreement, in the event either
Party wants to publish research data and/or information, including
DATA, that directly relates to CNSI TECHNOLOGY and/or arises out of
conduct under the RESEARCH PROTOCOL, whether in writing or orally, each
Party shall cooperate to achieve a mutually acceptable publication in a
timely manner, and the Parties shall follow standard procedures used in
scientific journals regarding authorship and acknowledgments. The
publishing Party shall take reasonable steps to allow the other Party
to provide comments and/or proposed modifications to the proposed
publication and/or to request a reasonable delay in publication in
order to protect patentable information including IMPROVEMENT(s). Such
steps include, but are not limited to, submission of any and all
proposed research publications that relate to the CNSI TECHNOLOGY
and/or DATA to the other Party at least forty five (45) days prior to
any disclosure to any outside party. The publishing Party agrees to
postpone publication of any sole or joint IMPROVEMENT for up to ninety
(90) days from the date BAYER received the proposed publication in
order to first protect potential global patent rights to such
IMPROVEMENT(s). Any information that the RESEARCH STEERING COMMITTEE
deems should not be published but should be held as a trade secret
shall
9
<PAGE> 17
not be published, and shall be so held during the term of this
Agreement. In any event, the publishing Party must get written consent
from the other Party prior to publication of any CONFIDENTIAL
INFORMATION that belongs to the other Party. In the event that
agreement(s) between CNSI and a third party concerning the subject
matter of this Agreement are already signed by both CNSI and the third
party before the EFFECTIVE DATE, and such agreement(s) contain terms
regarding publication of DATA that conflict with the terms in this
Article 2.4 (Research Publications), then CNSI shall promptly so advise
BAYER in order to allow for a timely review of the proposed publication
by BAYER.
Article 3
LICENSE GRANT
3.1 CNSI Grant of Patent Rights: CNSI hereby grants BAYER and its
AFFILIATES as designated by BAYER a royalty-bearing, exclusive license
(or in the case of CNSI PATENT RIGHTS that CNSI has licensed from a
third party, an exclusive sublicense) to make, use, sell, import,
sublicense, and have made, used, sold, and imported LICENSED TECHNOLOGY
under CNSI PATENT RIGHTS (which includes IMPROVEMENTS) in the FIELD in
the TERRITORY.
3.2 Term of Grant: The license granted in Article 3.1 (CNSI Grant of Patent
Rights) shall remain in force and effect until the expiration of the
last to expire of the CNSI PATENT RIGHTS unless this Agreement is
terminated earlier by either Party under Article 10 (Term and
Termination).
3.3 Reservation of Rights to CNSI: The above notwithstanding, CNSI retains
the right under CNSI PATENT RIGHTS to perform that research and other
conduct that is specifically identified as CNSI's obligation under this
Agreement. CNSI also retains the right to perform research and/or have
research performed under CNSI PATENT RIGHTS in the FIELD
*************************************ONLY AFTER BAYER is made aware of
the proposed research in reasonable detail, and after BAYER approves in
writing any third party with whom CNSI would contract for such research
services, and after BAYER approves in writing any actual CNSI/third
party research agreement relating to such research. Any such written
approval will be provided by BAYER within sixty (60) days of CNSI's
request for such approval.
3.4 CNSI Grant of Rights in Know How: CNSI hereby grants BAYER a
royalty-bearing exclusive license, including the right to sublicense,
to unlimited use of CNSI KNOW HOW (which includes IMPROVEMENTS) in the
FIELD in the TERRITORY. The foregoing notwithstanding, CNSI retains the
right under CNSI KNOW HOW to perform that research and other conduct
that is specifically identified as CNSI's obligation under this
Agreement. CNSI also retains the right to perform research and/or have
research performed under CNSI KNOW HOW in the FIELD at its own expense
***********************************************************************
***********************************************************************
**********************************************************************
3.5 CNSI Funded Research: CNSI may pursue research that is within the FIELD
but outside the scope of BAYER funded research hereunder only according
to the terms of Articles 3.3 (Reservation of Rights to CNSI), and 3.4
(CNSI Grant of Rights in Know How). CNSI must keep BAYER promptly
informed of all material data and results of any such research that
CNSI performs and/or has performed on at least a quarterly basis during
the term of this agreement. *******************************************
10
<PAGE> 18
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
**********************************************************************.
For clarification, any and all CNSI TECHNOLOGY, including IMPROVEMENTS,
that arises out of CNSI funded research under Articles 3.3 (Reservation
of Rights to CNSI), and 3.4 (CNSI Grant of Rights in Know How) during
the term of this Agreement falls within the scope of the licenses
granted herein and shall not be disposed of or otherwise used by CNSI
contrary to the terms of this Agreement.
**********************************************************************.
3.6 Term of Grant: The license granted in Article 3.4 (CNSI Grant of Rights
in Know How) shall remain in force and effect according to Article
4.3.2.3, or Article 10.1 (Term and Expiration) or Article 10.2.2
(Effect of Termination), whichever occurs first.
3.7 BAYER Grant of Rights:
3.7.1 BAYER grants no rights to CNSI hereunder for BAYER patents
and/or know how that originate solely from BAYER EXCEPT for
the limited right to use such patents and/or know how for the
sole purpose of performing research and other conduct
specifically identified under this Agreement.
3.7.2 If BAYER terminates this Agreement upon notice under Article
10.3.3 (Without Cause), then all rights granted by BAYER in
Article 3.7.1 shall be revoked upon termination, and BAYER
will negotiate in good faith with CNSI regarding a license of
any BAYER patent and/or know how rights relating directly to
PRODUCT that would, but for that license, preclude CNSI from
making, using or selling PRODUCT.
3.8 Bankruptcy or Insolvency: All rights and licenses granted to BAYER
under this Article 3 are, and shall be deemed to be, for purposes of
Section 365(n) of the Bankruptcy Code, licenses of rights to
"Intellectual Property" as defined under Section 101(35A) of the
Bankruptcy Code. The Parties agree that BAYER, as a licensee of such
rights under this Agreement, shall retain and may fully exercise all of
its rights and elections under the Bankruptcy Code, including but not
limited to BAYER's rights to continue to exercise the rights licensed
hereunder.
Article 4
LICENSE FEE, MILESTONES AND ROYALTIES
4.1 Consideration for License Granted: In consideration for the licenses
granted under Articles 3.1 (CNSI Grant of Patent Rights) and 3.4 (CNSI
Grant of Rights in Know How), BAYER shall pay CNSI one million dollars
($1,000,000) on or before January 11, 1999.
4.2 Milestone Payments :
4.2.1 **************************************************************
**************************************************************
**************************************************************
11
<PAGE> 19
4.2.2 **************************************************************
**************************************************************
*************************************************************.
4.2.3 **************************************************************
**************************************************************
**************************************************************
**************************************************************
*************************************************************.
4.2.4 **************************************************************
**************************************************************
**************************************************************
**************************************************************
4.2.5 BAYER shall pay CNSI:
**************************************************************
**************************************************************
**************************************************************
**************************************************************
4.2.6 **************************************************************
**************************************************************
**************************************************************
4.2.7 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
4.3 Royalty Payments:
4.3.1 Royalties for Patent Rights: In each country in which CNSI
PATENT RIGHTS exist at the time of the first sale of PRODUCT
in that country, and during such time that such rights have
not been held invalid or unenforceable by a decision of a
court or other governmental agency of competent jurisdiction,
unappealable or unappealed within the time allowed for appeal,
or which has not been admitted to be invalid or unenforceable
through reissue or disclaimer or otherwise, or has not
expired, the following shall apply:
4.3.1.1 BAYER shall pay CNSI a royalty of
******************************of NET SALES of each
PRODUCT sold in each country
for***************************** NET SALES for that
PRODUCT invoiced
12
<PAGE> 20
in all such countries during each January through
December fiscal year, and
4.3.1.2 *****************************************************
*****************************************************
*****************************************************
*****************************************************
4.3.1.3 Except for Article 4.3.1.4 below, when CNSI PATENT
RIGHTS cease to exist in any country, as long as
BAYER is not in default on any material term of this
Agreement, then the patent license granted in this
Agreement shall be deemed paid up, and BAYER shall be
free to continue to commercialize PRODUCT in that
country without any further payment due CNSI under
this Agreement.
4.3.1.4 In any country in which CNSI PATENT RIGHTS cease to
exist before
*************************************years from the
first invoiced sale of PRODUCT in that country has
passed, then a royalty on NET SALES for that PRODUCT
in that country shall be calculated under Article
4.3.2 (Royalties for Know How) for the remainder of
the *************************************year period,
whereupon Article 4.3.2.3 shall apply.
4.3.2 Royalties for Know How: In each country in which no CNSI
PATENT RIGHTS exist at the time of the first sale of PRODUCT
in that country (that is, where no patents have issued by that
date, or where patents have expired, or where patents have
been found invalid and/or unenforceable by a court,
governmental or administrative agency of competent
jurisdiction, or where no patent applications were ever
filed), The following shall apply:
4.3.2.1 *****************************************************
*****************************************************
*****************************************************
***************************************
4.3.2.2 *****************************************************
*****************************************************
*****************************************************
***************************************.
4.3.2.3 *****************************************************
*****************************************************
*****************************************************
*****************************************************
*****************************************************
4.3.2.4 The above notwithstanding, if PRODUCT is sold in a
country where a patent application that is CNSI
KNOW-HOW hereunder has been filed but has not yet
issued as of the date of the first invoiced sale of
13
<PAGE> 21
PRODUCT in that country, then, upon grant of CNSI
PATENT RIGHTS in that country, a royalty on NET SALES
of PRODUCT in that country shall be calculated
according to Article 4.3.1 (Royalties for Patent
Rights), and upon expiration of the patent term,
Article 4.3.1.3 shall apply.
4.3.3 **************************************************************
**************************************************************
**************************************************************
**************************************************************
4.3.4 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
*************************************************************.
4.3.5 License to Third Party Patent Rights:
4.3.5.1 If upon advice of its legal counsel, BAYER reasonably
determines that, but for a license under any third
party's issued United States patent and/or published
patent application or patent granted outside the
United States, BAYER could not legally develop and/or
commercialize LICENSED TECHNOLOGY in the FIELD, then
BAYER shall endeavor to obtain such license rights.
*****************************************************
*****************************************************
*****************************************************
*****************************************************
4.3.5.2 If BAYER chooses to enhance manufacture of any
PRODUCT hereunder in a manner that would require a
license from a third party to incorporate the desired
(but not necessary to make, use and/or sell PRODUCT)
enhancement, then BAYER may endeavor to obtain such
license rights at its own expense.
4.1.1 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
4.4 Accounting Records and Procedures
4.4.1 Royalty Payments: BAYER shall make royalty payments due CNSI
on a quarterly basis, within *************days following the
end of each calendar quarter for which
14
<PAGE> 22
royalties are due. Each royalty payment shall be accompanied
by a report summarizing the NET SALES of the PRODUCT on a
country by country basis during the relevant three-month
period, the currency conversion rate, if applicable, which
royalty rate is being applied, the total royalty payments due,
the taxes withheld, if any.
4.4.2 Currency: Royalty payments shall be made in United States
dollars. The currency in which NET SALES were invoiced shall
be converted to United States dollars on the date of payment
of the royalty due using the applicable commercial rate of
exchange for buying US dollars with that currency that is the
closing selling rate for such currency, quoted as local
currency per US$1, published in the Wall Street Journal for
the last business day of the Quarter for which such payments
are due.
4.4.3 Records and Audits: BAYER will maintain accounting records in
such form and detail as to substantiate BAYER's accounting of
royalty payments to CNSI. BAYER shall make those records
available for audit by a mutually agreeable nationally
recognized accounting firm at CNSI's written request and
expense for the sole purpose of verifying the correctness of
calculations and classifications of such revenues, net sales,
costs, expenses, or payments made under this Agreement. BAYER
shall preserve its records for any calendar year for a period
of three (3) years following the close of that calendar year.
Upon expiration of three (3) years, the calculation of
royalties payable with respect to such year shall be binding
and conclusive upon CNSI, and BAYER shall be released from any
liability or accountability with respect to royalties for such
year.
4.4.4 Confidentiality of Financial Reports: CNSI agrees to hold in
confidence according to Article 7 (Confidentiality) all
information concerning royalty payments and financial reports,
and all information learned in the course of any audit except
to the extent disclosure by CNSI is required by law. If CNSI
believes disclosure is required by law, CNSI shall immediately
so notify BAYER and shall assist BAYER in maintaining BAYER's
rights at BAYER's expense.
4.4.5 Payment of taxes: CNSI shall be responsible for any and all
taxes, levies or charges assessed against royalty payments it
receives under this Agreement. If laws or regulations require
that taxes be withheld on royalty payments, BAYER will
a) deduct those taxes from the amount of royalty payment
due CNSI,
b) pay the taxes to the proper taxing authority in a
timely manner, and
c) send proof of payment to CNSI within sixty (60) days
following that payment.
The Parties agree to cooperate to obtain the benefit of any
tax treaty with respect to such royalty payments.
4.4.6 Sublicensees: In the event BAYER sublicenses PRODUCT to any
third party for the purpose of allowing the third party to
sell PRODUCT other than contract manufacturing for BAYER, the
agreement with the sublicensee shall include an obligation for
the sublicensee to account for and report its net sales of
PRODUCT on the same basis as if such sales were made by BAYER,
and BAYER shall pay royalties to CNSI under this Agreement as
if the net sales of PRODUCT of the sublicensee were NET SALES
of BAYER.
15
<PAGE> 23
4.4.7 Non-Product Related Sublicenses: In the event BAYER
sublicenses any CNSI PATENT RIGHTS and/or CNSI KNOW HOW to a
third party for the purpose of the third party's avoiding
infringement of such rights, or for some other reason other
than for third party sale of PRODUCT under Article 4.4.6
(Sublicensees), then *************************************of
any payment paid to BAYER by the third party shall pass
through BAYER to CNSI, and rights in such agreement shall be
assignable to CNSI in the event of termination of this
Agreement.
Article 5
SUPPLY of MATERIAL
5.1 Research Material: All material, whether made by or on behalf of either
CNSI or BAYER, that is within the scope of CNSI TECHNOLOGY and that
exists on the EFFECTIVE DATE shall be freely shared between the
Parties, as designated by the RESEARCH STEERING COMMITTEE, for the
purpose of completing the RESEARCH PROTOCOL. All amounts of such
material required beyond what exists as of the EFFECTIVE DATE shall be
supplied by BAYER, as shall be determined by the RESEARCH STEERING
COMMITTEE. ***********************************************************
***********************************************************************
***********************************************************************
5.2 Other Material: Subject to Article 5.1 (Research Material), BAYER has
the right to and shall manufacture or otherwise provide all amounts of
material within the scope of LICENSED TECHNOLOGY necessary for BAYER to
perform its responsibilities under this Agreement, including all
material required to perform all development studies, as well as all
material necessary for BAYER's marketing and sale of PRODUCT hereunder.
5.3 BAYER Cost of Manufacture: BAYER shall be responsible for all its costs
of manufacture of material under Article 5.2 (Other Material),
including all fixed and variable costs.
Article 6
PRODUCT COMMERCIALIZATION
6.1 Right to Commercialize: BAYER and its designated AFFILIATES, as the
exclusive licensees of LICENSED TECHNOLOGY in the FIELD in the
TERRITORY as stated in Article 3, have the sole right to promote,
market, distribute and sell, and/or have promoted, marketed,
distributed and sold, PRODUCT in its name in the TERRITORY.
6.2 Co-Promotion : If BAYER, *************************************, decides
to sell any PRODUCT in the United States under a trade mark through the
efforts of its own sales force as well as another entity's sales force
("co-promote"), and if, at that time, CNSI has its own sales force
*************************************experienced in marketing products
in the appropriate therapeutic areas, and the combination of CNSI sales
staff with BAYER sales staff will,
*************************************, synergistically increase product
sales in a cost effective manner, then the Parties will negotiate in
good faith to determine if they can reach agreement regarding such
co-promotion. To be authorized, any such co-promotion shall be the
subject of a separate written agreement between the Parties.
6.3 Cost of Commercialization: BAYER shall be responsible for all costs of
commercialization of PRODUCT hereunder except, should CNSI co-promote
PRODUCT under Article 6.2 (Co-Promotion), costs and benefits of
commercialization shall be negotiated in good faith between the Parties
and shall be the subject of a separate written agreement.
16
<PAGE> 24
6.4 Product Liability: See Article 12.1 (Indemnification).
6.5 Trade Marks: BAYER and/or its AFFILIATES shall own all rights in any
and all trademarks for PRODUCT(s) commercialized hereunder. BAYER
and/or its AFFILIATES shall have sole responsibility for selection,
clearance and registration of said trademarks and for quality assurance
pertaining to the PRODUCT(s) bearing said trademarks. CNSI shall
cooperate with BAYER and/or its AFFILIATES and assist BAYER, if so
requested by BAYER, in the registration, defense and maintenance of
said trademarks. BAYER shall be responsible for all decisions and costs
relating to clearance, registration, defense and maintenance of
trademarks for the PRODUCT(s).
Article 7
CONFIDENTIALITY
7.1 Definition: CONFIDENTIAL INFORMATION is any meeting minutes generated
by the RESEARCH STEERING COMMITTEE and any RESEARCH PROTOCOL(s), as
well as all DATA generated hereunder, and any and all data and/or other
information related to the CNSI TECHNOLOGY and/or the FIELD which is
proprietary to the disclosing Party and not generally known, including
technological information not limited to compound(s), composition(s),
formulation(s) and/or, manufacturing information, and including
business information not limited to commercial forecasts, plans,
programs, customers, assets, financial projections, and costs.
CONFIDENTIAL INFORMATION also includes information described in Article
2.1.5.2 (Functions and Authority), Article 2.1.8 (Disbanding), Article
2.2.11 (Rights in DATA), Article 2.3.7 (Reporting), Article 4.4.4
(Confidentiality of Financial Reports), and Article 8.4 (Invention
Disclosure).
7.2 Obligations: Each Party agrees to hold all of the other Party's
CONFIDENTIAL INFORMATION received or generated hereunder in confidence
and neither disclose it to any third party nor allow any third party
access to it nor use it for any purpose other than as specified by this
Agreement. The above notwithstanding, BAYER may disclose CONFIDENTIAL
INFORMATION to its AFFILIATES which are bound by like terms of
confidentiality as those stated herein..
7.3 Exceptions: These obligations of non-disclosure and non-use shall not
apply to CONFIDENTIAL INFORMATION which:
(a) was, at the time of disclosure, in the possession of the
receiving Party and was not previously acquired from or on
behalf of the disclosing Party on a confidential basis,
(b) was in the public domain prior to disclosure, or became, after
disclosure, publicly known through no fault of the receiving
Party,
(c) was developed by or on behalf of the receiving Party
independent of its receipt of CONFIDENTIAL INFORMATION from
the disclosing Party,
(d) was received from a third party who rightfully made such
disclosure,
(e) was approved for use or release by written authorization from
the disclosing Party prior to such use or release by the
receiving Party, or
(f) is required to be disclosed by operation of law, governmental
regulation or court order provided the receiving Party gives
the disclosing Party notice of such disclosure prior to making
such disclosure, and the receiving Party uses all reasonable
effort to cooperate in securing confidential protection for
such information.
17
<PAGE> 25
Any specific CONFIDENTIAL INFORMATION shall not be deemed to fall
within (a), (b), (c), (d), (e) or (f) above merely because it falls
within the scope of more general information within one of these
exceptions.
7.4 Term of Confidentiality: These obligations of confidentiality and
nonuse are binding throughout the duration of this Agreement and remain
in force for a period of ten (10) years from the date of its
expiration.
7.5 Return of Information: Upon termination and upon request from the
disclosing Party, the receiving Party agrees to promptly return all
originals and copies of CONFIDENTIAL INFORMATION received, as well as
permanently delete all electronically or otherwise stored CONFIDENTIAL
INFORMATION from all systems containing such INFORMATION, except that
one copy may be retained by legal counsel solely as a measure of the
receiving Party's obligations under this Agreement.
7.6 Business Publications:
7.6.1 Neither Party may disclose any information regarding the
nature and/or occurrence of this transaction, or the nature
and/or occurrence of any event or information occurring as a
result of this transaction without the prior written consent
of the other Party, except that BAYER may disclose such
information to its AFFILIATES or sublicensees that are under
like terms of confidentiality as those stated herein without
such consent. Any such information that is required by law to
be disclosed by either Party shall first be submitted to the
non-disclosing Party for such written approval, which shall
not be unreasonably withheld, prior to such publication. This
restriction shall not apply to such information that is
already publicly available through no fault of the disclosing
Party.
7.6.2 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
Article 8
INVENTIONS AND PATENTS
8.1 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
8.2 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
18
<PAGE> 26
8.3 Joint Inventions: Each Party shall own an undivided, one-half interest
in any IMPROVEMENT(s) made jointly by BAYER and CNSI under this
Agreement. The Parties agree to consult with one another prior to
taking any action to obtain patent protection for such joint
IMPROVEMENT(s).
8.4 Invention Disclosure: CNSI shall promptly disclose to BAYER any
IMPROVEMENTS arising under this Agreement. BAYER agrees to hold such
disclosure on a confidential basis under the same terms regarding
confidentiality as described in Article 7 (Confidentiality). CNSI
agrees to keep BAYER informed of the filing and status of any patent
application or patent pertaining to this Agreement, and, if BAYER so
requests, shall give BAYER ample time in which to review and comment on
the substance and scope of any proposed submission to any patent
authority concerning any CNSI patent application hereunder.
8.5 Know-how: Any CNSI IMPROVEMENT which is not patented due to its failure
to qualify for patent protection or due to a determination not to
submit a patent application, shall be considered CNSI KNOW HOW
hereunder.
8.6 CNSI Patent Maintenance: CNSI shall not abandon or for any other reason
allow any CNSI PATENT RIGHTS to be terminated without first giving
BAYER sufficient notice to allow BAYER to determine whether it would be
interested in pursuing those rights in its own name and at its own
expense.
8.7 BAYER Patent Maintenance: : BAYER shall not abandon or for any other
reason allow any BAYER patent rights relating to the research performed
by BAYER hereunder to be terminated without first giving CNSI
sufficient notice to allow CNSI to determine whether it would be
interested in pursuing those rights in its own name and at its own
expense.
8.8 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
8.9 Assignment of Rights: To the extent that BAYER assumes the
responsibility for filing, obtaining and/or maintaining any patent
applications and/or patents on IMPROVEMENTS under Article 8.8
(BAYER/CNSI Patents), CNSI agrees to promptly assign such patent
application(s) and/or patent(s) to BAYER and to readily assist BAYER in
obtaining, maintaining and defending such patents at BAYER's expense
but without further payment to CNSI. Any CNSI PATENT RIGHTS assigned to
BAYER under this Article 8.9 (Assignment of Rights) shall become BAYER
patent rights and shall no longer be considered CNSI PATENT RIGHTS
hereunder.
8.10 No Waiver: By entering into this Agreement, subject to Article 8.9
(Assignment of Rights) and the licenses granted in this Agreement,
neither Party waives or forfeits any of its rights to any patent that
it owns and that exists at the EFFECTIVE DATE, or to any IMPROVEMENT
that it owns either jointly or solely.
8.11 Cost of CNSI Patents: BAYER may, in its sole discretion, choose to have
CNSI continue to file, prosecute and maintain patent applications that
are CNSI KNOW HOW and CNSI PATENT RIGHTS and shall be given reasonable
time and notice to comment on
19
<PAGE> 27
proposed actions concerning such rights, or it may choose to assume
filing, prosecution and maintenance of such rights directly or
indirectly, through outside counsel of its choice, and will give CNSI
reasonable time and notice to comment on proposed actions concerning
CNSI KNOW HOW and CNSI PATENT RIGHTS. In any event BAYER shall
reimburse CNSI for all necessary and reasonable, direct, actual patent
costs incurred by CNSI for CNSI PATENT RIGHTS and patent applications
that are CNSI KNOW HOW (including IMPROVEMENTS) that accrue after the
EFFECTIVE DATE but during the term of this Agreement.
8.12 Reimbursement of Costs: All patent costs to be reimbursed by BAYER
under Article 8.11 (Cost of CNSI Patents) shall be first paid by CNSI.
The invoice shall then be forwarded to BAYER. BAYER will pay CNSI the
invoice amount, not including fees for unreasonable extensions of time
and other extra fees that were under the control of CNSI, within forth
five (45) days of receipt of such invoice.
8.13 No further interest in patents/applications: If, at any time during the
Agreement, BAYER determines that it has no further commercial interest
in any particular patent(s)/application(s) that are CNSI KNOW HOW or
CNSI PATENT RIGHTS, then BAYER shall so notify CNSI in writing. BAYER
shall incur no further payment obligations regarding those particular
patents/applications as of the date of such written notice, and the
license granted to BAYER for those particular patents/applications
hereunder shall be revoked as of the same date. BAYER shall give CNSI
the notice described above in sufficient time to allow CNSI to maintain
any rights in any such CNSI KNOW HOW or CNSI PATENT RIGHTS in which
BAYER is no longer interested.
Article 9
Patent Infringement
9.1 Infringement by Third Parties:
9.1.1 Notification: If any claims in CNSI PATENT RIGHTS exclusively
licensed to BAYER hereunder are believed to be infringed by a
third party in a country where LICENSED TECHNOLOGY is being or
will be sold, the Party first having knowledge of such
infringement shall promptly so notify the other Party in
writing. Such notice shall set forth in reasonable detail the
facts of that infringement as are then known.
9.1.2 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
9.1.3 Distribution of Awards:
**************************************************************
**************************************************************
If CNSI brings suit under Article 9.1.2 (Initiating
Proceedings), then BAYER shall reimburse CNSI within
forty-five (45) days of receipt of an itemized invoice for
CNSI's reasonable expenses incurred in pursuing the award.
********************************
20
<PAGE> 28
**************************************************************
********************** Any award monies shall be added to
BAYER's NET SALES for the calendar year in which they were
received, and shall be included in the calculation of NET
SALES for purposes of determining the amount of royalties due
according to Article 4.3 (Royalty Payments). If BAYER brings
suit under Article 9.1.2 (Initiating Proceedings), then BAYER
shall first credit against any award received BAYER's
reasonable expenses incurred in pursuing the award, after
which the remaining amount shall be added to BAYER's NET SALES
for the calendar year in which they were received, and shall
be included in the calculation of NET SALES for purposes of
determining the amount of royalties due according to Article
4.3 (Royalty Payments).
9.1.4 Voluntary Disposition: No settlement or consent judgment or
other voluntary final disposition of a suit under this Article
9.1 may be entered into by either Party without the prior
consent of the other Party.
9.2 Claims Against LICENSED TECHNOLOGY:
9.2.1 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
9.2.2 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
9.2.3 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
21
<PAGE> 29
************************************************
*******************************
Article 10
Term and Termination
10.1 Term and Expiration: This Agreement shall be effective as of the
EFFECTIVE DATE and, unless terminated earlier pursuant to this Article
10 (Term and Termination), the Agreement shall expire on a country by
country basis on the expiration of BAYER's obligations to pay royalties
under the Agreement, at which time, as long as BAYER is not in material
default hereunder, BAYER shall have a paid-up, irrevocable, license to
practice LICENSED TECHNOLOGY as stated elsewhere herein.
10.2 Termination by CNSI:
10.2.1 For Cause: If CNSI believes in good faith that BAYER is in
material breach of any material provision of this Agreement,
including failure to make payments due hereunder, and BAYER
has not cured such breach or initiated dispute resolution
measures according to Article 12.6 (Dispute Resolution)
concerning the alleged breach within ninety (90) days of
receipt of written notice of material breach from CNSI
detailing the alleged breach, then CNSI may terminate this
Agreement as of the ninetieth (90th) day after the date of
BAYER's receipt of its written notice of material breach.
10.2.2 Effect of Termination: Termination of this Agreement for cause
by CNSI under Article 10.2 shall not relieve BAYER of any
obligation that accrued prior to such termination. Termination
for cause shall cause the revocation of all licenses and other
rights granted under this Agreement as of the date of
termination. However, BAYER shall have the right to dispose of
any inventory of bulk and/or finished PRODUCT it has as of the
date of termination, according to the terms of this Agreement.
This Article shall survive termination of this Agreement.
10.3 Termination by BAYER:
10.3.1 Upon Written Notice: At any time during this Agreement, BAYER
may terminate this Agreement one hundred twenty (120) days
from the date of written notice to CNSI of such termination
whereupon all licenses granted hereunder stand revoked, and
any inventory remaining shall be forwarded to CNSI at CNSI's
expense or destroyed, at CNSI's option. If such termination
takes place before CNSI completes all research described in
the RESEARCH PROTOCOL for which CNSI is responsible hereunder,
and, therefore, an overage has been paid by BAYER in relation
to the actual COST OF RESEARCH, the amount of the overage
shall be refunded to BAYER in full within ninety (90) days of
such termination.
10.3.2 Duty to Mitigate: BAYER will pay CNSI's COST OF RESEARCH
through the 120 day termination period identified in Article
10.3.1 (Upon Written Notice). However, immediately upon
receipt by CNSI of notice of termination according to Article
10.3.1 (Upon Written Notice), CNSI shall take immediate steps
to cease accruing, or, if that is not possible, to mitigate
any COST OF RESEARCH that was not already incurred or
committed as of the date of receipt of such notice.
22
<PAGE> 30
10.3.3 Without Cause: If such termination is without cause against
CNSI, (for example, or failure to receive necessary regulatory
approvals, or economic unfeasibility in BAYER's judgment,)
then CNSI shall have the right to negotiate in good faith for
a license from BAYER for any BAYER patents, patent
applications, know-how, trademarks (excluding the Bayer Cross,
trademarks containing the word "Bayer", and trademarks
containing the syllable "Bay"), and/or right of reference to
regulatory filings and/or approvals the lack of which could
preclude CNSI from practicing LICENSED TECHNOLOGY as sold or
contemplated to be sold by BAYER hereunder. If CNSI chooses to
exercise its right to negotiate under this clause within one
year of termination without cause, then BAYER shall negotiate
in good faith for such a license.
10.3.4 With Cause: If CNSI is in material breach of this Agreement
(for, for example but not by way of limitation, failure to
meet its obligations under the RESEARCH PROTOCOL), and has not
cured such breach or initiated dispute resolution procedures
under Article 12.7 (Dispute Resolution) within ninety (90)
days of receipt of notice of termination under Article 10.3.1
(Upon Written Notice), then such termination is with cause,
and BAYER may, at its option, terminate the entire Agreement,
or may terminate only the Research Program hereunder whereupon
the RESEARCH STEERING COMMITTEE disbands according to Article
2.1.7 (Disbanding), and CNSI's reservation of rights under
Article 3.3 (Reservation of Rights to CNSI) are revoked, and,
all other terms and conditions of this Agreement, including
royalty obligations, remain in full force and effect, and
BAYER has the right to perform or have performed any research
concerning LICENSED TECHNOLOGY in the FIELD at its own expense
during the remaining term of this Agreement. If BAYER chooses
to terminate only the Research Program hereunder, CNSI agrees
to the timely transfer of technology along with technical
assistance (provided BAYER reimburses CNSI for all
pre-approved actual costs incurred by CNSI therefor).
10.3.5 Termination Upon Reorganization
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
10.4 Disposition of Inventory: BAYER may dispose of its inventory of
PRODUCT(s) on hand as of the effective date of termination, and may
fill any orders for PRODUCT(s) accepted prior to the effective date of
termination, for a period of twelve (12) months after the effective
date of termination, and, within thirty (30) days after disposition of
such inventory and fulfillment of such orders (and in any event within
fourteen (14)months after termination) BAYER will forward to CNSI a
final report and pay all royalties due for NET SALES in such period.
23
<PAGE> 31
Article 11
Representations and Warranties
11.1 Corporate Existence and Power: Each Party represents and warrants to
the other Party that (a) it is a corporation duly organized and validly
existing and in good standing under the laws of the state in which it
is incorporated; (b) it has the corporate power and authority and the
legal right to own its property and assets, to lease the property and
assets it operates under lease, and to carry on its business as it is
now being conducted; and (c) it is in compliance with all requirements
of applicable law, except to the extent that any noncompliance would
not have a material adverse effect on the properties, business,
financial or other condition of such Party and would not materially
adversely affect such Party's ability to perform its obligations under
this Agreement.
11.2 Authorization and Enforcement of Obligations: Each Party represents and
warrants to the other Party that it has the corporate power and
authority and legal right to enter into this Agreement and to perform
its obligations hereunder; and that this Agreement has been duly
executed and delivered on behalf of each Party and, except as it may be
limited by applicable law, constitutes a legal, valid, binding
obligation, according to its terms.
11.3 Consents: Each Party represents and warrants to the other Party that
all necessary consents, approvals and authorizations of all
governmental authorities and others required to be obtained by each
Party in connection with this Agreement have been obtained.
11.4 No Conflict: Each Party represents and warrants to the other Party that
the execution and delivery of this Agreement and the performance of
such Party's obligations hereunder do not conflict with or violate any
requirement of applicable laws or regulations, and do not conflict
with, or constitute a default under any contractual obligation of such
Party.
11.5 Authorization of Obligations: The execution, delivery and performance
by each Party of this Agreement have been duly authorized by all
necessary corporate action and do not and will not (a) require any
consent or approval of its stockholders or any other third party that
has not been received by the EFFECTIVE DATE, (b) violate any provision
of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award presently in effect that have
applicability to it or any provision of its charter documents or (c)
result in a breach of or constitute a default under any material
agreement, mortgage, lease, license, permit or other instrument or
obligation to which it is a party or by which it or its properties may
be bound or affected.
11.6 CNSI Representations: CNSI represents and warrants to BAYER that as of
the date of this Agreement:
11.6.1 CNSI has disclosed to BAYER any and all pertinent information
of which it is aware and of which it, using its best efforts,
should be aware as of the EFFECTIVE DATE of this Agreement as
is material to and reasonably necessary for BAYER to
accurately evaluate its interest in entering into this
Agreement.
11.6.2 CNSI is the sole owner of, or the exclusive worldwide licensee
of CNSI PATENT RIGHTS and CNSI KNOW HOW, with right to grant
to BAYER the rights granted in this Agreement, free and clear
of any liens or encumbrances which would prevent or impair the
grant of such rights.
24
<PAGE> 32
11.6.3 CNSI has not assigned or conveyed any interest in CNSI PATENT
RIGHTS or CNSI KNOW HOW licensed to BAYER under this
Agreement, or entered into any agreement or made any
commitment which is inconsistent with or in derogation of the
rights granted to BAYER hereunder.
11.7 Certain Covenants of CNSI and BAYER: Throughout the term of this
Agreement, CNSI and BAYER each shall:
11.7.1 Maintain and preserve its corporate existence, rights,
franchises and privileges in the jurisdictions of its
formation.
11.7.2 Comply in all material respects with the requirements of all
applicable laws, rules, regulations and orders of any
government authority to the extent necessary to perform its
obligations hereunder, except for those laws, rules,
regulations, and orders it may be contesting in good faith.
Article 12
Miscellaneous
12.1 Indemnification:
12.1.1 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
12.1.2 **************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
25
<PAGE> 33
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
12.1.3 Force Majeure: Any delay in the performance of any of the
obligations of either Party (except for the payment of money)
shall not be considered a breach of this Agreement and the
time required for performance shall be extended for a period
equal to the period of such delay, provided that such delay
has been caused by or is the result of any act of God, acts of
the public enemy; insurrections; riots; embargoes; labor
disputes such as strikes, lockouts or boycotts; fires;
explosions; floods; earthquakes; mudslides; or other
unforeseeable causes beyond the control of the Party so
affected. The Party so affected shall give prompt notice to
the other Party of such cause, and shall take whatever
reasonable steps are necessary to relieve the effect of such
cause as rapidly as reasonable.
12.1.4 Survival: The following Articles shall survive expiration or
termination of this Agreement: Article 3.7.2 (Bayer Grant of
Rights); Article 4.4.3 (Records and Audits); Article 4.4.4
(Confidentiality of Financial Reports); Article 4.4.5 (Payment
of Taxes); Article 4.4.7 (Non-Product Related Sublicenses);
Article 6.5 (Trademarks); Article 7 (Confidentiality); Article
8.2 (Sole Inventions); Article 8.3 (Joint Inventions); Article
9.1.3 (Distribution of Awards); Article 9.2.3 (Patent
Indemnification); Article 10.2.2 (Effect of Termination);
Article 10.4 (Disposition of Inventory); Article 12.1
(Indemnification); and Article 12.7 (Dispute Resolution).
12.1.5 Notice: Whenever any notice is to be given hereunder, it shall
be in writing and shall be deemed received on the day
delivered, if delivered by courier on a business day, or if
sent by first-class certified or registered mail, postage
prepaid, to the following addresses
CNSI: Cambridge NeuroScience, Inc.
One Kendall Square, Building 700
Cambridge, MA 02139
Attention: President and CEO
BAYER: Bayer AG
Pharmaceuticals Business Group
D-51368 Leverkusen, Germany
Attention: International Cooperations and Licensing
with a copy to: Bayer AG
KB-RP
D-51368 Leverkusen, Germany
Attention: Patents and Licensing/Pharma
12.2 Waivers: No waiver of any term, provision, or condition of this
Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be construed as a further or continuing
waiver of any such term, provision, or condition of this Agreement
unless reduced to writing signed by an authorized representative of
each Party.
12.3 Applicable Law: This Agreement shall be construed under the substantive
laws of the State of Connecticut, without reference to its conflicts of
laws provisions.
26
<PAGE> 34
12.4 Dispute Resolution: Except when the provisions in Article 2.1.7
(Dispute Resolution) apply, should any dispute arise between the
Parties concerning this Agreement, the Parties agree to first attempt
to resolve the dispute in good faith between the Parties through
meetings between the President of BAYER's Pharmaceutical Division and
the President of CNSI before resorting to any other forum for a remedy.
If resolution of the dispute is not reached between the Presidents
within sixty (60) days of their first meeting to discuss such dispute,
then the Parties must promptly initiate mediation in good faith through
JAMS Endispute or another mutually agreeable, recognized mediation
group. If settlement has not been reached through mediation within
sixty (60) days of the first meeting among each Party and the mediator,
then either Party may bring suit against the other. If CNSI files suit
against BAYER, CNSI agrees to do so in New Haven County, Connecticut,
and If BAYER files suit against CNSI, BAYER agrees to do so in Suffolk
County, Massachusetts.
12.5 Assignment:************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
12.6 Severability: If any provision of this Agreement is held to be illegal
or unenforceable, that provision shall be limited to the minimum extent
necessary or, if necessary, eliminated, so that this Agreement shall
otherwise remain enforceable and in full force and effect
12.7 Integration Clause: This Agreement is the sole agreement with respect
to the subject matter hereof, and supersedes all proposals,
negotiations, conversations, discussions, agreements and/or
representations, whether oral or written, including any industry custom
or past dealing between the Parties relating to the subject matter of
this Agreement. The Parties agree that any and all obligations between
the Parties that are outside the terms of this Agreement and that
relate to the subject matter of this Agreement that preceded the
EFFECTIVE DATE of this Agreement have been satisfactorily executed or
are null and void.
12.8 Amendment of Agreement: No change, modification, extension,
termination, waiver or other amendment of this Agreement or any of the
provisions contained herein, shall be valid unless made in writing and
signed by a duly authorized representative of each Party.
27
<PAGE> 35
This Agreement is agreed to and accepted by:
Bayer AG Cambridge NeuroScience, Inc.
By: /s/ Dr. Brandan By:/s/ Harry W. Wilcox
Title:Direktor Title: President and CEO
Date:December 18, 1998 Date: December 23, 1998
and
By: /s/ I Villetebro
Title: Patents and licensing
Date: December 18, 1998
[IN DUPLICATE]
28
<PAGE> 36
Appendix 1
CNSI KNOW HOW
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
<PAGE> 37
Appendix 2
CNSI PATENT RIGHTS
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
<PAGE> 38
Appendix 3
RESEARCH PROTOCOL
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
<PAGE> 39
Appendix 4
CNSI Third Party Contracts
Related to CNSI TECHNOLOGY
CAMBRIDGE NEUROSCIENCE'S GGF-2 RELATED MATERIAL TRANSFER AGREEMENTS
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
<PAGE> 40
Appendix 5
CNSI Subcontractees and Proposed Budget
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
<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 Statements
(Forms S-8 No. 33-42933, 33-76408 and 333-05431) pertaining to the 1991 Equity
Incentive Plan, (Form S-8 No. 33-76410) pertaining to the 1993 Employee Stock
Purchase Plan, and (Form S-8 No. 33-76412) pertaining to the 1992 Director Stock
Option Plan of Cambridge NeuroScience, Inc. of our report dated February 10,
1999, 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, 1998.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 25, 1999
<PAGE> 1
EXHIBIT 99.1
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
From time to time, Cambridge NeuroScience, Inc. ("Cambridge NeuroScience"
or 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 statements 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 FURTHER DEVELOPMENT OF THE COMPANY'S LEAD PRODUCT
CANDIDATES
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. 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. 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.
Aptiganel
The Company's most advanced product candidate is aptiganel hydrochloride
("aptiganel"), formerly known as CERESTAT(R), an N-methyl D-aspartate ("NMDA")
ion-channel blocker under development for the treatment of stroke. The Company
and its collaborator at the time, Boehringer Ingelheim International GmbH ("BI")
commenced Phase III clinical trials for aptiganel in both traumatic brain injury
("TBI") and stroke in 1996. The Phase III clinical trials of aptiganel were
suspended prior to completion, based on the results of scheduled interim
analyses of the data in each trial. To date, aptiganel has not been proven safe
and effective in humans. In November 1998, the parties terminated the
collaboration and all rights were returned to the Company, subject to the
Company's agreement to pay BI a royalty on any future product sales.
In March 1998, the Company reported that further analysis of the Phase III
data indicated that aptiganel had: (i) an attractive safety profile at
relatively high doses in the TBI patient population, and (ii) a potential
therapeutic benefit in a subset of the stroke patient population. Based on input
from an independent panel of stroke experts, which convened in October 1998, and
the Company's review and analysis of the trial data, the Company remains
committed to the continued development of aptiganel for stroke. Any further
clinical trial will require outside funding, either through a corporate
collaboration or a government grant. However, there can be no assurance that
such funding will be available or that further development of aptiganel will
occur.
___________________
CERESTAT is a registered trademark of Boehringer Ingelheim International GmbH.
<PAGE> 2
There can be no assurance that regulatory authorities will permit additional
clinical trials for aptinagel. If additional clinical trials of aptiganel are
conducted, there can be no assurance that the product candidate will prove to be
safe and efficacious or will receive regulatory approvals.
OTHER NMDA ION-CHANNEL BLOCKERS
The Company is also developing CNS 5161 an N-methyl D-aspartate ("NMDA")
ion-channel blocker compound, which has completed two Phase I clinical trials,
including one trial in a pain model. The Company may consider the development
of CNS 5161 for certain chronic neurodegenerative disorders, such as
Parkinson's disease and MS.
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 stroke. There can be no
assurance that regulatory authorities will permit clinical trials for the
Company's other NMDA ion-channel blocker product candidates. 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.
GGF2
The Company's growth factor product candidate is recombinant human Glial
Growth Factor 2 ("GGF2"), a potential treatment for degenerative diseases of the
nervous system, including multiple sclerosis ("MS") and peripheral neuropathies.
In December 1998, the Company entered into a licensing and research
collaboration agreement with Bayer AG ("Bayer") with respect to the development
of GGF2 for the treatment of MS and other neurodegenerative diseases. The
Company and Bayer will work together to accomplish the tasks associated with
preclinical development, with Bayer providing financial support for this work.
Bayer will be responsible for the clinical development of GGF2. A series of
pre-IND studies has been initiated. Such studies include toxicity studies and
other work required by the Federal Drug Administration ("FDA") to file an
Investigational New Drug ("IND") application. There can be no assurance that
GGF2 will not demonstrate adverse toxicological effects in the planned studies.
Certain results from these studies could cause the partners to decide not to
proceed with clinical trials.
Currently, there are no Federal Drug Administration ("FDA") approved glial
growth factors for the treatment of MS. There can be no assurance that
significant effects on the outcome measures being used by the Company or its
collaborative partners in preclinical trials for rhGGF2 or in preclinical or
clinical trials for any of the Company's 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.
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 assurance that product revenues can be realized on a timely basis, if
ever.
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.
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, regulatory approval and marketing of any therapeutic
product. To achieve profitable operations, the Company must, alone or with
others, successfully identify, develop, obtain approval for, 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 stroke.
There can be no assurance that the Company's product development efforts
will be successfully completed, that the Company will obtain the required
regulatory approvals or that any products, if introduced, will be successfully
-2-
<PAGE> 3
marketed or achieve customer acceptance. Commercial availability of any
Cambridge NeuroScience products is not expected for a number of years, if at
all. See "-- Uncertainties Related to Further Development of the Company's Lead
Product Candidates."
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 can require the expenditure of substantial resources. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations that 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 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.
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 New Drug
Application ("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.
HISTORY OF LOSSES; UNCERTAINTY OF CONTINUED OPERATIONS AND FUTURE PROFITABILITY
As of December 31, 1998, the Company had an accumulated deficit of $106.4
million. The Company has not been profitable from inception and expects to
continue to incur operating losses for at least the next several years. In March
1998, the Company implemented a cost reduction plan that included a reduction in
headcount by 34 employees. In June 1998, the Company entered into an agreement
with a third party to sub-lease approximately half of the Company's office and
laboratory facilities, thereby reducing facilities-related operating expenses.
The Company believes that cash, cash equivalents and investments in
marketable securities of $12.7 million at February 28, 1999 will be sufficient
to maintain operations through 2000. The Company anticipates that it will
require substantial additional funds to further its research and product
development programs and for other operating activities and expects to continue
to incur losses for at least the next several 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. The Company's ability to further the development
of its research and development programs and achieve profitability depends 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 the
Company will be successful in its efforts to obtain third party funding for its
research and development programs. In addition, there can be no assurance that
Cambridge NeuroScience or its strategic partners will obtain the required
regulatory approvals and successfully identify, test, manufacture and market any
product candidates. Cambridge NeuroScience does not expect to generate revenues
from the sale of products, if any, for several years.
-3-
<PAGE> 4
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 with third parties.
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 currently has an ongoing
collaborative arrangement 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, and with Bayer for the
development of GGF2 for MS and other neurodegenerative diseases. A substantial
portion of the payments to be received by the Company from Allergan and Bayer
are dependent on the subject compounds achieving certain program development
milestones. The Company is dependent on the collaborator making progress with
the development of the subject compounds to achieve these milestone events.
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 Allergan, Bayer 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 is actively
pursuing the possibility of extending the term of its collaboration with
Allergan, the initial term of which expires in November 1999. However, there can
be no assurance that the terms of this collaboration will be extended or that
the Company will be successful in obtaining sufficient funding to enable it to
continue this area of research.
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 programs. Allergan may terminate its agreement
with the Company for breach and under certain other circumstances upon six
months notice. Bayer may terminate its agreement with the Company at any time,
upon 120 days written notice. Either the Company or Bayer may terminate such
agreement at any time for cause.
The termination of the Allergan or Bayer agreements or of other
collaborative arrangements which the Company may enter into in the future 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,
-4-
<PAGE> 5
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.
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, for 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 substantial 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.
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 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 rt-PA (Genentech, Inc.) for the
treatment of patients who have suffered a stroke within the preceding three
hours and for whom a CT scan shows no evidence of hemorrhage. Intravenous rt-PA
dissolves blood clots that might have caused a stroke by blocking arteries
supplying brain tissue with oxygen and nutrients. Other drug treatments that
have the potential to restore blood flow to the brain and are in Phase III
clinical trials, are Ancrod(R) (Knoll AG) and Abbokinase(R) (Abbott
Laboratories). In addition, a number of companies are developing other drugs to
limit the extent of brain damage resulting from a stroke by protecting nerve
cells from the biochemical processes which are responsible for cell death. In
animal studies, these "neuroprotective" drugs have been shown to limit brain
damage even when blood supply to brain tissue is not restored. The Company
believes that the most significant competition for aptiganel will come from
neuroprotective drugs that
-5-
<PAGE> 6
limit nerve cell death by inhibiting responses mediated via specific ion
channels. There are ongoing Phase III clinical trials in stroke patients for
fos-phenytoin (Warner-Lambert Company) and GV150526 (Glaxo-Wellcome).
Fos-phenytoin has actions on ion channels and is claimed to be neuroprotective,
but acts through mechanisms other than the NMDA ion-channel complex. GV150526 is
an antagonist of responses mediated via the NMDA ion-channel complex, but acts
through a mechanism distinct from the mechanism of action of aptiganel. The
Company believes that aptiganel is the only neuroprotective drug candidate at
its stage of development for stroke that acts by directly blocking the ion
channel of the NMDA ion-channel complex. In 1997, Interneuron Pharmaceuticals,
Inc. submitted an NDA to the FDA for CerAxon (citicoline sodium) to treat
patients with ischemic stroke. In 1998, Interneuron withdrew its NDA application
and commenced a third large clinical trial of CerAxon in ischemic stroke. The
Company believes that CerAxon does not act on ion channels but on other
biochemical mechanisms of nerve cell death or recovery from injury. The Company
believes that, if approved for marketing, aptiganel will be used in conjunction
with tPA, or other approved drugs that can restore tissue blood flow.
Furthermore, even if other neuroprotective compounds prove to be efficacious and
are approved for marketing, those that act on mechanisms of cell death other
than inhibition of responses mediated by the NMDA ion-channel complex will be
used in conjuction with, rather than as alternatives to aptiganel.
The Company is aware of four therapeutics currently being marketed to treat
MS. Betaseron(R) (Chiron Corporation/Schering AG), Avonex(R) (Biogen, Inc.),
Copaxone(R) (Teva Pharmaceuticals Industries Ltd./Hoechst Marion Roussel Ltd.)
aNd Rebif (Serono) are all based on an immunosuppression approach to the
disease, rather than the growth factor remyelination approach being pursued by
the Company. Rebif has been excluded from the U.S. market by the FDA until 2003.
There can be no assurance that these products or the introduction of 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 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 be 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
-6-
<PAGE> 7
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.
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 GGF2 product candidates. There can be no assurance that
the Company will not infringe any such issued U.S. third-party patents, and that
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 GGF2 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 GGF2 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-
-7-
<PAGE> 8
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.
Pursuant to the research collaboration and licensing agreement for the
development of GGF2, Bayer will manufacture all material needed in the conduct
of the development activities and shall be responsible for all associated costs.
Pursuant to the termination of the collaboration agreements with BI, the Company
has the right to purchase 56kg of aptiganel from BI within two years from the
date of the termination agreement.
UNCERTAINTIES RELATED TO MARKETING AND SALES
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. Pursuant to the collaboration agreement with Bayer
for the development of GGF2, Bayer has acquired the sole right to commercialize
any products derived from the collaboration and will bear all associated costs.
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 would receive aptinagel 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.
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
-8-
<PAGE> 9
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 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 the
Company's 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.
On January 22, 1999, the Company's common stock was delisted from the
Nasdaq National Market System due to a failure to maintain a minimum bid price
per share of $1.00. Immediately following the delisting, the Company began
trading on the Over the Counter Bulletin Board ("OTCBB"). The delisting of the
Company's common stock could have an adverse effect on the liquidity of the
common stock held by investors and on the Company's ability to raise equity in
the future.
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 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 by approximately half. See "-- History of Losses;
Uncertainty of Continued Operations and Future Profitability." At February 28,
1999, the Company had 17 full-time employees. Due to the small number of
employees at the Company, the loss of several employees could have an adverse
effect on the Company's ability to meet its obligations to its collaborative
partners, on the progress of its own scientific programs and ultimately on its
business, financial condition and results of operations.
-9-
<PAGE> 10
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 the
Company's 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 of 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 common 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, or $17.9 million, which was paid on April 14,
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. The Company
does not anticipate paying dividends in the foreseeable future.
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,863
<SECURITIES> 7,037
<RECEIVABLES> 2,080
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,240
<PP&E> 6,596
<DEPRECIATION> (6,219)
<TOTAL-ASSETS> 15,617
<CURRENT-LIABILITIES> 1,887
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 13,712
<TOTAL-LIABILITY-AND-EQUITY> 15,617
<SALES> 0
<TOTAL-REVENUES> 4,303
<CGS> 0
<TOTAL-COSTS> 5,984
<OTHER-EXPENSES> 2,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,894)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
