Filed Pursuant to Rule 424(b)(1) and (3)
Registration No. 333-19629
PROSPECTUS
1,250,000 Shares
[NEOSE TECHNOLOGIES, INC. LOGO]
Common Stock
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All of the 1,250,000 shares of Common Stock, par value $.01 per share
(the "Common Stock"), offered hereby are being sold by Neose Technologies, Inc.
("Neose" or the "Company"). The Company's Common Stock is quoted on the Nasdaq
National Market under the symbol "NTEC." On January 23, 1997, the last reported
sale price of the Common Stock, as reported on the Nasdaq National Market, was
$18.125 per share. See "Price Range of Common Stock."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
Price to Placement Agent Proceeds to
Public Fees (1) Company (2)(3)
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<S> <C> <C> <C>
Per Share...................... $17.50 $1.00 $16.50
- ------------------------------------------------------------------------------------------------------------------
Total.......................... $21,875,000 $1,250,000 $20,625,000
==================================================================================================================
</TABLE>
(1) The Common Stock is being offered on an all or none basis by the
Company to selected institutional investors. Vector Securities
International, Inc. (the "Placement Agent") has been retained to act,
on a best efforts basis, as agent for the Company in connection with
the arrangement of this transaction. The Company has agreed to pay the
Placement Agent a fee in connection with the arrangement of this
transaction and reimburse the Placement Agent for certain out-of-pocket
expenses. The Company has agreed to indemnify the Placement Agent
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). See "Plan of
Distribution."
(2) The termination date of the offering is January 29, 1997, subject to
extension by mutual agreement of the Company and the Placement Agent.
Prior to the closing date of this best efforts, all or nothing,
offering all investor funds will promptly be placed in escrow with
Citibank, N.A., as escrow agent for funds collected in connection with
the offering (the "Escrow Agent"), in an escrow account established for
the benefit of the investors. Upon receipt of notice from the Escrow
Agent that investors have affirmed purchase of the Common Stock and
deposited the requisite funds in the escrow account, the Company will
deposit with The Depository Trust Company ("DTC") the shares of Common
Stock to be credited to the accounts of the investors and will collect
the investor funds from the Escrow Agent. In the event that investor
funds are not received in the full amount necessary to satisfy the
requirements of the offering, all funds deposited with the Escrow Agent
will promptly be returned to the investors. See "Plan of Distribution."
(3) Before deducting expenses payable by the Company estimated at $285,000.
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Vector Securities International, Inc.
The date of this Prospectus is January 23, 1997.
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PROSPECTUS SUMMARY
The statements in this Prospectus that relate to future plans, events
or performance are forward-looking statements. Actual results could differ
materially due to a variety of factors, including the factors described under
"Risk Factors" and the other risks described in this Prospectus. The following
summary is qualified in its entirety by the more detailed information and the
Financial Statements and Notes thereto appearing elsewhere in this Prospectus,
including information under "Risk Factors."
The Company
Neose Technologies, Inc. ("Neose" or the "Company") is focused on the
enzymatic synthesis of complex carbohydrates (oligosaccharides), and the
discovery and development of complex carbohydrates for nutritional and
pharmaceutical uses. Complex carbohydrates serve as attachment sites for many
pathogens that cause infectious diseases. Present on all cells, these compounds
also play a critical role in the immune response. Because oligosaccharides are
difficult and expensive to produce, their commercial development has been
significantly limited despite the role they play in human diseases. The Company
believes that its proprietary Multi-Transferase Reaction ("MTR") technology
enables, for the first time, the rapid and cost-efficient production of
naturally-occurring oligosaccharides. The Company, with Abbott Laboratories
("Abbott"), a leading provider of infant formula in the United States, is
applying its MTR technology to the development of breast milk oligosaccharides
as additives to infant formula. Breast milk oligosaccharides are believed to
play an important anti-infective role in infants. In its therapeutic development
programs, the Company is using its technology to develop complex carbohydrates
as pharmaceuticals to treat various bacterial infections, such as
gastrointestinal and pediatric ear infections, and to prevent xenotransplant
rejection.
All human cell surfaces have complex carbohydrates that serve as
specific binding sites for other molecules and cells, including pathogens such
as bacteria, viruses, and other infectious microorganisms. In addition, soluble
oligosaccharides (oligosaccharides not bound to cells) produced by the body are
found in many body fluids. These soluble complex carbohydrates are identical to
the complex carbohydrates on cell surfaces, and are believed to serve as decoys
that bind to pathogens, preventing the pathogens from binding to cells and
causing disease. The Company believes that naturally-occurring oligosaccharides
can be developed into anti-infective pharmaceutical and healthcare products that
are less likely to cause adverse side-effects, and less likely to result in
resistant strains of infectious agents, than synthetic drugs or traditional
antibiotics.
Difficulties in producing oligosaccharides efficiently and in
sufficient quantities have significantly limited their development and
commercialization as pharmaceutical or healthcare products. Neose's proprietary
MTR technology utilizes enzymes as part of a molecular assembly line to
synthesize a wide variety of oligosaccharides. These enzymes, or
glycosyltransferases, are catalysts that join monosaccharides together in highly
specific ways. Neose has developed various methods to obtain the
glycosyltransferases necessary to manufacture many naturally-occurring
oligosaccharides. Utilizing its proprietary MTR technology, the Company believes
it can produce these naturally-occurring complex carbohydrates in commercial
quantities on a cost-effective basis. These compounds can then be used as lead
compounds for pharmaceutical development and for other healthcare applications.
Neose is applying its proprietary technologies to develop the following
products:
Nutritional Additives. Breast milk contains more than two dozen soluble
oligosaccharides that are believed to play an important anti-infective role in
infants by preventing the attachment of certain bacteria to gastrointestinal,
respiratory, and urinary tract cells. The Company has entered into a strategic
alliance with Abbott for the commercialization of breast milk oligosaccharides
for nutritional applications. Abbott, through its Similac(R) and Isomil(R)
products, is a leading provider of infant formula in the United States. The
Company's first oligosaccharide, NE-1340, is being developed as an additive to
Abbott's infant formula products. The Company believes that the development and
commercialization of this additive may occur more rapidly than pharmaceutical
product development.
3
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Pharmaceuticals. In its pharmaceutical discovery and development
efforts, the Company is targeting diseases or indications that are mediated by
complex carbohydrates located on cell surfaces, and that affect large patient
populations. The Company is currently developing pharmaceutical products for the
following indications:
o Gastritis and Peptic Ulcers. The Company is developing NE-0080, a
naturally-occurring human gastrointestinal oligosaccharide, to treat
gastritis and peptic ulcers caused by Helicobacter pylori ("H. pylori")
infections. An estimated four million people suffer from active peptic
ulcers each year in the United States, and approximately 500,000 new
cases are diagnosed annually. The Company completed Phase IA and Phase
IB clinical trials involving 24 healthy subjects in an ascending single
dose study and 32 subjects with asymptomatic H. pylori infections in a
10-day repeat dose study, respectively. The results of these studies
indicated that NE-0080 was well-tolerated and did not cause any adverse
side-effects. A Phase IC study, involving a 28-day repeat dose study in
11 subjects with asymptomatic H. pylori infections, was completed in
November 1996. Although the study was designed primarily to test
safety, the Company also used the non-invasive, urea breath test
("UBT") to measure H. pylori loads in the subjects over an eight-week
period. NE-0080 caused a statistically significant decrement in UBT
values. The Company plans to initiate Phase II studies on NE-0080 in
early 1997. Neose also is developing NE-1327, a polyvalent
configuration of NE-0080 that is significantly more effective than the
natural monovalent molecule in inhibiting in vitro binding of H. pylori
bacteria to human stomach cells.
o Pediatric Ear Infections. Neose is developing NE-1530, a naturally-
occurring human airway oligosaccharide, for the treatment of pediatric
ear infections. Middle ear infections, one of the most frequent reasons
for pediatrician visits, cause an estimated 30 million office visits
and prescriptions each year. Preclinical studies using animal models
have indicated that NE-1530 inhibits and reverses the attachment of
bacteria that cause ear infections and other respiratory diseases.
Neose is currently conducting additional preclinical studies and plans
to file in late 1997 an investigational new drug ("IND") application
for the treatment of pediatric ear infections. Most bacteria involved
in pediatric ear infections also cause acute infections associated with
chronic bronchitis and pneumonia. Although the Company has chosen
initially to develop NE-1530 to treat pediatric ear infections, the
Company also may develop this compound in the future for such other
indications.
o Xenotransplant Rejection. An estimated 20,000 human organ transplants
were performed in the United States in 1995 and many times that number
of patients are believed to die each year due to the lack of available
human organs. At the end of 1995, the waiting list for humans awaiting
human organs was approximately 44,000, and that list has grown
significantly each year. Although substantial resources have been
committed to develop animal organs for human transplants, hyperacute
rejection ("HAR"), in which the transplanted organ is rejected within
minutes of transplantation, remains one of the most critical obstacles
to xenotransplantation. HAR results from an antibody-mediated response
against an oligosaccharide found on the cell surface of most mammals
but absent in humans. The Company is developing NE-0501 to neutralize,
or to remove, the human antibodies against the mammalian
oligosaccharide. During 1996, the Company conducted preclinical studies
in which unmodified pig hearts were grafted into two baboons receiving
NE-0501 intravenously to neutralize the target antibodies. These
studies demonstrated that NE-0501, while present in the bloodstream in
adequate concentrations, allows the in vivo survival of the
transplanted organ and neutralizes the antibodies that initiate HAR.
The Company is collaborating with other companies that are pursuing
xenotransplantation with several different approaches, including
transgenic modification of pig organs, and chimeric tolerization of
donor organs. The Company believes that the use of oligosaccharides may
be an important part of the therapies that will ultimately be utilized
in the possible commercialization of xenotransplantation in the future.
Neose seeks to complement its internal research and development
resources through collaborations with corporate partners and research
institutions. Under Neose's strategic alliance with Abbott, Abbott has invested
$6.0 million in the Company and has paid the Company $5.2 million in contract
payments, license fees, and milestone payments, and has agreed to pay further
milestone payments and ongoing fees upon the successful commercialization of an
infant formula product that includes the Company's compound. In September 1995,
Neose entered into an exclusive research collaboration with Bracco Research USA
Inc. ("Bracco"), a world leader in diagnostic imaging products and formerly the
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diagnostics division of Bristol-Myers Squibb Company, to test the effectiveness
of oligosaccharides for in vivo imaging purposes.
The Company's objective is to be the leader in the discovery,
development, and manufacture of complex carbohydrates for a wide range of
nutritional and healthcare applications. The key elements of the Company's
strategy include: (i) continuing development of nutritional additives; (ii)
leveraging its core technology to discover and develop pharmaceutical products
to treat carbohydrate-mediated diseases; (iii) establishing strategic alliances
and research and development collaborations; (iv) continuing to develop its
manufacturing capabilities; and (v) pursuing additional applications of its core
technology.
The Company was incorporated in New York in January 1989, commenced
operations in 1990 and was reincorporated in Delaware in June 1991 under the
name Neose Pharmaceuticals, Inc. In April 1995, the Company changed its name to
Neose Technologies, Inc. The Company completed its initial public offering of
2,587,500 shares of Common Stock in February 1996, raising net proceeds of $29.1
million. The Company's executive offices are located at 102 Witmer Road,
Horsham, Pennsylvania 19044, and its telephone number is (215) 441-5890.
5
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The Offering
<TABLE>
<S> <C>
Common Stock offered................................................................... 1,250,000 shares
Common Stock to be outstanding after the offering...................................... 9,468,607 shares (1)
Use of proceeds........................................................................ Research and development activities,
capital expenditures, working capital,
and general corporate purposes,
including possible acquisitions. See
"Use of Proceeds."
Nasdaq National Market Symbol.......................................................... NTEC
</TABLE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from Period from
Nine Months inception inception
Ended (January 17, (January 17,
Year Ended December 31, September 30, 1989) to 1989) to
------------------------------------------ ------------- December 31, September 30,
1991 1992 1993 1994 1995 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ---- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues from collaborative
agreements........................ $ -- $ -- $ 2,600 $ 48 $ 1,199 $ 876 $ 1,006 $ 3,846 $ 4,852
Research and development expenses ... 1,055 1,941 3,399 5,004 4,733 3,426 4,900 16,476 21,376
General and administrative expenses.. 703 1,324 1,577 1,319 1,665 1,172 1,788 6,689 8,477
Interest income (expense), net....... (107) (90) (47) 63 132 73 1,082 (63) 1,019
Net loss............................. (1,865) (3,355) (2,423) (6,212) (5,067) (3,649) (4,600) (19,382) (23,982)
Pro forma net loss per share (2)..... $ (1.05) $ (0.60)
Shares used in computing pro forma
net loss per share (2)............ 4,848 7,728
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1996
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Actual As Adjusted(3)
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<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................................................. $ 35,717 $56,057
Total assets........................................................................... 39,032 59,372
Long-term debt (4)..................................................................... 683 683
Deficit accumulated during the development stage....................................... (23,982) (23,982)
Total stockholders' equity............................................................. 36,512 56,852
</TABLE>
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(1) Does not include, as of January 6, 1997, (i) 147,690 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price per share of $11.18, (ii) 1,199,643 shares of
Common Stock issuable upon exercise of outstanding options at a weighted
average exercise price of $10.04 per share, (iii) 260,729 shares of
Common Stock reserved for future option grants under the Company's stock
option plans, and (iv) 94,369 shares of Common Stock reserved for
issuance pursuant to the Company's employee stock purchase plan. See
"Management -- 1995 Stock Option/Stock Issuance Plan," "Management --
Employee Stock Purchase Plan," "Description of Capital Stock," and Note
7 of Notes to Financial Statements.
(2) See Note 2 of Notes to Financial Statements.
(3) Adjusted to give effect to the sale of the Common Stock offered hereby
(at a public offering price of $17.50 per share) and the receipt of the
estimated net proceeds therefrom. See "Use of Proceeds."
(4) The "As Adjusted" amount does not include the long-term debt financing
contemplated in connection with the Company's planned purchase of its
facility and Good Manufacturing Practices manufacturing expansion. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments."
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This Prospectus also includes trademarks and trade names of
companies other than the Company.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered by potential investors in evaluating an
investment in the shares of Common Stock offered hereby. These factors may cause
actual results, events or performance to differ materially from those expressed
in any forward-looking statements made by the Company in this Prospectus.
Early Stage of Development; Uncertainty of Product Development;
Technological Uncertainty; Novel Therapeutic Approach. The Company was founded
in 1989 and is at an early stage of development. The Company has not yet
completed the development of any of its products and, accordingly, has not begun
to market or generate revenues from the commercialization of products. It will
be a number of years, if ever, before the Company will recognize significant
revenues from product sales or royalties. Substantially all of the Company's
revenues received to date have resulted from payments received under its
strategic alliance with Abbott. The Company expects that substantially all of
its revenues for the foreseeable future will result from payments under its
strategic alliance with Abbott, license fees, payments from future strategic
alliances and collaborative arrangements, if any, and interest income. Such
revenues will be subject to significant fluctuations in both timing and amount.
There can be no assurance that the Company will receive royalty revenues from
Abbott or that the Company will be successful in entering into other strategic
alliances or collaborative arrangements that will result in significant
revenues. The Company's products under development will require significant
time-consuming and costly research, development, preclinical studies, clinical
testing, regulatory approval, and significant additional investment prior to
their commercialization, which may never occur. Moreover, the development and
commercialization of complex carbohydrates for pharmaceutical applications have
been pursued successfully by few companies. There can be no assurance that the
Company's research and development programs will be successful, that its
oligosaccharide products will exhibit the expected biological activities in
humans, that its nutritional additive will be successfully commercialized, that
its pharmaceutical products, if developed, will prove to be safe and efficacious
in clinical trials, that the Company or its collaborators will obtain the
necessary regulatory approvals for its products, or that the Company or its
collaborators will be successful in obtaining market acceptance of any of its
products. The Company or its collaborators may encounter problems and delays
relating to research and development, regulatory approval, manufacturing, and
marketing. The failure by the Company to address such problems and delays
successfully would have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, although several
companies are focusing research and development efforts in the area of
xenotransplantation-based products, such products represent a novel therapeutic
approach that has not yet been subject to extensive clinical testing. No
xenogeneic organ or living tissue has been approved by the United States Food
and Drug Administration ("FDA") for use in humans. There can be no assurance
that any xenotransplantation-based products, including the Company's NE-0501
oligosaccharide, will be approved by the FDA or other regulatory authorities, or
that, even if so approved, will be accepted by the medical community or
third-party payors.
Dependence on Abbott; Dependence on Other Collaborative Partners. The
Company's strategic alliance with Abbott provides, in part, for the receipt by
the Company of certain license fees, milestone payments, and, if
commercialization occurs, royalty payments. The Company has derived
substantially all of its revenues to date from its strategic alliance with
Abbott and anticipates that payments from Abbott will constitute all or a
substantial portion of its revenues for the next several years. Abbott has the
option at any time prior to the first commercial sale, if any, of infant formula
containing the Company's nutritional additive, to elect to make the underlying
license agreement with the Company non-exclusive, in which event the license
fees payable to the Company after commercialization would be reduced by 50%, and
Abbott's obligations to make contract and milestone payments would be
terminated. Abbott also has the right to terminate the underlying license
agreement upon 60 days' notice, in which event it would have no further funding
obligations to the Company. In addition, under the terms of the Abbott
agreement, if Abbott fails to make appropriate regulatory filings with the FDA
for the addition of Neose oligosaccharides in infant formula prior to December
31, 1997, Neose, at its option, may elect to convert the license of Neose
technology to a non-exclusive license to Abbott, in which event the license fees
payable by Abbott after
7
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commercialization would be reduced by 50%, and Abbott's obligations to make
contract and milestone payments would be terminated. The success of the
strategic alliance will depend on Abbott's own competitive, marketing and
strategic considerations, including the relative advantages of alternative
products being developed or marketed by competitors. The amount and timing of
resources Abbott commits to these activities are entirely within Abbott's
control. There can be no assurance that Abbott will pursue the development and
commercialization of this product or that Abbott will perform its obligations as
expected. No assurance can be given that the strategic alliance will result in
the successful commercialization of the Company's nutritional additive or that
any future milestone payments or fees will be received by the Company. The
suspension or termination of the Company's strategic alliance with Abbott, the
failure of the strategic alliance to be successful, or the delay in the
development or commercialization of the nutritional additive by Abbott would
have a material adverse effect on the Company's business, financial condition,
and results of operations. See "Business -- Strategic Alliance with Abbott."
The Company's strategy for the development and commercialization of its
pharmaceutical product candidates involves entering into collaborative
agreements with pharmaceutical and other companies. The Company may in the
future grant to its collaborative partners rights to license and commercialize
any products developed under these collaborative agreements, and such rights
would limit the Company's flexibility in considering alternatives for the
commercialization of such products. Under such agreements, the Company may rely
on its collaborative partners to conduct research and development efforts and
clinical trials on, obtain regulatory approvals for, and manufacture, market,
and commercialize certain of the Company's products. The amount and timing of
resources devoted to these activities generally will be controlled by each such
individual partner. To date, the Company has only entered into a limited number
of these collaborative arrangements, and none with respect to pharmaceutical
product candidates. There can be no assurance that the Company will be
successful in establishing any additional collaborative arrangements, that
existing or future collaborative arrangements will be successful in
commercializing products, or that the Company will derive any revenues from such
arrangements. In addition, the Company's strategy involves entering into
multiple, concurrent strategic alliances to pursue pharmaceutical discovery in
different disease areas. There can be no assurance that the Company will be able
to manage simultaneous programs successfully. With respect to existing and
potential future strategic alliances and collaborative arrangements, the Company
will be dependent upon the expertise and dedication of sufficient resources by
these outside parties to develop, manufacture, or market products. Should a
strategic alliance or collaborative partner fail to develop or commercialize a
product to which it has rights, the Company's business, financial condition, and
results of operations could be materially and adversely affected. See "Business
- -- Other Collaborative Relationships."
History of Operating Losses; Uncertainty of Future Profits. The Company
has not generated any revenues from operations, except for interest income and
revenues from strategic alliances. The Company has incurred losses since its
inception and, as of September 30, 1996, had a deficit accumulated during the
development stage of approximately $24 million for the period since inception.
The Company anticipates incurring additional losses over at least the next
several years. Such losses may fluctuate significantly from quarter to quarter
and are expected to increase as the Company expands its research and development
activities. To achieve profitability, the Company, alone or with others, must
successfully commercialize its nutritional additive, develop its pharmaceutical
products, conduct preclinical studies and clinical trials, obtain required
regulatory approvals and successfully manufacture, introduce, and market such
products. In addition, to the extent the Company relies upon others for
research, development, and commercialization activities, the Company's ability
to achieve profitability will be dependent upon the success of such outside
parties. The time required to reach profitability is highly uncertain, and there
can be no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. See "Management's Discussion and Analysis of
Financial Condition and Result of Operations."
8
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Additional Financing Requirements; Access to Capital. The Company has
incurred negative cash flows from operations since its inception, and has
expended, and expects to continue to expend in the future, substantial funds to
continue its research and development programs. The Company expects that its
existing capital resources, together with the net proceeds of this offering and
the interest earned thereon, will be adequate to fund its capital requirements
through 1999. No assurance can be given that there will be no change that would
consume available resources significantly before such time. The Company's future
capital requirements and the adequacy of available funds will depend on many
factors, including progress in its research and development activities,
including its pharmaceutical discovery and development programs, the magnitude
and scope of these activities, progress with preclinical studies and clinical
trials, the costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in existing collaborative
research relationships and strategic alliances, the ability of the Company to
establish additional collaborative arrangements for product development, the
cost of manufacturing scale-up and developing effective marketing activities and
arrangements, and the ability of the Company to obtain long-term financing with
respect to its planned manufacturing expansion. The Company has made and expects
to make capital expenditures in late 1996 and 1997 totaling approximately $7.5
million to expand FDA Good Manufacturing Practices ("GMP") manufacturing
capabilities for its compounds under development. In addition, the Company has
entered into a non-binding letter of intent with the owner of its leased
facility to purchase the facility for a total of approximately $3.8 million
contingent upon, among other things, the Company's obtaining financing for the
acquisition. Additional funds will be needed by the Company to expand its
manufacturing capacity to manufacture commercial quantities of its potential
products. The Company is exploring alternatives for long-term financing in
connection with its planned GMP manufacturing expansion and the purchase of its
facility, including the issuance of taxable and tax exempt bonds. The Company
does not currently have any committed sources of additional financing and no
commitments have been received by the Company for long-term financing to support
the expansion and purchase. To the extent that funds generated from the
Company's operations, together with its existing capital resources and the net
proceeds of this offering and the interest earned thereon, are insufficient to
meet current or planned operating requirements, it is likely that the Company
will seek to obtain additional funds through equity or debt financings,
collaborative or other arrangements with corporate partners and others, and from
other sources. The terms and prices of any such financings may be significantly
more favorable to investors than those of the Common Stock sold in this
offering, which could have the effect of diluting or adversely affecting the
holdings or the rights of existing stockholders of the Company, including
investors acquiring Common Stock in this offering. There can be no assurance
that additional financing will be available when needed or on terms acceptable
to the Company. If adequate additional funds are not available for these
purposes or otherwise, the Company may be required to delay, scale back, or
eliminate certain of its research and product development activities or certain
other aspects of its business or attempt to obtain funds through collaborative
arrangements that may require the Company to relinquish some or all of its
rights to certain of its intellectual property, product candidates, or products.
If adequate funds are not available, the Company's business, financial
condition, and results of operations will be materially and adversely affected.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments ."
Uncertainty Regarding Patents and Proprietary Rights. The Company's
success will depend in part on its ability to obtain patent protection for its
products, preserve its trade secrets, and operate without infringing the
proprietary rights of other parties. Because of the substantial length of time
and expense associated with bringing new products through development to the
marketplace, the pharmaceutical and biotechnology industries place considerable
importance on obtaining and maintaining patent and trade secret protection for
new technologies, products, and processes. The Company has an exclusive license
from the University of Pennsylvania ("Penn") to two U.S. patents as well as
certain related foreign patents and patent applications, subject to Penn's
reserved right of use, and right to permit use by non-profit organizations,
solely for educational and research purposes. Such license terminates upon the
expiration of the last to expire licensed patent in each country. The licensor
may, at its option, terminate the license upon
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60 days' notice if the Company is not using its continuing best efforts to
develop or sell a product using the licensed technology.
In addition, the Company owns three U.S. patents and has licensed two
other U.S. patents, and the Company and its licensors have filed a number of
U.S. and foreign patent applications. The Company may be dependent on licensors
or collaborators to prosecute certain of the Company's patent applications and
may be dependent on such parties to protect such patent rights if patents issue.
Legal standards relating to the scope of claims and the validity of patents in
the biotechnology field are uncertain and still evolving. There can be no
assurance that patent applications to which the Company holds rights will result
in the issuance of patents, that any patents issued or licensed to the Company
will not be challenged and held to be invalid, or that any such patents will
provide commercially significant protection to the Company's technology,
products, and processes. In addition, there can be no assurance that others will
not independently develop substantially equivalent proprietary information not
covered by patents to which the Company owns rights or obtain access to the
Company's know-how or that others will not be issued patents which may prevent
the sale of one or more of the Company's products, or require licensing and the
payment of significant fees or royalties by the Company to third parties in
order to enable the Company to conduct its business. Defense and prosecution of
patent claims can be expensive and time consuming, regardless of whether the
outcome is favorable to the Company, and can result in the diversion of
substantial financial, management, and other resources from the Company's other
activities. An adverse outcome could subject the Company to significant
liabilities to third parties, require the Company to obtain licenses from third
parties, or require the Company to cease any related research and development
activities or product sales. In addition, the laws of certain countries may not
protect the Company's intellectual property. No assurance can be given that any
licenses required under any such third-party patents or proprietary rights would
be made available on acceptable terms, if at all.
The Company's success is also dependent upon the skills, knowledge, and
experience of its scientific and technical personnel. To help protect its
rights, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company, and
require disclosure and assignment to the Company of their ideas, developments,
discoveries, and inventions. There can be no assurance, however, that these
agreements will provide adequate protection for the Company's trade secrets,
know-how, or other proprietary information in the event of any unauthorized use
or disclosure. See "Business -- Patents and Proprietary Rights."
Substantial Competition; Risk of Technological Obsolescence. The Company
is engaged in highly competitive industries. The Company competes with many
public and private companies, including well-known nutritional products
manufacturers, pharmaceutical companies, chemical companies, specialized
biotechnology companies, and academic institutions. Many of the Company's
competitors have significantly greater financial, scientific, and technical
resources, and manufacturing and marketing capabilities than the Company. In
addition, many of the Company's competitors have significantly greater
experience conducting preclinical studies and clinical trials of new
pharmaceutical products, and in obtaining regulatory approvals for
pharmaceutical products. The Company is relying on Abbott to develop and
commercialize its nutritional additive. As a result, the success of the
Company's nutritional additive will depend, in significant part, on Abbott's
ability to compete in the highly competitive infant formula market. Abbott's
principal competitors in this market include Bristol-Myers Squibb Company,
American Home Products Corp., Nestle S.A., and Gerber Products Co. Competitors
of the Company and its collaborators may develop products that compete
successfully with the Company's products and may develop and commercialize such
products more rapidly than the Company and its collaborators. In addition, the
Company's products may be subject to competition from related products developed
by competitors or different products developed using techniques other than those
developed by the Company or based on advances that may render the Company's
products less competitive or obsolete, uneconomical or otherwise less
competitive. Competition may increase further as a result of potential advances
from the study of complex carbohydrates and greater availability of capital for
investment in this field. There can be no
10
<PAGE>
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any being developed by
the Company, or that would render the Company's technology and products obsolete
or noncompetitive. See "Business -- Competition."
Government Regulation; No Assurance of Product Approval. The Company's
product candidates are subject to stringent regulation by a number of government
authorities in the United States and other countries, including the FDA.
NE-1340, the Company's infant formula ingredient, may be subject to FDA review
as a food additive. Substances that are generally recognized as safe ("GRAS")
are excluded from the definition of food additives. Information supporting the
safety of a food additive is submitted to the FDA in the form of a food additive
petition. The food additive petition process is generally expensive and lengthy,
frequently requiring several years after the petition is submitted to the FDA.
No assurance can be given that, if submitted, the FDA will accept the petition
or permit desired labeling claims and that, if accepted, such petition will not
result in the establishment of regulations which necessitate costly and
time-consuming compliance procedures. This process could be time-consuming and
expensive and would have a material adverse effect on the Company's business,
financial condition, and results of operations. The FDA has by regulation
affirmed a number of substances as GRAS, although it is not required that a
substance be affirmed as GRAS by regulation in order to be GRAS. A manufacturer
may make an independent determination that there is general recognition of
safety of a substance by qualified experts when used for a particular use. There
can be no assurance that Abbott will make such a determination or that the FDA
will agree with such a determination, if Abbott were to elect to make such a
determination. Accordingly, there is a risk that the FDA will disagree with the
determination. In such a circumstance the manufacturer must submit a GRAS
affirmation petition for the FDA to review and affirm GRAS status by regulation
in order to market and sell the additive or formula containing the additive.
This process could be time-consuming and expensive and would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
If the Company's technology is incorporated in products claiming a
therapeutic benefit, such products could be regulated as a drug rather than as a
food. Regulation of these products as a drug would require extensive clinical
testing and review by the FDA to support the claims made for the product. The
uncertainty regarding the regulatory status of this type of product could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Any infant formula containing the Company's nutritional additive will be
subject to the provisions of the United States Infant Formula Act, which amended
the Food, Drug and Cosmetic Act (the "FDC Act") and established detailed
requirements for infant formulas, including their manufacture, composition, and
labeling. Pursuant to the Company's agreement with Abbott, Abbott is responsible
for all regulatory activities relating to the infant formula additive. There can
be no assurance that Abbott will be able to satisfy all applicable regulatory
requirements. Abbott may also market infant formula containing the additive in
foreign countries. Infant formula regulatory requirements vary widely from
country to country, and may be more or less stringent than FDA requirements. The
time required to obtain clearances, if required, in foreign countries may be
longer or shorter than that required in the United States.
Prior to marketing, any pharmaceutical product candidates developed by
the Company must undergo an extensive regulatory approval process required by
the FDA and by comparable agencies in other countries. This process, which
includes preclinical studies and clinical trials of each compound to establish
its safety and effectiveness and requires compliance with FDA good laboratory,
clinical, and manufacturing practices during testing and manufacturing, can take
many years, requires the expenditure of substantial resources, and gives larger
companies with greater financial resources a competitive advantage over the
Company. Failure to comply with applicable requirements can result in fines,
recall, or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals, refusal to approve new drug
applications, and criminal prosecution. To date, no pharmaceutical product
candidate being developed by the Company has been submitted for approval or has
been approved by the FDA or any other regulatory authority for marketing, and
there can be no assurance that any such product will ever be approved for
11
<PAGE>
marketing, or that the Company will be able to obtain the labeling claims
desired for its products. The Company is and will continue to be dependent upon
and require that the laboratories and medical institutions conducting its
preclinical studies and clinical trials maintain both good laboratory and good
clinical practices and that the manufacturers of its compounds maintain
compliance with current GMP. Data obtained from preclinical studies and clinical
trials are subject to varying interpretations that could delay, limit, or
prevent FDA regulatory approval. Delays or rejections may be encountered based
upon changes in FDA policy for drug approval during the period of development
and FDA regulatory review. Similar delays also may be encountered in foreign
countries. Any delay in obtaining, or failure to obtain, such approvals would
adversely affect the Company's ability to generate product revenues or
royalties. There can be no assurance that regulatory approval will be obtained
for any product developed by the Company. Moreover, even if approval is granted,
such approval may entail commercially unacceptable limitations on the labeling
claims for which a product may be marketed. Even if such regulatory approval is
obtained, a marketed drug or compound and its manufacturer are subject to
continual review and inspection, and later discovery of previously unknown
problems with the product or manufacturer may result in restrictions or
sanctions on such product or manufacturer, including withdrawal of the product
from the market, and other enforcement actions. Additional governmental
regulations may be promulgated that would delay regulatory approval of the
Company's potential products. The Company cannot predict the impact of adverse
governmental action that might arise from future legislative and administrative
action. See "Business -- Government Regulation."
No Commercial Manufacturing Capability or Experience. To be successful,
the Company's products must be manufactured in commercial quantities under GMP
prescribed by the FDA and at acceptable costs. The Company has not yet
manufactured any products in commercial quantities and currently does not have
the facilities to manufacture any products in commercial quantities under GMP.
Existing facilities of the Company are not adequate for commercial scale
manufacturing. Therefore, the Company will need to develop its own commercial
scale GMP manufacturing facility and/or depend on its collaborators, licensees,
or contract manufacturers for the commercial manufacture of its products. In the
event the Company determines to establish a manufacturing facility, it will
require substantial additional funds, the hiring and retention of significant
additional personnel and compliance with extensive regulations applicable to
such a facility. The Company has no experience in such commercial manufacturing,
and there can be no assurance that the Company will be able to establish such a
facility successfully and, if established, that it will be able to manufacture
products in commercial quantities for sale at competitive prices. If the Company
determines to rely on collaborators, licensees, or contract manufacturers for
the commercial manufacture of its products, the Company will be dependent on
such corporate partners or other entities for, and will have only limited
control over, the commercial manufacturing of its products. There can be no
assurance that the Company will be able to enter into any such manufacturing
arrangements on acceptable terms, if at all. If the Company is not able to enter
into commercial manufacturing agreements, it could encounter delays in
introducing its products into certain markets, or find that the manufacture of
its products in these markets is adversely affected. There can be no assurance
that the parties to the Company's future commercial manufacturing agreements
will perform their obligations as expected, or that any revenue will be derived
from these commercial manufacturing agreements. See "Business -- Manufacturing."
Limited Clinical Trial Experience; No Marketing or Sales Capability or
Experience. Before obtaining required regulatory approvals for the commercial
sale of its pharmaceutical product candidates, the Company must demonstrate
through human clinical trials that such products are safe and efficacious for
use. To date, the Company has very limited experience in conducting clinical
trials. The Company will either need to rely on third parties to design and
conduct any required clinical trials or expend resources to hire additional
personnel to administer such clinical trials. There can be no assurance that the
Company will be able to find appropriate third parties to design and conduct
clinical trials or that it will have the resources to hire personnel to
administer clinical trials in-house.
The Company has no experience in marketing, distributing, or selling
nutritional additives or pharmaceutical products, and will have to develop a
sales force and/or rely on its collaborators, licensees,
12
<PAGE>
or arrangements with others to provide for the marketing, distribution, and
sales of its products. There can be no assurance that the Company will be able
to establish marketing, distribution, and sales capabilities or make
arrangements with third parties to perform such activities on acceptable terms,
if at all. See "Business -- Marketing, Distribution, and Sales."
Risks Associated with the Infant Formula Industry. To the extent NE-1340
is added to infant formula, the Company is subject to the risks generally
associated with the infant formula industry. These risks include: (i) product
tampering or production defects may occur requiring a recall of infant formula
containing NE-1340, or may reduce the demand for such infant formula; (ii) an
ingredient in such formula, including NE-1340, may be banned or its use limited
or declared unhealthful; and (iii) sales of infant formula may decline or use of
NE-1340 may be limited or discontinued due to real or perceived health concerns,
adverse publicity, or other reasons beyond the control of the Company.
Dependence on Key Personnel. The Company is highly dependent upon the
efforts of its senior management and scientific team. The loss of the services
of one or more members of the senior management and scientific team could
significantly impede the achievement of the Company's business and product
development objectives. Due to the specialized scientific nature of the
Company's business, the Company is also highly dependent upon its ability to
attract and retain qualified scientific, technical, and key management
personnel. The number of qualified scientific personnel is limited, and there is
intense competition for such persons and for other qualified personnel in the
areas of the Company's activities. There can be no assurance that the Company
will be able to continue to attract and retain the qualified personnel necessary
for the development of its existing business and its expansion into areas and
activities requiring additional expertise, such as production and marketing. The
Company may need to hire additional personnel or outside consultants skilled in
clinical testing and regulatory compliance as it develops its products. There
can be no assurance that the Company will be able to hire or retain such
personnel. The loss of, or failure to recruit scientific, technical and
managerial personnel could have a material adverse effect on the Company. In
addition, the Company relies on members of its Scientific Advisory Board and
consultants to assist the Company in formulating its research and development
strategy. All of the members of the Scientific Advisory Board and all of the
Company's consultants are employed by other employers, and each such member or
consultant may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to the Company. See "Business
- -- Scientific Advisory Board," "Business -- Employees," and "Management."
Third-Party Reimbursement; Uncertainty of Healthcare Reform Measures.
Successful commercialization of any pharmaceutical products the Company may
develop will depend in part upon the availability of reimbursement for the costs
of such products or funding from third-party healthcare payors such as
government and private insurance plans. Third-party payors are continuing their
efforts to contain or reduce the costs of healthcare through various means. For
example, third-party payors are increasingly challenging the coverage of and
prices charged for medical products and services. In addition, significant
uncertainty exists as to the coverage and reimbursement status of newly approved
pharmaceutical products. There can be no assurance that third-party
reimbursement or funding will be available or will permit price levels
sufficient to realize an appropriate return on the Company's investment in its
pharmaceutical product development. The U.S. Congress is considering a number of
legislative and regulatory reforms that may affect companies engaged in the
healthcare industry in the United States. Although the Company cannot predict
whether these proposals will be adopted or the effects such proposals may have
on its business, the existence and pendency of such proposals could have a
material adverse effect on the Company in general. In addition, the Company's
ability to commercialize potential pharmaceutical products may be adversely
affected to the extent that such proposals have a material adverse effect on
other companies that are prospective collaborators with respect to any of the
Company's pharmaceutical product candidates.
Product Liability; Lack of Product Liability Insurance. The Company's
business may be adversely affected by potential product liability risks which
are inherent in the testing, manufacturing, and marketing of the Company's
products which it has developed or which it may develop. There can be no
assurance that
13
<PAGE>
product liability claims will not be asserted against the Company, its
collaborators, or licensees. In addition, the use of pharmaceutical products
developed by the Company through collaborative or licensing arrangements in
clinical trials and the subsequent sale of such products is likely to cause the
Company to bear all or a portion of those potential product liability risks. The
Company does not currently have product liability insurance. There can be no
assurance that it will be able to obtain or maintain adequate product liability
insurance on acceptable terms or that such insurance will provide adequate
coverage against potential liabilities. Furthermore, there can be no assurance
that any collaborators or licensees of the Company will agree to indemnify the
Company, be sufficiently insured, or have a net worth sufficient to satisfy the
product liability claims. As a result, a product liability claim or recall could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Hazardous Materials; Compliance with Environmental Regulations. The
Company's research and development activities involve the controlled use of
hazardous materials, chemicals, and radioactive compounds. The risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any resulting damages, and any such liability could exceed the resources of
the Company which would have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company may incur
substantial additional costs to comply with environmental regulations if the
Company develops pharmaceutical manufacturing capacity. See "Business --
Government Regulation."
Control by Existing Management and Stockholders. Upon completion of this
offering, the Company's directors, executive officers, and certain principal
stockholders affiliated with members of the Board of Directors and their
affiliates will beneficially own approximately 12.2% of the Common Stock.
Accordingly, such stockholders, if acting together, may have the ability to
exert significant influence over the election of the Company's Board of
Directors and other matters submitted to the Company's stockholders for
approval. The voting power of these holders may discourage or prevent tender
offers for the Common Stock unless the terms are approved by such holders. See
"Principal Stockholders."
Possible Volatility of Common Stock Price; Dilution. The market price of
the Common Stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements by the Company, its collaborative
partners or the Company's present or potential competitors regarding
technological innovations or new commercial products or services, regulatory
developments, including the results of preclinical testing and clinical trials,
arrangements with collaborative partners, the achievement of or failure to
achieve certain milestones, developments or disputes concerning patent or
proprietary rights, government regulations, healthcare reform measures or public
concern regarding the safety or efficacy of the products to be developed by the
Company or its collaborators, and other events or factors. In addition, the
stock market has experienced extreme price and volume fluctuations. This
volatility has significantly affected the market prices of securities of many
biotechnology and pharmaceutical companies for reasons frequently unrelated to
or disproportionate to the performance of the specific companies. These broad
market fluctuations may adversely affect the market price of the Common Stock.
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the pro forma net tangible book value of
their investment of $11.49 per share. Additional dilution will occur upon
exercise of outstanding options and warrants. See "Dilution."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after the offering, or the possibility of such sales
occurring, could adversely affect prevailing market prices for the Common Stock
or the future ability of the Company to raise capital through an offering of
equity securities. Of the 9,468,607 shares to be outstanding after the offering,
the 1,250,000 shares of Common Stock offered hereby and an additional 6,212,809
shares of Common Stock outstanding will be freely tradable without restriction
in the public market unless such shares are held by "affiliates" of the Company,
as that term is defined in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). However, approximately 978,286 of these shares are
subject to a stockholders agreement whereby each holder who has signed the
stockholders agreement has agreed, until December 30, 1997, not to offer, sell
or otherwise dispose
14
<PAGE>
of, directly or indirectly, more than 2% per month, on a cumulative basis, of
the aggregate amount of shares held by such holder as of the Company's initial
public offering in February 1996, subject to certain conditions. The remaining
2,005,798 shares of Common Stock are restricted securities under the Securities
Act and may be sold in the public market only if they are registered or if they
qualify for exemption from registration under Rule 144 under the Securities Act.
Pursuant to "lock-up" agreements, all of the Company's executive officers and
directors, who collectively hold 927,490 of such restricted securities, have
agreed not to offer, sell or otherwise dispose of any of their restricted
securities for a period of 90 days from the date of this Prospectus without the
prior written consent of Vector Securities International, Inc. The Company also
has agreed that it will not offer, sell or otherwise dispose of Common Stock for
a period of 90 days from the date of this Prospectus, other than pursuant to
outstanding warrants and options, existing stock option and employee stock
purchase plans, and in connection with potential corporate collaborations and
acquisitions, without the prior written consent of Vector Securities
International, Inc. Upon termination of such lock-up agreements, approximately
908,906 of the "locked-up" restricted securities will be eligible for immediate
sale, beginning 90 days after the date of this Prospectus, in the public market
subject to certain volume, manner of sale and other limitations under Rule 144.
Vector Securities International, Inc. may, at its sole discretion and at any
time without notice, release all or any portion of the shares subject to such
lock-up agreements. The Securities and Exchange Commission (the "Commission")
has proposed revisions to Rule 144, the effect of which would be to shorten the
holding periods under Rule 144. If enacted, these proposed revisions would
increase, potentially substantially, the number of shares that would be
available for sale in the public market following the expiration of the lock-up
agreements.
As of January 6, 1997, options to purchase a total of 1,199,643 shares
of Common Stock were outstanding, of which options to purchase 415,694 shares
were exercisable. Of such shares subject to options, approximately 708,963
shares are subject to lock-up agreements for a period of 90 days from the date
of this Prospectus. As of January 6, 1997, an additional 355,098 shares were
available for future option grants and employee stock purchases under the
Company's stock option and employee stock purchase plans. All of the shares
issued, issuable or reserved for issuance under the Company's stock option and
employee stock purchase plans or upon the exercise of options issued or issuable
under such plans are covered by an effective registration statement. Such shares
may be sold in the open market, subject, in the case of certain holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lock-up
agreements and vesting restrictions imposed by the Company.
After the offering, holders of an aggregate of 3,236,423 shares of
Common Stock will be entitled to certain rights with respect to the registration
of such shares for resale under the Securities Act. In addition, the 147,690
shares issuable upon exercise of outstanding warrants have similar registration
rights. If such registrations cause a large number of shares to be registered
and sold in the public market, such sales could have an adverse effect on the
market price for the Company's Common Stock. See "Management -- 1995 Stock
Option/Stock Issuance Plan," "Management -- Employee Stock Purchase Plan,"
"Description of Capital Stock -- Registration Rights of Certain Holders,"
"Shares Eligible for Future Sale," and "Plan of Distribution."
Anti-Takeover Effect of Charter and By-Law Provisions and Delaware Law.
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion, and other rights and preferences that could materially and adversely
affect the voting power or other rights of the holders of Common Stock. The
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. The Company's By-Laws
contain procedural restrictions on director nominations by stockholders and the
submission of other proposals for consideration at stockholder meetings. The
possible issuance of Preferred Stock and the procedures required for director
nominations and stockholder proposals could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Common Stock, or
limit the price that investors might be willing to pay in the future for shares
of the Common Stock. In addition, certain provisions of Delaware law applicable
to the Company could also delay or make more difficult a merger, tender offer,
or proxy contest involving the Company. See "Description of Capital Stock."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,250,000 shares of
Common Stock offered hereby are estimated to be approximately $20.3 million, at
a public offering price of $17.50 per share, and after deducting the Placement
Agent's fee and other estimated offering expenses payable by the Company.
The Company intends to use approximately $7.0 million of the net
proceeds of this offering to fund its research and product development
activities, approximately $2.0 million for capital expenditures, and the balance
for working capital and general corporate purposes, including possible
acquisitions of or investments in technology, licenses, proprietary rights, or
companies that complement the business of the Company. There are currently no
agreements or other arrangements regarding any such acquisitions by the Company.
The amount and timing of expenditures for each purpose will depend on a number
of factors, including progress of the Company's research and development
programs, the number and breadth of these programs, the progress of the
development and commercialization efforts of the Company and Abbott, the overall
success of the Company's strategic alliance with Abbott, the ability of the
Company to establish and maintain additional strategic alliances and licensing
arrangements, competing technological and marketing developments, the costs
involved in preparing, filing, prosecuting, maintaining, and enforcing patent
claims and other proprietary rights, progress in the regulatory process, and
other factors. The Company believes that the net proceeds from this offering,
together with interest thereon, and the Company's existing capital resources
will be sufficient to fund its capital requirements through 1999. Pending such
uses, the net proceeds will be invested in investment grade instruments,
certificates of deposit, or direct or guaranteed obligations of the United
States.
DIVIDEND POLICY
The Company currently anticipates that it will retain all available
funds for use in the operation of its business and for potential acquisitions,
and therefore does not anticipate paying any cash dividends on its Common Stock
for the foreseeable future. The Company paid to certain holders of its Preferred
Stock cash dividends accrued thereon in the amount of $18,000 for the year ended
December 31, 1995. The Company has not otherwise declared or paid cash dividends
on its capital stock since 1992.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "NTEC." The following table sets forth, for the periods indicated,
the high and low closing sales price per share of the Common Stock, as reported
on the Nasdaq National Market, since the Company's initial public offering in
February 1996.
High Low
------- -------
1996
First Quarter (from February 15, 1996)........... $22.750 $12.500
Second Quarter................................... 24.000 18.375
Third Quarter.................................... 20.875 11.625
Fourth Quarter................................... 19.625 14.500
1997
First Quarter (through January 23, 1997)......... $19.250 $16.750
16
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1996 (i) the
capitalization of the Company and (ii) such capitalization as adjusted to give
effect to the sale of the 1,250,000 shares of Common Stock offered hereby (at a
public offering price of $17.50 per share) and the receipt of the estimated net
proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
As of September 30, 1996
---------------------------
Actual As Adjusted
-------- ------------
(In thousands)
<S> <C> <C>
Long-term debt (1)................................................... $ 683 $ 683
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued or outstanding......................... -- --
Common stock, $0.01 par value; 30,000,000 shares authorized;
8,203,616 shares issued and outstanding, actual; and 9,453,616
shares issued and outstanding, as adjusted (2)................. 82 95
Additional paid-in capital....................................... 60,705 81,032
Deferred compensation............................................ (293) (293)
Deficit accumulated during the development stage................. (23,982) (23,982)
--------- --------
Total stockholders' equity..................................... 36,512 56,852
-------- --------
Total capitalization...................................... $37,195 $57,535
======= =======
</TABLE>
- ------------------
(1) Does not include the long-term debt financing contemplated in
connection with the Company's planned purchase of its facility and GMP
manufacturing expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments."
(2) Does not include, as of January 6, 1997, (i) 147,690 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price per share of $11.18, (ii) 1,199,643 shares of
Common Stock issuable upon exercise of outstanding options at a
weighted average exercise price of $10.04 per share, (iii) 260,729
shares of Common Stock reserved for future option grants under the
Company's stock option plans, and (iv) 94,369 shares of Common Stock
reserved for issuance pursuant to the Company's employee stock purchase
plan. See "Management -- 1995 Stock Option/Stock Issuance Plan,"
"Management -- Employee Stock Purchase Plan," "Description of Capital
Stock," and Note 7 of Notes to Financial Statements.
17
<PAGE>
DILUTION
The net tangible book value of the Company at September 30, 1996 was
$36,512,000, or $4.45 per share. Net tangible book value per share is equal to
the Company's net tangible assets (tangible assets of the Company less total
liabilities) divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of the 1,250,000 shares of Common Stock
offered hereby (based on a public offering price of $17.50 per share and after
deducting the Placement Agent's fee and the estimated expenses of the offering),
the net tangible book value of the Company as of September 30, 1996 would have
been approximately $56,852,000, or $6.01 per share. This represents an immediate
increase in net tangible book value of $1.56 per share to existing holders and
immediate dilution in net tangible book value of $11.49 per share to new
investors. The following table sets forth the per share dilution to new
investors in the offering.
<TABLE>
<S> <C> <C>
Offering price per share..................................................... $17.50
Net tangible book value per share as of September 30, 1996................. $4.45
Increase per share attributable to new investors........................... 1.56
------
Net tangible book value per share after the offering......................... 6.01
------
Dilution per share to new investors.......................................... $11.49
======
</TABLE>
The following table summarizes, on a pro forma basis as of September
30, 1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by existing
stockholders and by new investors (based on a public offering price of $17.50
per share):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------------- ---------------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 8,203,616 86.8% $66,190,000 75.2% $ 8.07
New investors.................... 1,250,000 13.2 21,875,000 24.8 17.50
--------- ----- ----------- -----
Total.......... 9,453,616 100.0% $88,065,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables do not include, as of January 6, 1997, (i) 147,690
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price per share of $11.18, (ii) 1,199,643 shares of
Common Stock issuable upon exercise of outstanding options at a weighted average
exercise price of $10.04 per share, (iii) 260,729 shares of Common Stock
reserved for future option grants under the Company's stock option plans, and
(iv) 94,369 shares of Common Stock reserved for issuance pursuant to the
Company's employee stock purchase plan. The exercise of such warrants and
options will result in further dilution to new investors. See "Management --
1995 Stock Option/Stock Issuance Plan," "Management -- Employee Stock Purchase
Plan," "Description of Capital Stock," and Note 7 of Notes to Financial
Statements.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for the years
ended December 31, 1991, 1992, 1993, 1994, and 1995, and for the period from
inception (January 17, 1989) to December 31, 1995, have been derived from the
Company's audited financial statements. The financial statements of the Company
for each of the three years in the period ended December 31, 1995, and for the
period from inception (January 17, 1989) to December 31, 1995, and the related
balance sheets at December 31, 1994 and 1995 included elsewhere in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants. The balance sheet data at September 30, 1996 and the statement of
operations data for the nine month periods ended September 30, 1995 and 1996 and
for the period from inception (January 17, 1989) to September 30, 1996, have
been derived from unaudited financial statements of the Company that, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
condition and results of operation for those periods. The statement of
operations data for interim periods is not necessarily indicative of results for
subsequent periods or the full year. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Period from Period from
Nine Months Inception Inception
Ended (January 17, (January 17,
Year Ended December 31, September 30, 1989) to 1989) to
------------------------------------------- ------------- December 31, September 30,
1991 1992 1993 1994 1995 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ---- ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenue from collaborative
agreements............ $ -- $ -- $ 2,600 $ 48 $ 1,199 $ 876 $ 1,006 $ 3,846 $ 4,852
------- ------- ------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and
development........ 1,055 1,941 3,399 5,004 4,733 3,426 4,900 16,476 21,376
General and
administrative..... 703 1,324 1,577 1,319 1,665 1,172 1,788 6,689 8,477
------- ------- ------- ------- ------- ------- ------- -------- --------
Total expenses.. 1,758 3,265 4,976 6,323 6,398 4,598 6,688 23,165 29,853
------- ------- ------- ------- ------- ------- ------- -------- --------
Interest income (expense)
net................... (107) (90) (47) 63 132 73 1,082 (63) 1,019
------- ------- ------- ------- ------- ------- ------- -------- --------
Net loss................. $(1,865) $(3,355) $(2,423) $(6,212) $(5,067) $(3,649) $(4,600) $(19,382) $(23,982)
======= ======= ======= ======= ======= ======= ======= ======== ========
Pro forma net loss per
share (1)............ $ (1.05) $ (0.60)
======= =======
Shares used in computing
pro forma net loss per
share(1).............. 4,848 7,728
======= =======
</TABLE>
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
---------------------------------------------------- -------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 3,401 $ 820 $ 1,500 $ 5,363 $11,189 $35,717
Total assets.................................. 3,537 2,743 3,534 8,196 14,639 39,032
Long-term debt................................ -- 368 1,010 736 1,235 683
Deficit accumulated during the development stage (2,325) (5,680) (8,103) (14,315) (19,382) (23,982)
Total stockholders' equity.................. 2,193 1,887 1,448 6,352 11,733 36,512
</TABLE>
- --------------
(1) See Note 2 of Notes to Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
Overview
Neose, a development-stage company, commenced operations in 1990, and
has devoted substantially all of its resources to the development of its
enzymatic carbohydrate synthesis technology and to the discovery and development
of complex carbohydrates for a variety of applications, including nutritional
additives and pharmaceuticals. The Company does not anticipate receiving
revenues from product sales for at least the next several years. The Company
anticipates that its sources of revenue for the next several years will be
payments under its strategic alliance with Abbott and other collaborative
arrangements, license fees, payments from future strategic alliances and
collaborative arrangements, if any, and interest income. Payments under
strategic alliances and collaborative arrangements will be subject to
significant fluctuation in both timing and amount. Therefore, the Company's
results of operations for any period may not be comparable to the results of
operations for any other period.
In December 1992, the Company entered into its strategic alliance with
Abbott for the development of breast milk oligosaccharides as nutritional
additives. The Company has received approximately $5.2 million in contract
payments, license fees, and milestone payments from its strategic alliance with
Abbott. See "Business -- Strategic Alliance with Abbott."
The Company has not generated any revenues from operations, except for
interest income and revenues from strategic alliances. The Company has incurred
losses since its inception and, as of September 30, 1996, had a deficit
accumulated during the development stage of approximately $24 million for the
period since inception. The Company anticipates incurring additional losses over
at least the next several years. Such losses may fluctuate significantly from
quarter to quarter and are expected to increase as the Company expands its
research and development programs, including preclinical studies and clinical
trials for its pharmaceutical product candidates under development, and as the
Company expands its manufacturing capabilities.
Results of Operations
Three and Nine Months Ended September 30, 1995 and 1996
Revenues from collaborative agreements for the three and nine months
ended September 30, 1996, were $313,000 and $1.0 million, respectively, compared
to $376,000 and $876,000, respectively, for the corresponding periods in 1995.
The decrease for the comparable three month period was due to non-recurring
revenues received during the 1995 period. The increase for the comparable nine
month period was primarily attributable to increased revenues from the Company's
collaborative research agreements with Abbott and Bracco.
Research and development expenses for the three and nine months ended
September 30, 1996, were $1.5 million and $4.9 million, respectively, compared
to $1.2 million and $3.4 million, respectively, for the corresponding periods in
1995. The increases were primarily attributable to the hiring of additional
scientific personnel, increased purchases of laboratory supplies and services,
increased clinical trial expenditures for NE-0080, and increased funding of
external research.
General and administrative expenses for the three and nine months ended
September 30, 1996, were $597,000 and $1.8 million, respectively, compared to
$290,000 and $1.2 million, respectively, for the
20
<PAGE>
corresponding periods in 1995. The increases were primarily attributable to
increased patent and business development expenses, and expenses associated with
being a public company.
Interest income for the three and nine months ended September 30, 1996,
was $483,000 and $1.3 million, respectively, compared to $76,000 and $199,000,
respectively, for the corresponding periods in 1995. The increases were
primarily attributable to higher average cash balances resulting from the
closing of a private placement of equity securities in the third and fourth
quarters of 1995 and the Company's initial public offering in February 1996.
Interest expense for the three and nine months ended September 30,
1996, was $58,000 and $196,000, respectively, compared to $60,000 and $126,000,
respectively, for the corresponding periods in 1995. The increase during the
nine months ended September 30, 1996, was due to higher average loan balances,
as compared to the corresponding period in 1995.
Years Ended December 31, 1995 and 1994
Revenues from collaborative agreements increased to $1.2 million in
1995 from $48,000 in 1994 due to the timing and size of milestone payments and
license fees received from Abbott.
The Company's research and development expenses decreased to $4.7
million in 1995 from $5.0 million in 1994. The decrease was primarily
attributable to a decrease in expenses connected with the Company's strategic
alliance with Abbott resulting from the licensing in 1995 of certain
manufacturing rights to Abbott, which was partially offset by increases in other
research and development activities.
General and administrative expenses increased to $1.7 million in 1995
from $1.3 million in 1994. The increase reflected additional management expenses
associated with a general increase in the level of the Company's activities.
Interest income increased to $322,000 in 1995 from $257,000 in 1994 due
to higher average cash balances during 1995. Interest expense decreased to
$190,000 in 1995 from $194,000 in 1994 due to slightly lower average loan
balances during 1995.
Years Ended December 31, 1994 and 1993
Revenues from collaborative agreements decreased to $48,000 in 1994
from $2.6 million in 1993 due to the timing of milestone payments received from
Abbott.
Research and development expenses increased to $5.0 million in 1994
from $3.4 million in 1993. The increase was primarily attributable to the hiring
of additional research and development personnel, related increased purchases of
laboratory supplies and services, and increased equipment depreciation and
facilities expenses.
General and administrative expenses decreased to $1.3 million in 1994
from $1.6 million in 1993, primarily due to the payment of a onetime bonus to
the Company's former President and Chief Executive Officer in 1993, and the
higher level of professional fees related to financing activities and the
negotiation of the Company's strategic alliance with Abbott incurred in 1993.
Interest income increased to $257,000 in 1994 from $60,000 in 1993 due
to higher average cash balances during 1994. Interest expense increased to
$194,000 in 1994 from $106,000 in 1993 due to expenses related to equipment
financing transactions.
21
<PAGE>
Liquidity and Capital Resources
From inception through September 30, 1996, the Company has incurred a
cumulative net loss of approximately $24.0 million, and has financed its
operations through private and public offerings of its securities and revenues
from its strategic alliances. The Company had $35.7 million in cash and cash
equivalents at September 30, 1996, compared to $11.2 million at December 31,
1995. This increase is primarily attributable to the receipt of net proceeds
from the Company's initial public offering in February 1996. In February and
March 1996, the Company sold 2,587,500 shares of Common Stock to the public at a
price per share of $12.50. The Company received proceeds of approximately $29.1
million after deducting underwriting commissions and offering expenses.
The Company and Abbott have entered into collaborative agreements to
develop breast milk oligosaccharides as additives to infant formula and other
nutritional products. Under this strategic alliance, the Company has received
approximately $5.2 million in contract payments, license fees, and milestone
payments. In addition, Abbott is obligated to make an additional payment of $5.0
million to Neose within 60 days of the first commercial sale, if any, of infant
formula containing the Company's nutritional additive. Abbott may (i) at any
time prior to the first commercial sale, if any, of infant formula containing
the Company's nutritional additive, elect to make its license agreement
non-exclusive, in which event the license fees payable by Abbott after
commercialization would be reduced by 50%, and Abbott's obligations to make
contract and milestone payments, including the $5.0 million milestone payment,
would be terminated, or (ii) elect to terminate the license agreement and return
the licensed technology to Neose upon 60 days' notice, in which event it would
have no further funding obligation to the Company, including no obligation to
make the $5.0 million milestone payment. In addition, under the terms of the
Abbott agreement, if Abbott fails to make appropriate regulatory filings with
the FDA for the addition of Neose oligosaccharide in infant formula prior to
December 31, 1997, Neose, at its option, may elect to convert the license of
Neose technology to a non-exclusive license to Abbott, in which event the
license fees payable by Abbott after commercialization would be reduced by 50%,
and Abbott's obligations to make contract and milestone payments, including the
$5.0 million milestone payment, would be terminated.
The Company expects to make additional capital expenditures totaling
approximately $7.5 million in connection with its planned GMP manufacturing
expansion and has entered into a non-binding letter of intent to acquire its
facility for a total of approximately $3.8 million. The Company presently leases
its facility. The Company's minimum lease obligation for the year ended December
31, 1996 was approximately $310,000. See "-- Recent Developments."
The Company has entered into a capital lease agreement with an
equipment finance company that provides for up to $1.5 million of financing, of
which approximately $1.4 million had been drawn on as of September 30, 1996.
During 1993, 1994, 1995, and during the nine months ended September 30,
1995 and 1996, the Company purchased approximately $491,000, $975,000, $875,000,
$613,000, and $667,000 of capital equipment and leasehold improvements.
The Company also has obligations to certain of its employees under
employment agreements. See "Management -- Employment Agreements."
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to continue its research and development programs. The Company
expects that its existing capital resources, together with the net proceeds of
this offering and the interest earned thereon, will be adequate to fund its
capital requirements through 1999. No assurance can be given that there will be
no change that would consume available resources significantly before such time.
The Company's future capital requirements and the adequacy of available funds
will depend on many factors, including progress in its research and development
activities,
22
<PAGE>
including its pharmaceutical discovery and development programs, the magnitude
and scope of these activities, progress with preclinical studies and clinical
trials, the costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in existing collaborative
research relationships and strategic alliances, the ability of the Company to
establish additional collaborative arrangements for product development, the
cost of manufacturing scale-up and developing effective marketing activities and
arrangements, and the ability of the Company to obtain long-term financing with
respect to its planned manufacturing expansion. The Company has made and expects
to make capital expenditures in late 1996 and 1997 totaling approximately $7.5
million to expand GMP manufacturing capabilities for its compounds under
development. In addition, the Company has entered into a non-binding letter of
intent with the owner of its leased facility to purchase the facility for a
total of approximately $3.8 million contingent upon, among other things, the
Company's obtaining financing for the acquisition. Additional funds will be
needed by the Company to expand its manufacturing capacity to manufacture
commercial quantities of its potential products. The Company is exploring
alternatives for long-term financing in connection with its planned GMP
manufacturing expansion and the purchase of its facility, including the issuance
of taxable and tax exempt bonds. The Company does not currently have any
committed sources of additional financing and no commitments have been received
by the Company for long-term financing to support the expansion and purchase. To
the extent that funds generated from the Company's operations, together with its
existing capital resources and the net proceeds of this offering and the
interest earned thereon, are insufficient to meet current or planned operating
requirements, it is likely that the Company will seek to obtain additional funds
through equity or debt financings, collaborative or other arrangements with
corporate partners and others, and from other sources. The terms and prices of
any such financings may be significantly more favorable to investors than those
of the Common Stock sold in this offering, which could have the effect of
diluting or adversely affecting the holdings or the rights of existing
stockholders of the Company, including investors acquiring Common Stock in this
offering. There can be no assurance that additional financing will be available
when needed or on terms acceptable to the Company. If adequate additional funds
are not available for these purposes or otherwise, the Company may be required
to delay, scale back, or eliminate certain of its research and product
development activities or certain other aspects of its business or attempt to
obtain funds through collaborative arrangements that may require the Company to
relinquish some or all of its rights to certain of its intellectual property,
product candidates, or products. If adequate funds are not available, the
Company's business, financial condition, and results of operations will be
materially and adversely affected. See "-- Recent Developments."
Recent Developments
The Company expects to make additional capital expenditures in the
total amount of approximately $7.5 million, which began in the fourth quarter of
1996, to expand GMP manufacturing capabilities for NE-0080, and to establish
GMP manufacturing capabilities for NE-1530 and NE-0501. In each case, the
Company believes that the planned GMP capacity will be adequate to complete
clinical trials for the respective compounds. In addition, the Company believes
that the planned expansion will give it capacity to manufacture under GMP
conditions certain amounts of these and other carbohydrates for third parties.
In connection with the planned capital expenditures, the Company is exploring
various long-term financing alternatives as discussed below.
In connection with the planned GMP manufacturing expansion described
above, the Company has entered into a non-binding letter of intent with the
owner of the facility to purchase the facility for a total of approximately $3.8
million. The Company is currently negotiating a definitive purchase agreement
for the facility.
In connection with the planned $7.5 million GMP manufacturing expansion
and the planned $3.8 million purchase of its facility, the Company is exploring
various alternatives for long-term financing. The Company plans to make
application to the Montgomery County (Pennsylvania) Industrial Development
Authority for the issuance of approximately $10.0 million total in taxable and
tax exempt bonds to support
23
<PAGE>
this project. The bonds are expected to be supported by a AA-rated letter of
credit, and a reimbursement agreement from the Company's bank, Jefferson Bank,
to the letter of credit issuer. To provide credit support for this arrangement,
the Company is prepared to offer a first mortgage on the land, building,
improvements, and certain machinery and equipment to Jefferson Bank, and to
provide certain covenants for the maintenance of minimum cash and short-term
investment balances. See "Certain Transactions."
24
<PAGE>
BUSINESS
The statements in this Prospectus that relate to future plans, events
or performance are forward-looking statements. Actual results could differ
materially due to a variety of factors, including the factors described under
"Risk Factors" and the other risks described in this Prospectus.
Neose is focused on the enzymatic synthesis of complex carbohydrates
(oligosaccharides), and the discovery and development of complex carbohydrates
for nutritional and pharmaceutical uses. Complex carbohydrates serve as
attachment sites for many pathogens that cause infectious diseases. Present on
all cells, these compounds also play a critical role in the immune response. Due
to their complexity, oligosaccharides are difficult and expensive to produce,
and their commercial development has been significantly limited despite the role
they play in human diseases. The Company believes that its proprietary MTR
technology enables, for the first time, the rapid and cost-efficient production
of naturally-occurring oligosaccharides. The Company, with Abbott, a leading
provider of infant formula in the United States, is applying its MTR technology
to the development of breast milk oligosaccharides as additives to infant
formula. Breast milk oligosaccharides are believed to play an important
anti-infective role in infants. In its therapeutic development programs, the
Company is using its technology to develop complex carbohydrates as
pharmaceuticals to treat various bacterial infections, such as gastrointestinal
and pediatric ear infections, and to prevent xenotransplant rejection.
Background
All human cell surfaces have complex carbohydrates that serve as
specific binding sites for other molecules and cells, including pathogens such
as bacteria, viruses, and other infectious microorganisms. The first step in the
development of many infectious diseases is the attachment of the bacterium,
virus, or other pathogen to the human cell. This attachment often occurs when a
specific receptor protein on the pathogen recognizes a specific carbohydrate on
the human cell. The protein/carbohydrate interaction, which allows the pathogen
to initiate the disease process, is highly dependent on the complementary shapes
of the protein and the carbohydrate.
Oligosaccharides are not, however, located only on cell surfaces.
Soluble oligosaccharides (oligosaccharides not bound to cells) produced by the
body are found in many body fluids, including breast milk, tears, urine, and
respiratory and gastrointestinal secretions. These soluble complex carbohydrates
are identical to the complex carbohydrates on cell surfaces, and are believed to
serve as decoys that bind to pathogens, preventing the pathogens from binding to
cells and causing disease. The pathogens are then expelled from the body in
respiratory and gastrointestinal secretions. For example, breast milk contains a
number of soluble oligosaccharides that are believed to prevent the attachment
of certain bacteria and viruses to gastrointestinal, respiratory, and urinary
tract cells in infants. Soluble oligosaccharides are, therefore, thought to be
one of the body's natural anti-infective agents (which also include white blood
cells and antibodies). The anti-infective role of oligosaccharides is
illustrated below:
25
<PAGE>
[GRAPHIC APPEARS HERE]
[The following is required for the EDGAR filing and will not appear in the
printed prospectus: This diagram depicts schematically two human cells.
The first human cell has come in contact with a bacterium and the protein
receptors of the bacterium have attached to the cell's surface oligosaccharides.
The second human cell has come in contact with a bacterium; however, soluble
oligosaccharides have attached to the bacterium, preventing the bacterium from
attaching to the cell surface oligosaccharides. The diagram is centered around
two human cells, each labeled as a "Human Cell." The cells are depicted by half
circles, with the flat side to the bottom of the diagram and the arched side
facing towards the top of the diagram. Extending from various points on the
arched sides of each human cell are four cell surface oligosaccharides, depicted
by a string of five to seven small circles that end with a small box. The human
cell on the left side of the diagram has arrows extending from a label "Cell
Surface Oligosaccharides" to the two string-like series of cell surface
oligosaccharides on its right side. Above the top of the cell surface
oligosaccharides is a bacterium, depicted by an oval shape, and labeled as
"Bacterium." Extending from the bottom of the bacterium and attached to the top
of the two center cell surface oligosaccharides are protein receptors depicted
by a vertical line. The bacterium also has two other protein receptors, one on
each side, depicted by a line that branches into two parts at its end.
Above the human cell on the right side of the diagram are seven soluble
oligosaccharides labeled as "Soluble Oligosaccharides," depicted similarly to
the cell surface oligosaccharides, but with tails of three small circles. Three
of these units are attached to lines (protein receptors) extending out from an
oval (the bacterium). The bacterium is not connected in any way to the human
cell or cell surface oligosaccharides below it.]
Caption: The protein/carbohydrate interaction that allows the pathogens to
initiate the disease process is highly dependent on the complementary shapes of
the protein and the carbohydrate. Soluble complex carbohydrates are identical to
the complex carbohydrates on cell surfaces, and are believed to serve as decoys
that bind to pathogens, preventing the pathogens from binding to cells and
causing disease.
Oligosaccharides are chains of monosaccharides, or individual sugar
molecules, that can be joined in many different combinations. Because there are
ten types of individual sugar molecules in humans, and because any two of these
may be chemically linked in up to 22 different ways, oligosaccharides are very
complex. For example, four different monosaccharides can be arranged to make
35,560 different complex carbohydrates. In contrast, four different amino acids,
which are the building blocks of proteins, can be combined to make only 24
distinct peptides.
The specific biological properties of an oligosaccharide are dictated
by its component monosaccharides and the chemical linkage between those
monosaccharides. Because monosaccharide chains can be linked in so many
different combinations, with each combination potentially having a different
biological activity, synthesis of complex carbohydrates is difficult.
Traditional organic chemical synthesis of oligosaccharides is time-consuming,
prohibitively expensive, and becomes more complex as the length of a chain
increases. Moreover, because oligosaccharides are not directly encoded by genes,
they cannot be produced by established recombinant methods. Difficulties in
producing oligosaccharides efficiently and in sufficient quantities have
significantly limited their development and commercialization.
Neose's MTR Technology
Neose believes its proprietary MTR technology platform enables, for the
first time, the rapid and cost-effective synthesis of commercial quantities of
oligosaccharides. The Company's MTR technology utilizes enzymes to synthesize
specific chemical linkages among individual sugar molecules. These enzymes,
which are referred to as glycosyltransferases, are catalysts that join
monosaccharides together in highly specific ways. Generally, each
glycosyltransferase attaches a specific sugar molecule to another specific sugar
molecule by means of a specific chemical linkage.
To synthesize an oligosaccharide, the Company uses its MTR technology
to join monosaccharides in a chain. This process, which can be viewed as a
molecular assembly line, is illustrated below:
26
<PAGE>
[GRAPHIC APPEARS HERE]
[The following is required for the EDGAR filing and will not appear in the
printed prospectus: This diagram depicts schematically the process of making the
oligosaccharides A-B-C-D from the monosaccharide A. The diagram centers on three
cylinder shaped units, labeled in the center of each, from left to right:
B-Transferase, C-Transferase and D-Transferase. Extending from the lower right
side of each cylinder is a tube extending out horizontally and then dropping
down at a ninety degree angle. Several tear shaped drops fall from each tube to
a small cylinder below and to the right of each large cylinder, labeled in the
center of each cylinder A-B, A-B-C and A-B-C-D, from left to right. The small
cylinder labeled A-B is connected by a long arrow up to the top of the large
cylinder to its right labeled C-Transferase. The small cylinder labeled A-B-C is
connected by a long arrow up to the top of the large cylinder to its right
labeled D-Transferase. Above the large cylinder on the left (labeled
B-Transferase) is the label "A" with an arrow pointing down to the cylinder. To
the right of the label "A" is the label "B~PN" with an arrow also pointing down
to the cylinder. Above the large cylinder in the middle (labeled C-Transferase)
is the label "C~PN" with an arrow pointing down to the cylinder. Above the large
cylinder on the right (labeled D-Transferase) is the label "D~PN" with an arrow
pointing down to the cylinder.]
Caption: To make the oligosaccharide A-B-C-D, the monosaccharide A, along with a
B sugar donor molecule (B-PN), is added to a B-transferase preparation that
causes the B sugar molecule to link to A, producing the disaccharide A-B. Then
the A-B disaccharide, along with a C sugar donor molecule (C-PN), is added to a
C-transferase preparation and the trisaccharide A-B-C is produced. Then the
A-B-C trisaccharide, along with a D sugar donor molecule (D-PN), is added to a
D-transferase preparation and the tetrasaccharide A-B-C-D is produced. This
process can be continued to attach additional monosaccharides to the A-B-C-D
chain.
Glycosyltransferases synthesize linkages at a very rapid rate. Because
glycosyltransferases can work for months before having to be replenished, the
Company believes that the correct preparation can generate the desired
oligosaccharide in a commercially scalable manner. Nevertheless, the cost of
manufacturing a product depends in significant part on the cost of obtaining the
glycosyltransferases. Neose has accordingly invested heavily in recombinant
methods of producing the glycosyltransferases necessary to manufacture
cost-effectively many naturally-occurring oligosaccharides. This procedure has
significantly reduced the costs, and increased the efficiencies, of
manufacturing certain oligosaccharides.
Strategy
The Company's objective is to be the leader in the discovery,
development, and manufacture of complex carbohydrates for a wide range of
nutritional and healthcare applications. The key elements of the Company's
strategy include:
Continuing Development of Nutritional Additives. Through its strategic
alliance with Abbott, the Company is developing a breast milk oligosaccharide
for use as an additive to infant formula. The Company believes that the
development and commercialization of this additive may occur more rapidly than
pharmaceutical product development. The Company intends to continue to develop
this product and enhance production capacity in conjunction with Abbott. There
are more than two dozen oligosaccharides found in breast milk. The Company,
together with Abbott, has developed one breast milk oligosaccharide, and is
exploring the development of additional breast milk oligosaccharides for use in
infant formula and in adult nutritional supplement products. In addition, the
Company is exploring with other collaborators the development of other
oligosaccharides for other nutritional and non-prescription products.
Leveraging Core Technology for Pharmaceutical Product Development.
Using its core technology, the Company is currently developing pharmaceutical
products for the treatment of gastritis and peptic ulcers, pediatric ear
infections, and for the prevention of xenotransplant rejection. The Company has
also identified
27
<PAGE>
a number of other diseases and indications that are potential targets for
carbohydrate-based pharmaceutical product development.
Establishing Additional Strategic Alliances and Research
Collaborations. The Company generally intends to develop its pharmaceutical
products through preclinical development and initial clinical trial phases and
to use strategic alliances to supplement its internal clinical development and
regulatory resources. The Company seeks to establish strategic alliances with
pharmaceutical companies to conduct late-stage clinical trials, to obtain
regulatory approvals, and to market and sell the Company's products, in exchange
for license fees, milestone payments, and royalties. The Company also intends to
continue to enter into research collaborations with corporate partners and with
academic research institutions to enhance and further develop its technology
platform.
Continuing to Develop Manufacturing Capabilities. The Company intends
to continue to develop and refine its MTR technology to reduce costs, increase
output, and improve production speed. The Company intends to develop its
manufacturing capabilities to support clinical development, and ultimately,
commercial introduction, of its pharmaceutical products. In addition, on a
selective basis, the Company intends to develop capabilities to manufacture
oligosaccharide products for third parties.
Pursuing Additional Applications of Its Core Technologies. The Company
believes that its proprietary MTR technology has broad applications in a wide
range of industries. Through its research collaboration with Bracco, the Company
is testing the effectiveness of oligosaccharides for in vivo imaging purposes.
The Company intends to pursue other applications as time and resources permit.
Products in Development
Neose has focused its initial research and development efforts on (i) a
nutritional additive product, NE-1340, a breast milk oligosaccharide that is
being developed in conjunction with Abbott for inclusion in its infant formula
products, and (ii) potential carbohydrate-based therapeutic products for the
treatment of chronic gastritis and peptic ulcers, pediatric ear infections, and
the prevention of xenotransplant rejection. The following table sets forth the
development status of each of the Company's product candidates:
<TABLE>
<CAPTION>
Product Application/Indication Development Status (1)
- ------- ---------------------- -----------------------
<S> <C> <C>
NE-1340 Infant formula additive Manufacturing scale-up(2)
NE-0080 Gastritis and peptic ulcers (monovalent) Completed Phase IC trial;
Phase II trial planned in
early 1997
NE-1530 Pediatric ear infections Preclinical studies; IND
planned in late 1997
NE-0501 Prevention of xenotransplant rejection Preclinical studies
NE-1327 Gastritis and peptic ulcers (polyvalent) Preclinical studies
</TABLE>
- ------------
(1) See "Business -- Government Regulation" for a description of the
various regulatory requirements.
(2) At least 90 days prior to marketing, the manufacturer of a reformulated
infant formula must submit to the FDA the description of any major
reformulation or change in processing and assurances that the
reformulated infant formula will not be marketed without complying with
nutrient and quality factor requirements and GMP control requirements.
In the case of NE-1340, the manufacturer must either submit a GRAS
petition or food additive petition prior to such FDA submission, or
self-affirm GRAS, which may be the fastest route to commercialization,
at the time of such submission. If the FDA does not object within 90
days of such submission, the manufacturer may commence commercial sales
of infant formula containing the Company's additive in the United
States. Approval of the reformulated infant formula also will be
necessary in a number of foreign countries. See "Business -- Government
Regulation."
28
<PAGE>
Nutritional Additives
Breast milk contains more than two dozen complex carbohydrates that are
believed to provide infants with protection against bacterial and viral
infections. Commercial infant formula products, which are based on either cow's
milk or soy extracts, do not contain breast milk oligosaccharides. Studies
indicate that breast-fed infants have fewer bacterial and viral infections than
formula-fed infants. The Company believes that this is due, in part, to the
presence of oligosaccharides in breast milk. Neose is using its core technology
to develop breast milk oligosaccharides for inclusion as additives to commercial
infant formula. Neose has entered into an exclusive license agreement with
Abbott, a leading provider of infant formula in the United States, to
commercialize the Company's nutritional additives.
Infant formula marketing strategies are designed to convince
pediatricians and hospitals to recommend the brand of choice to new parents.
Barring complications, switching brands of infant formula is uncommon, and price
competition has not played a significant role in brand selection. The Company
believes that infant formula manufacturers are increasingly seeking ways to
differentiate their products, and to provide an impetus to switch brands of
infant formula. The Company's breast milk oligosaccharide additive is intended
to provide effective product differentiation without requiring significant
pricing adjustments.
Utilizing Neose's MTR technology, Abbott is currently developing the
capability to manufacture the infant formula additive in commercial quantities.
At least 90 days prior to marketing, the manufacturer of a reformulated infant
formula must submit to the FDA the description of any major reformulation or
change in processing, and assurances that the reformulated infant formula will
not be marketed without complying with nutrient and quality factor requirements
and GMP control requirements. In the case of NE-1340, the manufacturer must
either submit a GRAS petition or food additive petition prior to such FDA
submission, or self-affirm GRAS, which may be the fastest route to
commercialization, at the time of such submission. If the FDA does not object
within 90 days of such submission, the manufacturer may commence commercial
sales of infant formula containing the Company's additive in the United States.
Approval of the reformulated infant formula also will be necessary in a number
of foreign countries. See "Business -- Strategic Alliance with Abbott" and
"Business -- Government Regulation."
Additionally, the Company and Abbott are exploring the development of
additional breast milk oligosaccharides for use in infant formula, and the
inclusion of breast milk oligosaccharides in nutritional supplement products for
the elderly, or for nutritionally-compromised adults. In addition, the Company
is exploring with other collaborators the development of other oligosaccharides
for other nutritional and non-prescription healthcare products.
Pharmaceuticals
Neose's initial pharmaceutical development programs are targeted at the
discovery and development of novel oligosaccharide anti-infectives, specifically
anti-bacterials. The Company believes that oligosaccharide anti-infectives will
have substantial benefits as compared with conventional antibiotics.
Oligosaccharides are naturally-occurring, are cost-effective to produce
utilizing the Company's technology, have relatively low toxicity, and are less
likely to cause adverse side-effects. Conventional antibiotics, currently the
primary treatment for bacterial infections, act by killing bacteria and do not
interfere with the initial step of infection. In addition, bacteria are
increasingly becoming resistant to existing antibiotics, severely limiting their
effectiveness. Antibiotics, which act by killing pathogens, select for, and
consequently facilitate the proliferation of strains of the pathogen that are
resistant to the antibiotics. Because the Company's anti-infective product
candidates do not act by killing pathogens, but rather by preventing attachment
of pathogens to cell surfaces, the Company believes that use of its
anti-infectives is less likely to result in the development of resistant
strains.
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Two of the Company's initial drug discovery and development efforts are
targeted to develop treatments for gastritis and peptic ulcers caused by H.
pylori infections and pediatric ear infections.
Gastritis and Peptic Ulcers. Neose is developing a naturally-occurring
human gastrointestinal oligosaccharide to treat gastritis and peptic ulcers
caused by H. pylori infections. H. pylori has been acknowledged to be the cause
of gastritis and over 80% of all peptic ulcer cases. An estimated four million
people suffer from active peptic ulcers each year in the United States, and
approximately 500,000 new cases are diagnosed annually. The Company estimates
that the direct medical costs of treating peptic ulcers in the United States
exceed $2.0 billion per year.
Until recently, treatment of gastritis and peptic ulcers focused on the
use of antagonists of acid secretion, such as the H-2 antagonists, Tagamet(R)
(cimetidine) and Zantac(R) (ranitidine), and the proton pump inhibitors,
Prilosec(R) (omeprazole) and Prevacid(R) (lansoprazole). While assisting in the
healing of gastritis and peptic ulcers, these drugs acting alone do not cure the
underlying H. pylori infection. Consequently, high rates of recurrence and the
need for chronic therapy are associated with these treatment regimes. One
approach currently used to treat gastritis and recurrent peptic ulcers involves
the administration of antibiotics, in combination with other drugs. Even the
most effective antibiotic treatments, however, may be complicated by (i) the
need to treat for prolonged periods with multiple drugs, (ii) side-effects and
problems with patient compliance, (iii) relapses if treatment is interrupted,
and (iv) the development of antibiotic-resistant strains of H. pylori.
NE-0080, Neose's product candidate for the treatment of H. pylori
infections, is a carbohydrate molecule that is identical to a human stomach cell
carbohydrate utilized by H. pylori to attach to its target cells. In in vitro
preclinical studies, NE-0080 prevented the attachment of H. pylori to human
stomach cell lines, and dislodged previously bound H. pylori bacteria from such
cells. Studies in two different animal models have shown that NE-0080 decreased
H. pylori levels. In November 1994, Neose completed preclinical studies of
NE-0080. The Company filed an IND with the FDA in December 1994 and completed
Phase IA and Phase IB clinical trials involving 24 healthy subjects in an
ascending single dose study in April 1995 and 32 subjects with asymptomatic H.
pylori infections in a 10-day repeat dose study in March 1996, respectively. The
results of these studies indicated that NE-0080 was well-tolerated and did not
cause any adverse side-effects. A Phase IC study, involving a 28-day repeat
dose study in 11 subjects with asymptomatic H. pylori infections, was completed
in November 1996. Although the study was designed primarily to test safety, the
Company also used the non-invasive UBT test to measure H. pylori loads in the
subjects over an eight-week period. NE-0080 caused a statistically significant
decrement in UBT values. The Company plans to initiate Phase II studies on
NE-0080 in early 1997. Neose also is developing NE-1327, a polyvalent
configuration of NE-0080 that is significantly more effective than the natural
monovalent molecule in inhibiting in vitro binding of H. pylori bacteria to
human stomach cells.
Pediatric Ear Infections. Neose is developing NE-1530, a
naturally-occurring human airway oligosaccharide, for the treatment of pediatric
ear infections. Middle ear infections are one of the most frequent reasons for
pediatrician visits. According to an industry report, there are an estimated 30
million office visits and prescriptions each year attributable to middle ear
infections. Healthcare costs in the United States associated with middle ear
infections exceed $2.0 billion annually. Current antibiotic therapies are losing
their effectiveness due to the development of resistant strains of the bacteria
that cause these infections.
NE-1530 contains a sugar sequence identical to that of airway
carbohydrates to which respiratory disease-causing bacteria attach, and
subsequently initiate colonization. In in vitro tests, the compound blocked the
attachment to human airway cells of Streptococcus pneumoniae, Hemophilus
influenzae, and Moraxella catarrhalis, the bacteria most frequently associated
with a variety of respiratory infections, including pediatric ear infections,
acute infections associated with chronic bronchitis, and pneumonia. In addition,
results of animal studies indicate that this compound inhibits and reverses the
attachment of these bacteria. The Company is developing a formulation of NE-1530
for nasal administration, is conducting further
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preclinical studies, and intends to file an IND application in late 1997.
Although the Company has chosen initially to develop NE-1530 for pediatric ear
infections, the Company also may develop this compound in the future for other
indications, such as acute infections associated with chronic bronchitis and
pneumonia.
Xenotransplant Rejection. An estimated 20,000 human organ transplants
were performed in the United States in 1995 and many times that number of
patients are believed to die each year due to the lack of available human
organs. At the end of 1995, the waiting list for humans awaiting human organs
was approximately 44,000, and that list has grown significantly each year. There
have been efforts in the past to utilize animal organs, particularly pig organs
due to their size, availability, and physiological similarities to humans, to
address the shortage of human organs. These efforts, however, have not been
successful. Although substantial resources have been committed to develop animal
organs for human transplants, HAR, in which the transplanted organ is rejected
within minutes of transplantation, remains one of the most critical obstacles to
xenotransplantation. HAR results from an antibody-mediated response against an
oligosaccharide found on the cell surface of most mammals, but absent in humans.
In vitro studies and limited in vivo surgeries indicate that it may be
possible to prevent, to some extent, HAR by administering sufficient quantities
of the Company's specific oligosaccharide prior to and following surgery to bind
and neutralize the circulating antibodies. Animal studies have demonstrated that
the administration of the appropriate oligosaccharide may prevent HAR to a
sufficient degree, and for a sufficient period of time, to allow the recipient
to accommodate the grafted organ. Once HAR is overcome, existing
immunosuppressive pharmaceuticals are available to help the physician manage the
ongoing accommodation of the new organ in most patients.
Neose has synthesized significant quantities of the oligosaccharide
that is the target of the antibody responsible for HAR, and has collaborated
with a leading transplant surgeon in preclinical studies of this compound,
designated NE-0501, as a preventive agent for HAR in xenotransplants utilizing
pig organs. During 1996, the Company conducted preclinical studies in which
unmodified pig hearts were grafted into two baboons receiving NE-0501
intravenously to neutralize the target antibodies. These studies demonstrated
that NE-0501, while present in the bloodstream in adequate concentrations,
allows the in vivo survival of the transplanted organ and neutralizes the
antibodies that initiate HAR. The Company is collaborating with other companies
that are pursuing xenotransplantation with several different approaches,
including transgenic modification of pig organs, and chimeric tolerization of
donor organs. The Company believes that the use of oligosaccharides may be an
important part of the therapies that will ultimately be utilized in the possible
commercialization of xenotransplantation in the future.
Other Potential Products
Other clinically important infections mediated by complex carbohydrates
include dental and periodontal infections, vaginitis, tuberculosis, sexually
transmitted diseases, diarrhea, urinary tract infections, and corneal ulcers. To
the extent funding and other resources become available for research and
development, the Company intends to target compounds in the following three
areas: (i) oral hygiene (compounds that would inhibit the activity of plaque and
gingivitis-causing bacteria), (ii) urinary tract infections, and (iii)
anti-fungals (compounds that would inhibit the attachment of Candida albicans,
the fungus that causes common vaginal infections). Using its proprietary
technology, Neose believes it can manufacture complex carbohydrates for eventual
development as novel anti-infective drugs to combat one or more of these
infectious diseases.
The Company, in conjunction with Bracco, is also exploring the use of
complex carbohydrates for development as in vivo diagnostic imaging agents. See
"Business -- Other Collaborative Relationships -- Bracco." The Company also
intends to explore the use of its core technology to create structural molecules
for food industry applications, and to target compounds that would have
anti-bacterial and anti-inflammatory applications in the cosmetics industry.
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Strategic Alliance with Abbott
The Company and Abbott entered into collaborative agreements to develop
breast milk oligosaccharides as additives to infant formula and other
nutritional products. Abbott has manufacturing rights and manufacturing
development responsibilities for the nutritional additives. Under this strategic
alliance, Abbott has invested $6.0 million in Neose and Neose has received
approximately $5.2 million in contract payments, license fees, and milestone
payments from Abbott. In addition, Neose is to receive $5.0 million within 60
days of the first commercial sale, if any, of infant formula containing the
Company's nutritional additive. Abbott will manufacture the nutritional additive
for its own use and has agreed to pay Neose ongoing fees based on the dry weight
of the infant formula sold containing the nutritional additive. The Company is
required to credit $3.75 million of the license fees against the ongoing fees in
equal amounts over four years. In addition, Abbott has agreed to renegotiate the
fees due Neose on the sale of products containing the nutritional additive in
any case where Neose has made a contribution that both parties agree will result
in a substantial commercial advantage. Abbott is considering the utilization of
other proprietary technology exclusively licensed to Neose that may further
significantly reduce the cost of manufacture of the oligosaccharide additives to
infant nutritional formula. If Abbott determines to adopt this technology in its
manufacturing processes, Abbott has acknowledged to Neose that it would be
obligated under that provision of its agreement to renegotiate the financial
terms. There can be no assurance that Abbott will determine to utilize the Neose
technology in its manufacturing processes. Under the terms of the Abbott
agreements, if Abbott fails to make appropriate regulatory filings with the FDA
for the addition of Neose oligosaccharides in infant formula prior to December
31, 1997, Neose, at its option, may elect to convert the license of Neose
technology to a non-exclusive license to Abbott, in which event the license fees
payable by Abbott after commercialization would be reduced by 50%, and Abbott's
obligations to make contract and milestone payments, including the $5.0 million
milestone payment, would be terminated. Abbott may, at any time prior to the
first commercial sale, if any, of infant formula containing the Company's
nutritional additive, elect to make its license agreement non-exclusive, in
which event the license fees payable by Abbott after commercialization would be
reduced by 50%, and Abbott's obligations to make contract and milestone
payments, including the $5.0 million milestone payment, would be terminated.
Abbott also has the right to cancel the underlying license agreement upon 60
days' written notice and return the technology, in which event it would have no
further funding obligations to the Company. The Company anticipates that its
manufacturing arrangement with Abbott will assist the Company in developing its
own manufacturing capability.
Other Collaborative Relationships
Neose seeks to complement its internal resources through the formation
of relationships with universities and other companies. The Company has formed
several such collaborative relationships to date, and intends to enter into
additional relationships in the future. The Company's other collaborative
relationships are described below.
Bracco
Neose has entered into a collaborative research agreement with Bracco
Research USA Inc., a unit of Bracco Industria SpA and formerly the diagnostics
division of Bristol-Myers Squibb Company. Under the terms of the agreement,
Neose will supply Bracco with complex carbohydrates, which Bracco will attach to
diagnostically useful agents. If the resulting new molecules can highlight
specific targets, they may be promising candidates for development as human in
vivo imaging agents. Under the terms of the three-year agreement, Bracco has
paid Neose $375,000 to date and is obligated to pay Neose $375,000 over the next
18 months to fund research and development. This agreement is terminable at any
time upon 60 days' notice, in which event Bracco would have no further funding
obligations to the Company.
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The Rockefeller University
In October 1995, Neose licensed from The Rockefeller University
proprietary technology for a group of gene sequences that allow the recombinant
production of highly active and efficient enzymes involved in the synthesis of
carbohydrates. Neose expects that these enzymes will substantially reduce the
cost of manufacture of certain carbohydrates.
In addition, The Rockefeller University scientists have collaborated
with Neose in the area of carbohydrates involved in upper respiratory
infections. Neose has licensed one issued patent and one patent application from
The Rockefeller University directed toward the therapeutic uses of certain
oligosaccharides in these areas.
University of Pennsylvania
Neose has entered into an exclusive license agreement with the
University of Pennsylvania for the use, development, and commercialization of
patent and technology rights relating to the Company's proprietary MTR
technology substantially developed by Dr. Stephen A. Roth, the Company's
Chairman and Chief Executive Officer, while Professor of Biology at Penn. Penn
beneficially owns approximately 1.8% of the Common Stock and upon completion of
this offering, Penn will beneficially own approximately 1.6% of the Common
Stock.
Research and Development
The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company has assembled a
scientific staff with multidisciplinary skills in advanced research
technologies, including biochemistry, organic chemistry, analytic chemistry,
molecular biology, cell biology, microbiology, and enzymology. The Company
currently has 40 employees engaged in research and development. The Company's
research facilities include laboratories for each of the scientific staff's
disciplines, in vitro testing facilities, and formulation facilities.
In addition to its in-house research programs, the Company collaborates
with academic and research institutions to support research in areas of interest
to the Company. Usually, such research assistance is performed in conjunction
with additional in-house research. The faculty member supervising the outside
research effort may also participate as a consultant to the Company.
Patents and Proprietary Rights
The Company relies on patent rights, trade secrets, trademarks, and
nondisclosure agreements to establish and protect its proprietary rights in its
technologies and products. Despite these precautions, it may be possible for
unauthorized third parties to utilize the Company's technology or to obtain and
use information that the Company regards as proprietary. The Company may be
dependent on licensors or collaborators to prosecute certain of the Company's
patent applications and may be dependent on such parties to protect such patent
rights if patents issue. The laws of some foreign countries do not protect the
Company's proprietary rights in its technologies and products to the same extent
as do the laws of the United States.
To date, the Company, through its license with Penn, has obtained
exclusive, worldwide rights to two issued U.S. patents. Both patents expire in
2010. The first patent, for which certain corresponding foreign patents have
issued and other foreign patent applications are pending, is directed to an
apparatus for synthesizing carbohydrates or carbohydrate-containing compounds
utilizing three or more different glycosyltransferases. The second U.S. patent
is directed to an apparatus containing a specific pair of enzymes to synthesize
a breast milk oligosaccharide and to other apparatuses containing multiple
glycosyltransferases. In addition, the Company, through its license with Penn,
has received rights to a patent
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application directed to a process for obtaining glycosyltransferases from
natural sources. The Penn license terminates upon the expiration of the last to
expire licensed patent in each country. Penn may, at its option, terminate the
license upon 60 days' notice if the Company is not using its continuing best
efforts to develop or sell a product using the licensed technology. The Company
also has licensed from The Rockefeller University two issued patents and one
patent application. These are directed toward certain gene sequences and
therapeutic uses of certain oligosaccharides. In addition to the licensed
patents, three U.S. patents have issued to the Company within the past year.
These patents are directed toward manufacturing processes for, and therapeutic
uses of, oligosaccharides. The Company, both independently and through its
licenses, has rights to a number of U.S., and corresponding foreign, patent
applications.
No assurance can be given that the U.S. Patent and Trademark Office or
any foreign patent office will grant patent protection for the subject matter of
any pending patent applications, or that present or future patents will provide
meaningful protection to the Company's present or future technologies, products,
or processes. Furthermore, no assurance can be given that others will not
independently develop substantially equivalent proprietary information or obtain
access to the Company's know-how or that others will not be issued patents that
may prevent the sale of one or more of the Company's products, or require
licensing and the payment of significant fees or royalties by the Company to
third parties in order to enable the Company to conduct its business. Legal
standards relating to the scope of claims and the validity of patents in the
biotechnology field are still evolving, and no assurance can be given as to the
degree of protection any patents issued or licensed to the Company will afford,
the validity of any such patents, or the Company's ability to avoid violating or
infringing any patents issued to others. There can be no guarantee that any
patents issued to or licensed by the Company will not be infringed by the
products of others. Defense and prosecution of patent claims can be expensive
and time-consuming, even in those instances in which the outcome is favorable to
the Company, and can result in the diversion of substantial resources from the
Company's other activities. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third parties, or require the Company to cease any related research and
development activities or product sales. In addition, the laws of certain
countries may not protect the Company's intellectual property.
The Company's success is also dependent upon the skills, knowledge, and
experience of its scientific and technical personnel. To help protect its
rights, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company, and
requires disclosure and assignment to the Company of their ideas, developments,
discoveries, and inventions. There can be no assurance, however, that these
agreements will provide adequate protection for the Company's trade secrets,
know-how, or other proprietary information in the event of any unauthorized use
or disclosure. NEOSE is a trade name of the Company.
The Company's management and scientific personnel have been recruited
primarily from other scientific companies, pharmaceutical companies, and
academic institutions. In some cases, these individuals may be continuing
research in the same areas with which they were involved prior to joining the
Company. As a result, the Company could be subject to allegations of violation
of trade secrets and similar claims. The Company has not received any notice of
any such claims and knows of no basis of any such claims. See "Risk Factors --
Uncertainty Regarding Patents and Proprietary Rights."
Government Regulation
The Company's product candidates and manufacturing facilities are
subject to stringent regulation by a number of government authorities in the
United States and other countries, including the FDA, pursuant to the FDC Act
and regulations thereunder. The Company's infant formula additive may be subject
to FDA review as a food additive, and the infant formula containing this
additive will be subject to the provisions of the United States Infant Formula
Act. The Company is also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
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the Resource Conservation and Recovery Act, and other similar federal, state and
local laws, rules, and regulations governing laboratory activities, waste
disposal, handling of toxic, dangerous or radioactive materials, and other
matters. The Company is unable to predict whether any governmental agency will
adopt requirements, including regulations, which would have a material and
adverse effect on any future product applications involving biotechnology. The
Company currently voluntarily complies with the National Institutes of Health
Guidelines for Research Involving Recombinant DNA Technologies. Although the
Company believes that it is in compliance with all applicable laws, rules, and
regulations, these laws, rules, and regulations change frequently, and there can
be no assurance that federal or state governments will not impose upon all or a
portion of the Company's activities additional restrictions which might
adversely affect the Company's business, prospects, financial condition, or
results of operations. See "Risk Factors -- Government Regulation; No Assurance
of Product Approval."
Regulation of Infant Formula Additives
Food and food ingredients are subject to the provisions of the FDC Act
regarding adulteration and misbranding of food. Food additives are broadly
defined as any substances that may become a component, or otherwise affect the
characteristics, of food, and the safety of which is established by regulation
rather than general recognition among experts. All new food additives require
premarket clearances. The Company's breast milk oligosaccharide, which is
intended to be marketed as an additive for infant formula, may be subject to the
extensive and lengthy FDA review process for food additives.
Information supporting the safety of a food additive is submitted to
the FDA in the form of a food additive petition. Such a petition is required to
contain reports of safety investigations of the food additive and details
regarding its physical, chemical, and biological properties. All product safety
studies submitted to the FDA usually must be conducted in accordance with FDA
Good Laboratory Practices ("GLP") requirements. Submission of a food additive
petition does not assure that the FDA will issue a food additive regulation. The
information must establish to a reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The food
additive petition process generally is expensive and lengthy, frequently
requiring several years after the petition is submitted to the FDA. No assurance
can be given that the FDA will accept the petition or that, if accepted, such
petition will not result in the establishment of regulations concerning the use
of the product.
Substances that are GRAS are excluded from the definition of food
additives. A manufacturer may make an independent determination that qualified
experts would generally agree that a substance is GRAS for a particular use.
Alternatively, a GRAS affirmation petition may be submitted for the FDA to
review and affirm GRAS status by regulation. There can be no assurance that
Abbott will make an independent determination or that the FDA will agree with
such independent determination, if Abbott were to elect to make such a
determination. Accordingly, there is a risk that the FDA will disagree with the
independent determination. In such a circumstance, the manufacturer must submit
a GRAS affirmation petition for the FDA to review and affirm GRAS status by
regulation in order to market and sell the additive or formula containing the
additive. This process could be time-consuming and expensive and would have a
material adverse effect on the Company's business, financial condition, and
results of operations. Furthermore, a company's decision to rely on an
independent determination may limit the marketability of that company's products
as to food manufacturers, many of whom require confirmation of GRAS status from
the FDA before they will purchase substances for use in foods from third
parties.
The infant formula into which the Company's breast milk oligosaccharide
is introduced will be subject to review and approval under the Infant Formula
Act, which has detailed requirements for the manufacture, composition, and
labeling of infant formulas. Under the Infant Formula Act, infant formula
manufacturers are required to notify the FDA of any intent to revise, add, or
substitute any protein, fat, or carbohydrate in infant formula 90 days prior to
the intended date of commercial distribution. The submission must contain the
quantitative formulation of the new infant formula, a description of any
reformulation or change in processing, and assurances that the new infant
formula will not be marketed without complying
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with the nutrient and quality factor requirements and GMP control requirements.
Upon notification, the FDA has a 90-day period in which to request additional
information, or deny marketing rights for the new formula. If no response is
forthcoming from the FDA within 90 days of notification, the manufacturer may
proceed with commercial sales of the newly formulated product. Pursuant to the
Company's agreements with Abbott, Abbott is responsible for all regulatory
activities relating to the infant formula additive. There can be no assurance
that Abbott will be able to satisfy all applicable regulatory requirements.
In addition, Abbott may market infant formula containing the additive
in foreign countries. Infant formula regulatory requirements vary widely from
country to country, and may be more or less stringent than FDA requirements. The
time required to obtain required clearances, if required, in foreign countries
may be longer or shorter than that required in the United States.
If the Company's technology is incorporated in products claiming a
therapeutic benefit, such products could be regulated as a drug rather than as a
food. Regulation of these products as a drug would require extensive clinical
testing and review by the FDA to support the claims made for the product. The
uncertainty regarding the regulatory status of this type of product could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Regulation of Pharmaceutical Products
The Company's research and development activities regarding, and the
future manufacturing and marketing of, its pharmaceutical products will be
subject to significant regulation by numerous government authorities in the
United States and other countries. Pharmaceutical products intended for
therapeutic use in humans are governed principally by the FDC Act and by FDA
regulations in the United States and by comparable laws and regulations in
foreign countries. The FDC Act and other federal statutes and regulations govern
the testing, manufacture, safety, labeling, storage, record keeping, approval,
advertising, and promotion of such products. Failure to comply with applicable
requirements can result in fines, recall, or seizure of products, total or
partial suspension of production, withdrawal of existing product approvals,
refusal to approve new drug applications, and criminal prosecution. The process
of completing clinical testing and obtaining FDA approval for a new drug or
biological product requires a number of years and the expenditure of substantial
resources and there can be no assurance that approval will be granted.
Following drug discovery, the steps required before a new
pharmaceutical product may be marketed in the United States include: (1)
preclinical laboratory and animal tests; (2) the submission to the FDA of an IND
application; (3) clinical and other studies to assess safety and parameters of
use; (4) adequate and well-controlled clinical trials to establish the safety
and effectiveness of the drug; (5) the submission of a New Drug Application
("NDA") to the FDA; and (6) FDA approval of the NDA prior to any commercial sale
or shipment of the drug.
Typically, preclinical studies are conducted in the laboratory and in
animal model systems to gain preliminary information on the drug's pharmacology
and toxicology and to identify the potential safety problems that would preclude
testing in humans. The results of these studies are submitted to the FDA as part
of the IND application and are reviewed by the FDA prior to authorizing the
sponsor to conduct clinical trials in human subjects. Unless the FDA objects to
an IND, the IND will become effective 30 days following its receipt by the FDA.
Clinical trials of an investigational product in human subjects
typically are conducted in three phases and are subject to specific protocols
that are particularly detailed in Phases II and III. Each protocol indicating
how the clinical trial will be conducted must be submitted for review to the FDA
as part of the IND. Clinical trials using xenotransplants raise unique safety
issues and the FDA has developed and is expected to continue to develop
additional requirements for INDs for these types of trials. The FDA's review of
a study protocol does not necessarily mean that if the study is successful it
will constitute proof of efficacy or safety.
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The FDA may require changes in a protocol both prior to and after the
commencement of a trial. There is no assurance that the FDA will permit a study
to go forward or, once started, to be completed.
Phase I clinical trials are designed to determine the metabolic and
pharmacologic effects of the drug in humans, the side-effects associated with
increasing doses, and possibly, to obtain early indications of efficacy. These
studies generally involve a small number of healthy volunteer subjects, but may
be conducted on people with the disease the drug is intended to treat. Phase II
studies are conducted to evaluate the effectiveness of the drug for a particular
indication and thus involve patients with the disease under study. These studies
also provide evidence of the short term side-effects and risks associated with
the drug. Phase III studies are generally designed to provide the substantial
evidence of safety and effectiveness of a drug required to obtain FDA approval.
They often involve a substantial number of patients in multiple study centers
and may include chronic administration of the drug in order to assess the
overall benefit-risk relationship of the drug. A clinical trial may combine the
elements of more than one phase and typically two or more Phase III studies are
required. Typical estimates of the total time required for completing such
clinical testing vary between four and ten years.
Reports of results of the preclinical studies and clinical trials for
non-biologic drugs are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment. This application also includes details
of the manufacturing and testing processes, as well as proposed product
packaging and labeling. FDA approval of the NDA is required before the applicant
may market the new product in the United States. The clinical testing and FDA
review process for new drugs are likely to require substantial time, effort, and
expense. The FDA may refuse to approve an NDA if applicable statutory and/or
regulatory criteria are not satisfied, or may require additional testing or
information.
The Company has not submitted an NDA to the FDA or received approval
from any other regulatory authority to market any of its product candidates, and
there can be no assurance that any such product will ever be approved for
marketing, or that the Company will be able to obtain the labeling claims
desired for its products. The Company is and will continue to be dependent upon
and require that the laboratories and medical institutions conducting its
preclinical studies and clinical trials maintain both good laboratory and good
clinical practices and that the manufacturers of its compounds maintain
compliance with current GMP requirements. Data obtained from preclinical studies
and clinical trials are subject to varying interpretations that could delay,
limit, or prevent FDA regulatory approval. Delays or rejections may be
encountered based upon changes in FDA policy for drug approval during the period
of development and FDA regulatory review. Similar delays also may be encountered
in foreign countries. Any delay in obtaining, or failure to obtain, such
approvals would adversely affect the Company's ability to generate product
revenues or royalties. There can be no assurance that regulatory approval will
be obtained for any product developed by the Company. Moreover, even if approval
is granted, such approval may entail commercially unacceptable limitations on
the labeling claims for which a product may be marketed.
Even after initial FDA approval has been obtained, further studies may
be required to provide additional data on safety, or to gain approval for the
use of a product as a treatment in clinical indications other than those for
which the product was initially tested. The FDA may also require post-marketing
testing and surveillance programs to monitor the drug's effects. Side-effects
resulting from the use of pharmaceutical products may prevent or limit the
further marketing of products.
Once the sale of a product is approved, the FDA regulates production,
manufacturing, marketing, and other activities to ensure compliance with the FDC
Act and the FDA's implementing regulations. Product approvals may be withdrawn,
or other actions may be ordered, or sanctions imposed if compliance with
regulatory requirements is not maintained. Other countries in which any products
developed by the Company or its licensees may be marketed impose a similar
regulatory process. The Company cannot predict the impact of adverse
governmental action that might arise from future legislative and administrative
action.
37
<PAGE>
For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements relating to the conduct of
clinical trials, product licensing, pricing, and reimbursement vary widely from
country to country.
Competition
The Company is engaged in highly competitive industries. The Company
competes with many public and private companies, including well-known
nutritional products manufacturers, pharmaceutical companies, chemical
companies, specialized biotechnology companies, and academic institutions. Many
of the Company's competitors have significantly greater financial, scientific,
and technical resources, and manufacturing and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience conducting preclinical studies and clinical trials of new
pharmaceutical products, and in obtaining regulatory approvals for
pharmaceutical products.
The Company is relying on Abbott to develop and commercialize its
infant formula additive. As a result, the success of the Company's infant
formula additive will depend, in significant part, on Abbott's ability to
compete in the highly competitive infant formula market. Abbott's principal
competitors in this market include Bristol-Myers Squibb Company, American Home
Products Corp., Nestle S.A., and Gerber Products Co. Competitors of the Company
and its collaborators may develop products that compete successfully with the
Company's products and may develop and commercialize such products more rapidly
than the Company and its collaborators. Competition may increase further as a
result of potential advances from the study of complex carbohydrates, and
greater availability of capital for investment in this field. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any being developed by
the Company, or that would render the Company's technology and products obsolete
or noncompetitive. Although Neose is not aware of any companies that are
developing breast milk oligosaccharides as additives to infant formula, other
companies are investigating potential infant formula additives. Such compounds
may compete as additives to infant formula, but are not directly substitutable
for, or competitive with, carbohydrate additives.
The anti-H. pylori market is currently dominated by large
pharmaceutical companies with products that generally kill bacteria on a
non-specific basis. In response to recent evidence that infection with the
bacterium H. pylori is the major cause of peptic ulcers, certain of these
pharmaceutical companies and others have initiated or expanded research programs
aimed at the eradication of H. pylori. However, many of these research programs
are focusing on conventional antibiotic agents, each of which has reported
incidences of side-effects and resistance. To date, no single product has alone
received FDA approval of a labeling indication for H. pylori, although the FDA
has approved several combinations of multiple products with a specific labeling
indication for eradication of H. pylori. The market for treatment of respiratory
infections and otitis media is currently dominated by large pharmaceutical
companies with antibiotics that kill bacteria non-specifically. The use of
antibiotics often results in the development of side-effects and resistance. Due
to the significant commercial opportunities for respiratory infection and otitis
media therapeutics, many pharmaceutical and biotechnology companies are believed
to be developing alternative therapeutics and vaccines for the treatment and
prevention of respiratory infections and otitis media. Due to the limited supply
of human organs, there is a developing need for alternatives. The Company is
aware of several other pharmaceutical companies that are doing work in the area
of xenotransplants.
Several companies are developing oligosaccharide therapeutics, and one
company produces by enzymatic means a limited number of oligosaccharides and
oligosaccharide precursors. The Company believes that none of these companies
has the ability currently to manufacture a wide variety of human oligosaccharide
products in quantities sufficient for commercialization. Other companies,
however, that are developing non-human oligosaccharides may have the capability
to produce, via fermentation, quantities sufficient for clinical studies and
commercialization. In addition, some companies are investigating novel methods
of organic synthesis, sometimes in combination with enzymatic steps, in order to
produce
38
<PAGE>
commercial quantities of complex carbohydrates. There can be no assurance that
these and other efforts by potential competitors will not be successful, or that
other methods of carbohydrate synthesis will not be developed to compete with
the Company.
Manufacturing
To be successful, the Company's products must be manufactured in
commercial quantities under GMP prescribed by the FDA, and at acceptable costs.
The Company has not yet manufactured any products in commercial quantities and
currently does not have the facilities to manufacture any products in commercial
quantities under GMP. Although the Company is formulating amounts sufficient to
conduct initial clinical trials of one pharmaceutical product candidate under
GMP conditions, existing facilities of the Company are not adequate for
commercial scale manufacturing. The Company plans to construct GMP manufacturing
facilities in its current Horsham facility during the first half of 1997
adequate to provide Neose capacity for the GMP production of amounts of NE-0080,
NE-1530, and NE-0501 necessary for the conduct of anticipated clinical trials of
those compounds. In addition, the expanded facility is expected to give Neose
the capacity to manufacture limited amounts of GMP carbohydrate materials for
third parties. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments" for a description of the
anticipated financial aspects of this manufacturing expansion. The Company will
need to develop its own GMP manufacturing facility and/or depend on its
collaborators, licensees, or contract manufacturers for the commercial
manufacture of its products. In the event the Company determines to establish a
manufacturing facility, it will require substantial additional funds, the hiring
and retention of significant additional personnel and compliance with extensive
regulations applicable to such a facility. The Company has no experience in such
commercial manufacturing, and there can be no assurance that the Company will be
able to establish such a facility successfully and, if established, that it will
be able to manufacture products in commercial quantities for sale at competitive
prices. If the Company determines to rely on collaborators, licensees, or
contract manufacturers for the commercial manufacture of its products, the
Company will be dependent on such corporate partners or other entities for, and
will have only limited control over the commercial manufacturing of, its
products. There can be no assurance that the Company will be able to enter into
any such manufacturing arrangements on acceptable terms, if at all. If the
Company is not able to enter into commercial manufacturing agreements, it could
encounter delays in introducing its products into certain markets, or find that
the manufacture of its products in these markets is adversely affected. There
can be no assurance that the parties to the Company's future commercial
manufacturing agreements will perform their obligations as expected, or that any
revenue will be derived from these commercial manufacturing agreements. See
"Risk Factors -- No Commercial Manufacturing Capability or Experience."
Marketing, Distribution, and Sales
The Company has no experience in marketing, distributing, or selling
nutritional additives or pharmaceutical products, and will have to develop a
sales force and/or rely on its collaborators or licensees, or on arrangements
with others to provide for the marketing, distribution, and sales of its
products. There can be no assurance that the Company will be able to establish
marketing, distribution, and sales capabilities or make arrangements with third
parties to perform such activities on acceptable terms, if at all. See "Risk
Factors -- Limited Clinical Trial Experience; No Marketing or Sales Capability
or Experience."
Scientific Advisory Board
The Company has assembled a Scientific Advisory Board (the "SAB")
composed of eight members (the "Scientific Advisors") who are leaders in certain
of the Company's core disciplines, and who review the Company's research,
development, and clinical activities. Scientific Advisors are available for
consultation with the Company's management. The SAB meets as a group at
scheduled semi-annual meetings, and some Scientific Advisors meet more
frequently, on an individual basis, with the Company's scientific personnel and
management to discuss the Company's ongoing research and development projects.
39
<PAGE>
Upon election to the SAB, Scientific Advisors receive a onetime grant
of an option to purchase 6,666 shares of Common Stock at fair market value,
vesting over a four-year period. Each member of the SAB is eligible to receive
$2,000 per day as compensation for consulting services, up to a maximum of
$24,000 per year. In addition, each Scientific Advisor was granted an option to
purchase 1,500 shares of Common Stock during 1996. Each member of the SAB has
agreed to transfer to the Company the rights to all technology invented that is
related to the business of the Company and that was derived directly or
indirectly from the proprietary information of the Company, and has further
agreed not to compete with the Company for a period of one year following
termination of his or her membership. The current members of the SAB are as
follows:
Baruch S. Blumberg, M.D., Ph.D., Neose's SAB Chairman, was
Master of Balliol College, Oxford University, and is the Fox Chase
Distinguished Scientist and Senior Advisor to the President, Fox Chase
Cancer Center in Philadelphia, and University Professor of Medicine and
Anthropology, University of Pennsylvania. Dr. Blumberg received the
Nobel Prize for Physiology or Medicine in 1976 for his research on the
hepatitis B virus, for his invention of the hepatitis B vaccine, and
for his discoveries of mechanisms relating to the origins and
dissemination of infectious diseases. Dr. Blumberg has received 22
honorary degrees, more than 25 distinguished scientific awards and, in
addition to his numerous current appointments, has published over 400
scientific articles and abstracts.
Merton Bernfield, M.D. is Chief of Newborn Medicine at the
Children's Hospital in Boston, chairs the Department of Newborn
Medicine at the Brigham & Women's and Beth Israel Hospitals, and serves
as the Clement A. Smith Professor of Pediatrics and Professor of Cell
Biology at Harvard Medical School. Dr. Bernfield has had numerous
senior academic and administrative appointments as well as an extensive
list of awards and honors. Dr. Bernfield currently serves on the
editorial boards of six scientific peer review journals, is a member of
the Institute of Medicine of the National Academy of Sciences, and has
authored and co-authored over 140 scientific publications.
Harold C. Neu, M.D. is Professor of Medicine and Pharmacology,
and was Chief, Division of Infectious Diseases at Columbia University.
Dr. Neu is a member of the Scientific Committee of the International
Society for Chemotherapy, was the Chairman of the Subcommittee on
Infectious Diseases, and served on the Committee on Public Health of
the New York Academy of Medicine. Dr. Neu currently serves on the
editorial boards of more than 20 peer review journals and has received
several awards for his scientific accomplishments.
Harry Schachter, M.D., Ph.D., FRSC is an expert of
international repute in glycoconjugates, and has served as Professor
and Chairman of the Department of Biochemistry at the University of
Toronto and as Head of the Division of Biochemistry Research at
Toronto's Hospital for Sick Children. Dr. Schachter has been awarded
numerous honors, and has authored over 120 scientific publications
related to glycoconjugates. He has served as the President of the
International Glycoconjugate Organization, and serves on the editorial
boards of several journals.
Stanton Segal, M.D. is Director of the Division of Biochemical
Development and Molecular Diseases at the Children's Hospital of
Philadelphia and Professor of Pediatrics and Medicine at the University
of Pennsylvania School of Medicine. Dr. Segal has published over 375
scientific articles on all aspects of carbohydrate metabolism and
metabolic defects. He has served on many national committees, and is on
the editorial board of both Metabolism and Enzyme and Protein.
Barry D. Shur, Ph.D. is Professor and Chairman, Department of
Anatomy and Cell Biology, Emory University School of Medicine. Dr. Shur
serves on the editorial board of Glycobiology and Developmental
Biology, and has authored or co-authored over 100 scientific
publications.
40
<PAGE>
Elaine Tuomanen, M.D. is Associate Professor and Head of the
Laboratory of Molecular Infectious Diseases at The Rockefeller
University, New York, where she has been engaged in full-time research
since 1981. Dr. Tuomanen is the author or co-author of over 100
publications, and her work has been recognized by awards from the
American Society of Microbiology, the American Lung Association, the
Society for Pediatric Research, and the Infectious Diseases Society of
America.
George Whitesides, Ph.D. is Mallinckrodt Professor of
Chemistry at Harvard University and the former Chairman of the
Department of Chemistry at Harvard. The recipient of many scientific
awards and accolades, Dr. Whitesides serves in numerous national
advisory positions and on the editorial boards of several peer review
journals.
Employees
As of December 31, 1996, Neose had 49 employees (13 of whom held Ph.D.,
Pharm.D., or M.D. degrees), consisting of 40 employees engaged in research and
development activities and nine employees devoted to business development,
finance, and administrative activities. The Company's staff includes
carbohydrate biochemists as well as scientists with expertise in organic
chemistry, analytic chemistry, molecular biology, microbiology, cell biology,
scale-up manufacture, and regulatory affairs. A significant number of the
Company's management and professional employees have prior experience with
pharmaceutical or biotechnology companies, and many have specialized training in
carbohydrate technology. None of the Company's employees is covered by
collective bargaining agreements, and Neose believes that it maintains good
relations with its employees.
Facilities
The Company currently leases approximately 45,000 square feet of
laboratory and office space in Horsham, Pennsylvania. Build-out has been
completed on approximately 25,000 square feet of this facility with
approximately 80% of such space being devoted to research and development. The
Company intends during the first half of 1997 to complete build-out of the
remaining approximately 20,000 square feet for use as pilot-scale manufacturing
and offices. In connection with the remaining build-out, the Company expects to
make capital expenditures in the total amount of approximately $7.5 million,
which began in the fourth quarter of 1996, to expand GMP manufacturing
capabilities for the Company's compounds under development. The Company's lease
terminates in 2002. The Company has the option to extend the lease for an
additional five years or to terminate the lease early, in either 1997 or 1999.
The Company has entered into a non-binding letter of intent with the owner of
its facility for the purchase of the facility, and is currently negotiating a
definitive purchase agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments" for a
discussion of the manufacturing expansion and anticipated financial aspects of
the facility purchase. The Company believes that its facility is adequate to
meet the Company's purposes for at least the next two years.
Legal Proceedings
The Company is not a party to any legal proceedings.
41
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth certain information with respect to the
directors, executive officers, and key employees of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------------ ---- ------------------------------------------------
<S> <C> <C>
Stephen A. Roth, Ph.D..................... 54 Chairman, Chief Executive Officer, and Director
P. Sherrill Neff.......................... 45 President, Chief Financial Officer, and Director
Edward J. McGuire, Ph.D................... 59 Vice President, Research and Development
David A. Zopf, M.D........................ 54 Vice President, Drug Development
Robert L. Fleming......................... 62 Director of Manufacturing and Operations
Marjorie Hurley, Pharm.D.................. 37 Director of Regulatory Affairs
Paul M. Simon, Ph.D....................... 45 Director of Drug Development
William F. Hamilton, Ph.D. (1)(2)......... 57 Director
Douglas J. MacMaster, Jr. (2)............. 66 Director
Lindsay A. Rosenwald, M.D. (2)............ 41 Director
Lowell E. Sears (1)....................... 45 Director
Jerry A. Weisbach, Ph.D................... 63 Director
</TABLE>
- ------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Dr. Roth has served as a director of the Company since December 1989
and as its Chairman and Chief Executive Officer since August 1994. Dr. Roth
co-founded the Company, and from April 1992 until August 1994, he served as
Senior Vice President, Research and Development and Chief Scientific Officer of
the Company. Prior to joining the Company, he was a consultant to the Company.
Dr. Roth was on the faculty of the University of Pennsylvania from 1980 to 1994
and was Chairman of Biology from 1982 to 1987. Dr. Roth serves on the Editorial
Board of Current Research in Developmental Biology, The Quarterly Review of
Biology, and The Journal of Molecular Recognition. Dr. Roth received his A.B. in
biology from The Johns Hopkins University, his Ph.D. in developmental biology
from the Case Western Reserve University and completed his post-doctorate
training in carbohydrate chemistry at The Johns Hopkins University.
Mr. Neff has served as President, Chief Financial Officer, and a
director of Neose since December 1994. From February 1993 to December 1994,
Mr. Neff was Senior Vice President, Corporate Development at U.S. Healthcare,
Inc., a managed healthcare company, where Mr. Neff had responsibility for
managing the growth of several subsidiary companies, and sustaining growth
through strategic acquisitions, investments, and partnerships. From March 1984
to February 1993, Mr. Neff worked at Alex. Brown & Sons Incorporated, an
investment banking firm, where he was Managing Director and Co-Head of the
Financial
42
<PAGE>
Services Group. Mr. Neff received his B.A. in religion from Wesleyan University
and his J.D. from the University of Michigan Law School. Mr. Neff is a director
of JeffBanks, Inc., a publicly traded bank holding company. Mr. Neff has been a
member of the Pennsylvania Bar since 1980.
Dr. McGuire has served as Vice President, Research and Development of
the Company since April 1990. He is responsible for leading the oligosaccharide
synthesis team. Dr. McGuire was on the faculty of the University of Pennsylvania
from 1985 to April 1990. From 1984 to 1985, Dr. McGuire served as a Senior
Researcher at Genetic Engineering, Inc., a biotechnology company, and from 1972
to 1984 he was a Research Biochemist at the National Jewish Hospital. Dr.
McGuire received his B.A. in biology from Blackburn College, his Ph.D. in
biochemistry/chemistry from the University of Illinois Medical School, and held
a National Institutes of Health ("NIH") post-doctoral fellowship at the
University of Michigan and The Johns Hopkins University.
Dr. Zopf has served as Vice President, Drug Development of the Company
since April 1992. From August 1991 to March 1992, Dr. Zopf was a consultant to
the Company on the biomedical applications of complex carbohydrates. From April
1988 to July 1991, Dr. Zopf served as Vice President and Chief Operating Officer
of BioCarb, Inc., a biotechnology company and the U.S. subsidiary of BioCarb AB,
where he managed the research and development programs of novel
carbohydrate-based diagnostics and therapeutics. Dr. Zopf worked at NIH from
1971 to 1988, most recently as Chief, Section on Biochemical Pathology at the
National Cancer Institute. Dr. Zopf currently serves on the editorial board of
Archives of Biochemistry and Biophysics. Dr. Zopf received his A.B. in zoology
from Washington University and his M.D. from Washington University School of
Medicine.
Mr. Fleming has served as Director of Manufacturing and Operations of
the Company since February 1993. Mr. Fleming served as Director, Production and
Facilities at Vestar Inc., a drug distribution and manufacturing company, from
1986 to February 1993 and from 1979 to 1986, he served as Vice President,
Operations for Adria Laboratories Inc., a pharmaceutical company. Prior to
joining Adria Laboratories Inc., Mr. Fleming held a number of positions,
including Plant Manager, at the Mead-Johnson division of Bristol-Myers Squibb
Company from 1957 to 1979. Mr. Fleming received his B.S. in chemical engineering
from Purdue University and his M.B.A. from the University of Evansville.
Dr. Hurley has served as Director of Regulatory Affairs of the Company
since November 1993. From 1987 to November 1993, Dr. Hurley served in various
positions, including as Assistant Director, Regulatory Affairs at Cytogen Corp.,
a biotechnology company. From 1984 to 1987, she held several positions,
including project coordinator at the Wyeth-Ayerst Laboratories division of
American Home Products Corp. Dr. Hurley received her B.S. in pharmacy and her
Pharm.D. from the University of Michigan.
Dr. Simon has served as Director of Drug Development of the Company
since November 1992 and has been responsible for in vitro and in vivo
preclinical testing of Neose compounds. From March 1983 to September 1992, he
was a research immunologist in the cellular immunology of cancer, AIDS,
transplantation, and autoimmune diseases at E.I. DuPont ("DuPont") and DuPont
Merck Pharmaceuticals. Prior to joining DuPont, Dr. Simon trained as a
post-doctoral fellow at the University of California at Los Angeles and at the
Dana Farber Cancer Institute, Harvard Medical School. Dr. Simon received his
B.S. in mathematics from City College of New York and received his Ph.D. in
biology from Syracuse University.
Dr. Hamilton has served as a director of the Company since September
1991. Dr. Hamilton has served on the University of Pennsylvania faculty since
1967 and is the Landau Professor of Management and Technology and Director of
the Jerome Fisher Program in Management and Technology at The Wharton School and
the School of Engineering and Applied Science at the University of Pennsylvania.
Dr. Hamilton serves as a director of Centocor, Inc., a biopharmaceutical
company, Hunt Manufacturing Co., a manufacturer of art and office supplies, and
Marlton Technologies, Inc., a trade show supply company. Dr. Hamilton received
his B.S. and his M.S. in chemical engineering and his M.B.A. from the University
of Pennsylvania and his Ph.D. in applied economics from the London School of
Economics.
43
<PAGE>
Mr. MacMaster has served as a director of the Company since May 1993.
Mr. MacMaster served as Senior Vice President of Merck & Co., Inc. ("Merck")
from July 1988 to January 1992, where he was responsible for worldwide chemical
and pharmaceutical manufacturing, the Agvet Division, and the Specialty
Chemicals Group. From 1985 to 1988, Mr. MacMaster was President of the Merck
Sharp Dohme Division of Merck, with responsibility for the U.S. human healthcare
business. Mr. MacMaster was an employee of Merck for 30 years. Mr. MacMaster
serves as a director of American Precision Industries, Inc., a heat transfer and
precision equipment manufacturing company, Flamel Technologies, S.A., a polymer
chemistry and drug delivery company, Martek Biosciences Corp., a biological
products manufacturing company, Oravax, Inc., a biopharmaceutical company, and
United States Bioscience Inc., a biotechnology company, and is also on the Board
of Trustees of Thomas Jefferson University and Martha's Vineyard Hospital
Foundation. Mr. MacMaster received his B.A. from St. Francis Xavier University
and his J.D. from Boston College Law School.
Dr. Rosenwald has served as a director of the Company since January
1989, and served as its Chairman until August 1994. Dr. Rosenwald is a founder
of several biopharmaceutical companies, including Neose and Interneuron
Pharmaceuticals, Inc. In August 1991, Dr. Rosenwald founded the Castle Group,
Ltd., a New York-based venture capital and merchant banking firm and in March
1992 he founded Paramount Capital, Inc., an investment bank specializing in the
biopharmaceutical industry. In June 1994, Dr. Rosenwald founded Aries Financial
Services, Inc., a money management firm specializing in the health sciences
industry. Dr. Rosenwald served as a Managing Director of Corporate Finance at
the investment banking firm of D.H. Blair & Co., Inc. from June 1987 to February
1992, and as a Senior Securities Analyst at the investment banking firm of
Ladenburg, Thalmann & Co. Inc., from September 1986 to June 1987. Dr. Rosenwald
is also Chairman of the Board of Directors of Interneuron Pharmaceuticals, Inc.,
and a director of BioCryst Pharmaceuticals, Inc., Sparta Pharmaceuticals, Inc.,
Atlantic Pharmaceuticals, Inc., Ansan, Inc., Xenometrix, Inc., Titan
Pharmaceuticals, Inc., Avigen, Inc., VIMRx Pharmaceuticals, Inc., Avax
Technologies, Inc., and Enzymed, Inc. Dr. Rosenwald received his B.A. in finance
from Pennsylvania State University and his M.D. from Temple University School of
Medicine.
Mr. Sears has served as a director of the Company since September 1994.
Mr. Sears has been a private investor involved in portfolio management and life
sciences venture capital since April 1994. From October 1988 until April 1994,
Mr. Sears was Chief Financial Officer of Amgen Inc., a pharmaceutical company,
and from September 1992 until January 1994, Mr. Sears also served as Senior Vice
President responsible for the Asia-Pacific region. From August 1986 until
October 1988, Mr. Sears was Treasurer and Director of Planning for Amgen Inc.
From July 1976 to April 1986, Mr. Sears held senior financial and planning
positions at Atlantic Richfield Co. Mr. Sears is Chairman of the Board of
Directors of CoCensys, Inc., a neuropharmaceuticals company, and is a director
of Techne Corp., a biological products manufacturing company and Activated Cell
Therapy, Inc., a cell processing company. Mr. Sears received his B.A. in
economics from Claremont McKenna College and his M.B.A. from Stanford
University.
Dr. Weisbach has served as a director of the Company since May 1993.
From 1988 to July 1994, Dr. Weisbach served as Director of Technology Transfer
and Adjunct Professor at The Rockefeller University where he was responsible for
the licensing of technology. Dr. Weisbach served as Vice President of
Warner-Lambert Company from 1981 to 1987 and President, Pharmaceutical Research
Division from 1979 to 1987, where he was responsible for all pharmaceutical
research and development activities. Prior to joining Warner-Lambert,
Dr. Weisbach served at SmithKline and French Laboratories from 1960 to 1979,
where he was Vice President, Research from 1977 to 1979. Dr. Weisbach serves as
a Director of Hybridon, Inc., Xytronyx, Inc., and Exponential Biotherapies,
Inc., which are biotechnology companies, Synthon Corporation, a chemical
intermediation company, and CIMA Laboratories, Inc., a drug delivery company.
Dr. Weisbach is also a member of the Scientific Advisory Boards of Magainin
Pharmaceuticals, Inc., Myco Pharmaceuticals Inc., and Receptor Laboratories,
Inc. Dr. Weisbach received his B.S. in chemistry from Brooklyn College and his
M.A. and his Ph.D. in chemistry from Harvard University.
44
<PAGE>
All directors hold office until the next annual meeting of stockholders
or until their successors have been elected and qualified.
The Audit Committee was established in January 1992 and reviews, acts
on, and reports to the Board of Directors with respect to various auditing and
accounting matters, including the selection of the Company's auditors, the scope
of the annual audits, fees to be paid to the auditors, the performance of the
Company's independent auditors, and the accounting practices of the Company.
The Compensation Committee was established in October 1991 and
determines the salaries and incentive compensation of the officers of the
Company and provides recommendations for the salaries and incentive compensation
of the other employees and the consultants of the Company. The Compensation
Committee also administers various incentive compensation, stock, and benefit
plans.
Director Compensation
Effective January 1, 1997, non-management members of the Board of
Directors, other than Dr. Rosenwald, receive an annual retainer of $14,000 as
consideration for their services as directors of the Company and are reimbursed
for reasonable travel expenses incurred in connection with their attendance at
such meetings. Non-management directors, other than Dr. Rosenwald, may also
receive consulting fees of $2,000 per day of additional service. Non-management
directors appointed or elected to the Board of Directors on or after February
15, 1996, will receive an option grant under the Company's 1995 Stock
Option/Stock Issuance Plan to purchase 16,666 shares of Common Stock, at the
fair market value at the date of the grant, vesting over a four-year period upon
each anniversary of the date of grant. In addition, on the date of each annual
meeting of stockholders held after February 15, 1996, each non-management
director who will continue to serve as a director for the following year, and
also has served as a director for at least six months prior to the date of the
annual meeting, shall receive an option to purchase 3,333 shares of Common
Stock, at the fair market value at the date of the grant, vesting over a
one-year period. Additionally, under the Director Fee Option Grant Program of
the Company's 1995 Stock Option/Stock Issuance Plan, the non-management
directors may elect to apply their annual retainer fees towards the acquisition
of options to purchase shares of Common Stock. Dr. Rosenwald receives no
compensation for his services as a director of the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Dr. Hamilton, Mr. MacMaster, and
Dr. Rosenwald. Certain members of the Compensation Committee are parties to
transactions with the Company. See "Certain Transactions."
45
<PAGE>
Executive Compensation
The following table sets forth all compensation earned in 1996 and 1995
by the Company's Chief Executive Officer and the Company's four other most
highly compensated executive officers in 1996 (together, the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
------------
Annual Compensation Securities
------------------------ Underlying All Other
Name and Principal Position Year Salary Bonus Options(#) Compensation
- --------------------------- ---- ------------------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Roth........................ 1996 $230,000 $52,500 90,000 $5,172(1)(2)
Chief Executive Officer 1995 200,000 50,000 90,000 5,172(1)(2)
P. Sherrill Neff....................... 1996 225,000 52,500 90,000 5,235(1)(3)
President, Chief Financial Officer 1995 225,000 50,000 90,000 5,172(1)(3)
Edward J. McGuire...................... 1996 129,600 40,000 15,000 3,855(1)(4)
Vice President, Research and 1995 120,000 35,000 10,000 3,745(1)(4)
Development
David A. Zopf.......................... 1996 151,200 40,000 15,000 4,372(1)(5)
Vice President, Drug Development 1995 144,000 30,000 6,666 5,046(1)(5)
David F. Pritchard(6).................. 1996 118,656 -- -- 3,518(1)(7)
Vice President, Business Development 1995 115,200 10,000 7,000 3,504(1)(7)
- ------------------
</TABLE>
(1) Includes $552 in premiums paid for group term life insurance policy.
(2) Includes $4,620 in matching contributions in each of 1995 and 1996 to
the Company's tax-qualified employee savings and retirement plan (the
"401(k) Plan").
(3) Includes $4,683 and $4,620 in 1996 and 1995, respectively, in matching
contributions to the 401(k) Plan.
(4) Includes $3,303 and $3,193 in 1996 and 1995, respectively, in matching
contributions to the 401(k) Plan.
(5) Includes $3,820 and $4,494 in 1996 and 1995, respectively, in matching
contributions to the 401(k) Plan.
(6) Mr. Pritchard ceased being an executive officer of the Company
effective as of November 22, 1996, and ceased being an employee
effective as of January 2, 1997. Effective as of January 2, 1997,
Mr. Pritchard and the Company entered into a separation and consulting
agreement and general release. See "-- Employment Agreements."
(7) Includes $2,966 and $2,952 in 1996 and 1995, respectively, in matching
contributions to the 401(k) Plan.
Stock Option Information
The following table sets forth certain information concerning grants of
stock options made during 1996 to each of the Named Executive Officers. No stock
appreciation rights were granted to any Named Executive Officer during fiscal
year 1996.
46
<PAGE>
Option Grants in 1996
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
------------------------------------------------------------- at Assumed Annual Rates of
Number of Percentage of Stock Price Appreciation for
Securities Total Option Term(3)
Underlying Options Exercise Expiration ----------------------------
Name Options Granted(1) Granted(2) Price Date 5% 10%
- ---- ------------------ ------------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Roth.......... 90,000 26.6% $15.125 12/02/06 $856,083 $2,169,482
P. Sherrill Neff......... 90,000 26.6 15.125 12/02/06 856,083 2,169,482
Edward J. McGuire........ 15,000 4.4 15.125 12/02/06 142,680 361,580
David A. Zopf............ 15,000 4.4 15.125 12/02/06 142,680 361,580
David F. Pritchard....... -- -- -- -- -- --
</TABLE>
- ---------
(1) These options are exercisable in four annual installments commencing on
the first anniversary of the date of grant.
(2) Based on an aggregate of 338,850 options granted to employees in 1996,
including options granted to the Named Executive Officers.
(3) Potential realizable value is based on the assumption that the price
per share of Common Stock appreciates at the assumed annual rate of
stock appreciation for the option term. The assumed 5% and 10% annual
rates of appreciation (compounded annually) over the term of the option
are set forth in accordance with the rules and regulations adopted by
the Commission and do not represent the Company's estimate of stock
price appreciation.
The following table sets forth certain information concerning the
number and value of unexercised options held by each of the Named Executive
Officers on December 31, 1996. No stock appreciation rights were outstanding on
December 31, 1996. No stock appreciation rights were exercised during the fiscal
year ended December 31, 1996 by any of the Named Executive Officers.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Value Options(#) In-The-Money Options ($)
On Realized ----------------------------- ------------------------------
Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Roth........ -- -- 29,901 161,666 $249,839 $ 696,351
P. Sherrill Neff....... -- -- 82,500 197,500 860,850 1,119,300
Edward J. McGuire...... 2,000 $25,350(1) 40,500 22,500 632,400 110,625
David A. Zopf.......... -- -- 30,366 21,665 480,872 116,605
David F. Pritchard..... 3,333 54,495(2) 8,417 8,583 133,881 116,619
</TABLE>
- ----------
(1) Based on the sales price of the Common Stock on the exercise date, less
the exercise price payable for such shares.
(2) Based on the fair value of the Common Stock at the exercise date, less
the exercise price payable for such shares. Pursuant to the terms of a
separation and consulting agreement and general release effective
January 2, 1997 between Mr. Pritchard and the Company, effective
January 2, 1997, the vesting of options to purchase 7,083 shares of
Common Stock held by Mr. Pritchard accelerated and such options became
immediately exercisable, unvested options to purchase 1,500 shares of
Common Stock were canceled, and all vested options not exercised will
terminate 90 days after January 2, 1997.
47
<PAGE>
1995 Stock Option/Stock Issuance Plan
The Company's 1995 Stock Option/Stock Issuance Plan (the "1995 Plan")
was adopted by the Board of Directors on March 23, 1995 and approved by the
stockholders on April 12, 1995. On December 6, 1995, the Board of Directors
approved an increase in the aggregate number of shares of Common Stock available
for issuance under the 1995 Plan. Stockholder approval of the increase was
obtained on December 19, 1995. On April 16, 1996, the Board of Directors
approved an amendment to the 1995 Plan to implement a Director Fee Option Grant
Program (the "Director Fee Program") pursuant to which non-employee members of
the Company's Board of Directors may elect to receive their annual retainer fee
in stock options rather than cash, effective as of January 1, 1997. Stockholder
approval of the amendment was obtained on June 14, 1996 at the Company's 1996
Annual Meeting of Stockholders. The 1995 Plan is intended to serve as the
successor equity incentive program to the Company's 1991 and 1992 Stock Option
Plans (the "Predecessor Plans"). The 1995 Plan became effective on the date of
its adoption by the Board, except that the Automatic Option Grant Program
described below became effective on the date of the Company's initial public
offering, February 15, 1996, and the Director Fee Program became effective on
June 14, 1996. As of January 6, 1997, a total of 1,390,374 shares of Common
Stock are authorized for issuance under the 1995 Plan. This amount includes (i)
the shares which remained available for issuance under the Predecessor Plans on
the effective date of the 1995 Plan, including the shares subject to outstanding
options thereunder, plus (ii) an increase of 333,333 shares authorized by the
Board of Directors on March 23, 1995, and (iii) an increase of 600,000 shares
authorized by the Board of Directors on December 6, 1995. In no event may any
one participant in the 1995 Plan receive option grants, separately exercisable
stock appreciation rights, or direct stock issuances for more than 250,000
shares over the term of the 1995 Plan.
The 1995 Plan is divided into four separate components: (i) the
Discretionary Option Grant Program under which employees, non-employee directors
(other than the members of the Compensation Committee), and consultants may, at
the discretion of the plan administrator, be granted options to purchase shares
of Common Stock at an exercise price not less than 85% of the fair market value
of the Common Stock on the grant date, (ii) the Stock Issuance Program under
which such persons may, at the plan administrator's discretion, be issued shares
of Common Stock directly, through the purchase of such shares at a price not
less than 85% of the fair market value of the Common Stock at the time of
issuance or as a bonus tied to the performance of services, (iii) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee directors to purchase shares of
Common Stock at an exercise price equal to 100% of the fair market value of the
Common Stock on the grant date, and (iv) the Director Fee Program under which
non-employee Board members may elect to apply all or a portion of their annual
retainer fees otherwise payable in cash to the acquisition of a special option
grant.
The Discretionary Option and the Stock Issuance Programs are
administered by a Compensation Committee appointed by the Board (the
"Compensation Committee"). The Compensation Committee, as plan administrator,
has complete discretion to determine which eligible individuals are to receive
option grants, stock appreciation rights or stock issuances, the time or times
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance, and the maximum term for which any granted option is to remain
outstanding. All grants under the Automatic Option Grant Program and the
Director Fee Program will be made in strict compliance with the express
provisions of that program, and no administrative discretion is exercised by the
Compensation Committee with respect to those grants.
In the event that the Company is a party to certain corporate
transactions (as defined in the 1995 Plan), including, under certain
circumstances, a merger or asset sale, each outstanding option and unvested
stock issuance will, under certain circumstances, automatically accelerate in
full. Options and stock issuances that do not accelerate at the time of the
acquisition will accelerate in the event the individual's service is terminated,
whether involuntarily or through a resignation for good reason, within 18 months
following the acquisition. The plan administrator may also accelerate options
and unvested stock issuances upon a change
48
<PAGE>
in control (as defined in the 1995 Plan) of the Company or the termination of
the individual's service, whether involuntarily or through a resignation for
good reason, within a specified period following the change in control. Options
currently outstanding under the Predecessor Plans contain different acceleration
provisions in connection with an acquisition of the Company. Options outstanding
under the 1992 Stock Option Plan may, under certain circumstances, accelerate
upon a change in control but the options outstanding under the 1991 Stock Option
Plan do not contain any acceleration provisions in connection with such a change
in control. The plan administrator has the discretion, however, to extend the
acceleration provisions of the 1995 Plan to outstanding options under the
Predecessor Plans which are incorporated into the 1995 Plan.
Stock appreciation rights may be issued under the Discretionary Option
Grant Program which will allow the holders to surrender their outstanding
options for an appreciation distribution from the Company equal to the excess of
(i) the fair market value of the vested shares of Common Stock subject to the
surrendered option over (ii) the aggregate exercise price payable for such
shares. Such appreciation distribution may be made in cash or in shares of
Common Stock.
The plan administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
Under the Automatic Option Grant Program, each non-employee director
first elected or appointed to the Board of Directors after the effective date of
that program will automatically be granted an option for 16,666 shares of Common
Stock on the date of his or her election or appointment to the Board of
Directors, provided such individual has not been previously employed by the
Company. In addition, at each annual stockholders meeting held after the date of
the Company's initial public offering, February 15, 1996, each individual with
at least six months of Board service who is to continue to serve as a
non-employee director following the meeting will automatically be granted an
option for 3,333 shares of Common Stock, even if such individual has been
previously employed by the Company or joined the Board of Directors prior to the
offering.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of service on the Board of
Directors. Each automatic option will be immediately exercisable; however, any
shares purchased upon exercise of the option will be subject to repurchase
should the optionee's service as a non-employee director cease prior to vesting
of the shares. The initial 16,666 share grant will vest in successive equal
annual installments over the optionee's initial four-year period of Board
service. Each additional 3,333 share grant will vest upon the optionee's
completion of one year of service on the Board of Directors, as measured from
the grant date. However, each outstanding option will immediately vest upon
certain changes in the ownership or control of the Company.
Under the Director Fee Program, each non-employee Board member may
elect to apply all or a portion of his or her annual retainer fee otherwise
payable in cash to the acquisition of a special option grant under the Director
Fee Program. Such election must be filed with the Company prior to the start of
the calendar year of participation. The option grant will automatically be made
on the first trading day in January following the filing of the option-in-lieu
of cash election and will have an exercise price per share equal to one-third of
the fair market value of the option shares on the grant date. The number of
option shares will be determined by dividing the amount of the retainer fee
applied to the program (effective January 1, 1997, the non-employee directors
will receive a $14,000 annual retainer) by two-thirds of the fair market value
per share of Common Stock on the grant date. As a result, the total spread on
the option (the fair market value of the option shares on the grant date less
the aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee subject to the director's election.
49
<PAGE>
The option will become exercisable for the option shares in a series of
twelve successive equal monthly installments upon the optionee's completion of
each month of Board service during the calendar year for which the option grant
is made. The option will remain exercisable for such shares until the earlier of
(i) the expiration of the ten-year option term or (ii) the end of the three-year
period measured from the date of the optionee's cessation of Board service.
Should the optionee die or become disabled during his or her period of Board
service, then the option shares will immediately vest in full. In addition, upon
certain changes in the ownership or control of the Company, each outstanding
option will immediately vest in full.
The 1995 Plan will terminate on the earlier of (i) February 28, 2005 or
(ii) the date on which all shares for issuance under the Plan have been issued.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on December 6, 1995 and was approved by the
stockholders on December 19, 1995. The Purchase Plan is designed to allow
eligible employees of the Company and participating subsidiaries to purchase
shares of Common Stock, at semi-annual intervals, through periodic payroll
deductions under the Purchase Plan, and a reserve of 100,000 shares of Common
Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive
offering periods, each with a maximum duration of 24 months. However, the
initial offering period began on February 15, 1996 and will end on the last
business day in January 1998. Each offering period will be comprised of
successive purchase intervals, each of a duration of six months. Shares of
Common Stock will be purchased for each participant at the end of each purchase
interval during the offering period. On July 31, 1996, participants in the
Purchase Plan acquired 5,631 shares of Common Stock under the Purchase Plan.
Payroll deductions may not exceed 10% of the participant's total cash
earnings each semi-annual period. The purchase price per share will be
eighty-five percent (85%) of the lower of (i) the fair market value of the
Common Stock on the participant's entry date into the offering period or (ii)
the fair market value on the semi-annual purchase date.
Employment Agreements
In December 1994, the Company entered into an employment agreement for
an initial period of three years, which may be extended for additional one-year
periods, with P. Sherrill Neff (the "Neff Agreement") whereby Mr. Neff is
employed as President and Chief Financial Officer of the Company. Pursuant to
the Neff Agreement, Mr. Neff receives a minimum base salary of $225,000 per year
and a performance incentive bonus of up to 50% of base salary at the discretion
of the Board of Directors or the Compensation Committee thereof. In connection
with the Neff Agreement, the Company granted to Mr. Neff options to purchase
100,000 shares of Common Stock at an exercise price of $5.70 per share, 20,000
of which vested immediately with the remainder vesting ratably over four years.
Pursuant to the terms of the Neff Agreement, Mr. Neff has entered into a
standard noncompetition and confidentiality agreement with the Company. In
addition, if Mr. Neff is involuntarily terminated without "cause" (as defined in
the Neff Agreement) or terminated voluntarily or involuntarily following certain
changes of control of the Company or a sale of all or substantially all of the
Company's assets in a complete liquidation or dissolution, the Company is
required to continue to pay Mr. Neff for 12 months after termination or such
shorter amount of time remaining in his employment term.
In April 1992, the Company entered into a one-year employment agreement
extendable in one-year increments, with David A. Zopf (the "Zopf Agreement")
whereby Dr. Zopf is employed as Vice President, Drug Development. The Zopf
Agreement provides for an annual base salary of $151,200 and a bonus of up to
25% of base salary at the discretion of the Chief Executive Officer. In
connection with the Zopf Agreement, the Company granted to Dr. Zopf options to
purchase 26,666 shares of Common Stock at fair market value,
50
<PAGE>
which options vest in four equal annual installments commencing on the first
anniversary of the Zopf Agreement. The Zopf Agreement contains certain
restrictive covenants, including provisions relating to noncompetition,
nonsolicitation, and the nondisclosure of proprietary information during his
employment with the Company and for specified periods thereafter.
Effective January 2, 1997, a separation and consulting agreement and
general release was entered into between the Company and David F. Pritchard, the
Company's former Vice President, Business Development. The agreement provided
for a lump-sum severance payment to Mr. Pritchard of approximately $50,000 on
that date and total consulting fees of approximately $60,000 during a six-month
consulting period beginning at the end of Mr. Pritchard's severance period (May
31, 1997) and ending on November 30, 1997, subject to reduction or termination
upon Mr. Pritchard's employment by or receipt of compensation for services from
another person before or during the consulting period. In addition, effective
January 2, 1997, the vesting of options to purchase 7,083 shares of Common Stock
held by Mr. Pritchard accelerated and such options became immediately
exercisable. All vested options not exercised will terminate 90 days after
January 2, 1997.
401(k) Plan
In July 1991, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of the Company's eligible
employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the lesser of 15% of eligible compensation
or the annual limit prescribed by statute and have the amount of such reduction
contributed to the 401(k) Plan. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in any of
six investment options. The 401(k) Plan is intended to qualify under Section 401
of the Internal Revenue Code so that contributions by employees to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn, and so that the contributions by employees will be deductible
by the Company when made. The 401(k) Plan provides for matching cash
contributions to the 401(k) Plan by the Company equal to 50% of the amount
deferred up to 5% of compensation. The Company made matching contributions of
approximately $61,000, $62,000, $53,000, and $28,000 to the 401(k) Plan in 1996,
1995, 1994, and 1993, respectively. Matching contributions vest over a four-year
period.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation provides that, except to the
extent prohibited by the Delaware General Corporation Law, its directors shall
not be personally liable to the Company or its stockholders for monetary damages
for any breach of fiduciary duty as directors of the Company. Under Delaware
law, the directors have a fiduciary duty to the Company which is not eliminated
by this provision of the Certificate of Incorporation and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
directors' duty of loyalty to the Company, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited by
Delaware law. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. In addition, the Company has obtained
liability insurance for its officers and directors.
The Certificate of Incorporation also provides that the Company shall
indemnify, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, all of its present and former officers and directors,
and any party agreeing to serve as an officer, director, or trustee of any
entity at the Company's request, in connection with any civil or criminal
proceeding threatened or instituted against such party by reason of actions or
omissions while serving in such capacity. Indemnification by the Company
includes payment of expenses in defense of the indemnified party in advance of
any proceeding or final disposition thereof if the indemnified party undertakes
to repay the Company upon an ultimate determination that the
51
<PAGE>
indemnified party was not entitled to indemnification by the Company. This
provision also requires board of director approval as a precondition to any
indemnification by the Company for proceedings instituted by the indemnified
party. The rights to indemnification provided in this provision do not preclude
the exercise of any other indemnification rights by any party pursuant to any
law, agreement, or vote of the stockholders or the disinterested directors of
the Company.
Section 145 of the Delaware General Corporation Law generally allows
the Company to indemnify the parties described in the preceding paragraph for
all expenses, judgments, fines, and amounts in settlement actually paid and
reasonably incurred in connection with any proceedings so long as such party
acted in good faith and in a manner reasonably believed to be in or not opposed
to the Company's best interests and, with respect to any criminal proceedings,
if such party had no reasonable cause to believe his or her conduct to be
unlawful. Indemnification may only be made by the Company if the applicable
standard of conduct set forth in Section 145 has been met by the indemnified
party upon a determination made (1) by the board of directors by a majority vote
of a quorum of directors who are not parties to such proceedings, or (2) if such
a quorum is not obtainable or if directed by a quorum of disinterested
directors, by independent legal counsel in a written opinion, or (3) by the
stockholders.
52
<PAGE>
CERTAIN TRANSACTIONS
During 1995, the Company paid $435,179 in commissions and expenses to
Paramount Capital, Inc. ("Paramount"), which acted as placement agent in
connection with the sale of a portion of the Series F Convertible Preferred
Stock of the Company ("Series F Stock"). Lindsay A. Rosenwald, the sole
stockholder of Paramount, is a director and principal stockholder of the
Company. In December 1995, the Company granted to an employee of Paramount
options to purchase an aggregate of 49,999 shares of Common Stock at a weighted
average exercise price of $17.94, vesting in various amounts over five years,
for financial advisory services. In connection with the private placement of the
Series E Convertible Preferred Stock of the Company ("Series E Stock") during
1994, the Company paid $1,246,505 in commissions and expenses to Paramount, the
placement agent. Additionally, Paramount received warrants which are currently
exercisable for 119,961 shares of Common Stock. In February 1994, Dr. Rosenwald
advanced the Company $440,000 to fund the Company's restricted funds account
held in escrow pursuant to the Company's facility lease. The Company repaid the
full amount of the advance in April 1994. See "Principal Stockholders" and "Plan
of Distribution."
In connection with the potential acquisition by the Company of its
leased facility, the Company intends to obtain credit support for the
transaction from Jefferson Bank and will pay the bank fees in connection
therewith. Mr. Neff, the Company's President and Chief Financial Officer, is a
director of JeffBanks, Inc., the parent holding company of Jefferson Bank. The
Company believes that the terms of the credit support arrangement generally will
be no less favorable than those that could be obtained from other lending
institutions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments."
In connection with the private placement of the Series F Stock during
1995, the following directors and persons affiliated with directors made
purchases of Series F Stock at a price equivalent to $12.00 per share of Common
Stock on an as-converted basis as set forth in the table below. All outstanding
shares of Preferred Stock of the Company were automatically converted into
shares of Common Stock upon the closing of the Company's initial public offering
in February 1996.
<TABLE>
<CAPTION>
Common
Number of Stock
Shares issued upon
Directors and Persons Affiliated with Directors of Series F Stock conversion
- --------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Stephen A. Roth.......................................... 2,500 834
P. Sherrill Neff(1)...................................... 37,500 12,501
William F. Hamilton...................................... 6,250 2,084
Douglas J. MacMaster, Jr................................. 25,000 8,334
Lindsay A. Rosenwald..................................... 6,250 2,084
Sears Family Living Trust................................ 10,000 3,334
Jerry A. Weisbach........................................ 6,250 2,084
</TABLE>
- ------------------
(1) Includes 25,000 shares of Series F Stock, which were converted into
8,334 shares of Common Stock, purchased by Mr. Neff's father-in-law.
In June 1994, the Company sold 22,750 shares of Series E Stock at $4.75
per share to the Sears Family Living Trust, a trust for which Lowell E. Sears, a
director, is the trustee, and 421,053 shares of Series E Stock at $4.75 per
share to U.S. Healthcare, Inc. Mr. Neff was Senior Vice President, Corporate
Development of U.S. Healthcare at such time.
53
<PAGE>
From January 1, 1994 through December 31, 1996, the Company granted its
current directors and executive officers options to purchase a total of 608,327
shares of Common Stock at exercise prices ranging from $1.425 to $21.00 per
share. See "Management."
For information regarding employment agreements with Named Executive
Officers, see "Management -- Employment Agreements." For information regarding
compensation of Directors, see "Management -- Director Compensation."
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth at January 6, 1997 and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby,
certain information with respect to the beneficial ownership of the Common Stock
(i) by each person who is known by the Company to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock, (ii) by each
of the Named Executive Officers, (iii) by each of the directors of the Company,
and (iv) by all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage Beneficially
Owned
Number of Shares -----------------------
Beneficially Prior to After
Name Owned(1) Offering Offering
- ----- ---------------- -------- --------
<S> <C> <C> <C>
Lindsay A. Rosenwald, M.D.(2).............................. 606,791 7.4% 6.4%
c/o Paramount Capital, Inc.
787 7th Avenue
New York, NY 10019
Stephen A. Roth, Ph.D.(3).................................. 233,307 2.8 2.5
P. Sherrill Neff(4)........................................ 87,637 1.1 *
Edward J. McGuire, Ph.D.(5)................................ 118,611 1.4 1.2
David A. Zopf, M.D.(6)..................................... 33,985 * *
David F. Pritchard(7)...................................... 18,891 * *
William F. Hamilton, Ph.D.(8).............................. 29,360 * *
Douglas J. MacMaster, Jr.(9)............................... 20,194 * *
Lowell E. Sears(10)........................................ 27,188 * *
Jerry A. Weisbach, Ph.D.(11)............................... 13,944 * *
All current directors and executive officers as a group
(10 persons)(12)........................................ 1,189,908 14.0 12.2
</TABLE>
- ----------
* Less than one percent.
(1) Gives effect to the shares of Common Stock issuable within 60 days of
January 6, 1997 upon the exercise of all options and other rights
beneficially owned by the indicated stockholders on that date. Unless
otherwise indicated, the persons named in the table have sole voting
and sole investment control with respect to all shares beneficially
owned. Beneficial ownership is determined in accordance with the rules
of the Commission and includes voting and investment power with respect
to shares.
(2) Includes (i) 75,624 shares of Common Stock owned by Dr. Rosenwald's
wife, (ii) 30,250 shares of Common Stock held by Dr. Rosenwald's wife
as custodian for Dr. Rosenwald's children, and (iii) 32,000 shares of
Common Stock held by Rosenwald Foundation, Inc., as to which
Dr. Rosenwald disclaims beneficial ownership. Dr. Rosenwald may be
deemed to share voting and investment power with respect to such
shares.
(3) Includes (i) 15,758 shares of Common Stock owned by Dr. Roth's daughter
and (ii) 29,901 shares of Common Stock issuable upon exercise of stock
options.
(4) Includes 82,500 shares of Common Stock issuable upon exercise of stock
options.
(5) Includes 40,500 shares of Common Stock issuable upon exercise of stock
options.
(6) Includes 30,366 shares of Common Stock issuable upon exercise of stock
options.
(7) Includes 15,500 shares of Common Stock issuable upon exercise of stock
options.
(8) Includes 27,276 shares of Common Stock issuable upon exercise of stock
options.
(9) Includes 11,860 shares of Common Stock issuable upon exercise of stock
options.
(10) Includes 9,264 shares of Common Stock issuable upon exercise of stock
options. Also includes 17,924 shares of Common Stock owned by the Sears
Family Living Trust, of which Mr. Sears is the trustee.
(11) Includes 11,860 shares of Common Stock issuable upon exercise of stock
options.
(12) See notes (2) through (11).
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of this offering, the Company's authorized
capital stock will consist of 30,000,000 shares of Common Stock, par value $0.01
per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value
$0.01 per share ("Preferred Stock").
Common Stock
At January 6, 1997, there were 8,218,607 shares of Common Stock
outstanding and held of record by approximately 450 stockholders. At January 6,
1997, there were options outstanding to purchase an aggregate of 1,199,643
shares of Common Stock with a weighted average exercise price of $10.04.
Each holder of Common Stock is entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders. Except as
required by applicable law, the holders of the Common Stock will vote together
with the holders of each series of outstanding Preferred Stock, who vote on an
as converted basis. There is no cumulative voting for the election of directors
and, as a consequence, minority stockholders will not be able to elect directors
on the basis of their votes alone. Subject to preferences that may be applicable
to the then outstanding shares of Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." Upon
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock then outstanding are entitled to share in the Company's assets remaining
after the payment of liabilities and the satisfaction of any liquidation
preference granted to the holders of any outstanding shares of Preferred Stock.
All shares of Common Stock outstanding and to be outstanding upon completion of
this offering are and will be fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock with such voting rights, designations, preferences and rights and such
qualifications, limitations or restrictions thereof, as may be determined by the
Board of Directors. Although the Company has no current plans to issue any
shares of Preferred Stock, the issuance of Preferred Stock or of 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 would be willing to
pay in the future for shares of the Company's Common Stock. Such Preferred Stock
could be issued with voting and conversion rights that could adversely affect
the voting power of holders of the Common Stock.
The Company believes that the Preferred Stock provides the Company with
increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance allows the Company to issue shares of
Preferred Stock without the expense and delay of holding a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of Common
Stock, will be available for issuance without further action by stockholders of
the Company, unless such action is required by applicable law or the rules of
any stock exchange or quotation system on which the Company's securities may be
listed or quoted.
Common Stock Warrants
The Company has warrants outstanding for the purchase of 147,690 shares
of Common Stock with a weighted average exercise price of $11.18 per share.
Warrants to purchase 8,334 shares of Common Stock at $19.50 per share were
issued in June 1993 to each of Aberlyn Capital Management Limited Partnership
("ACMLP") and Aberlyn Holding Company, Inc. ("AHC," and together with ACMLP,
"Aberlyn") in connection with a Master Lease Agreement and in consideration of
certain consulting services to the Company. Such warrants are immediately
exercisable and expire in June 1998. Warrants to purchase 3,536
56
<PAGE>
shares of Common Stock at $14.85 per share were issued in February 1994 to each
of ACMLP and AHC in connection with a Master Lease Agreement and in
consideration of certain consulting services to the Company. Such warrants are
immediately exercisable and expire in February 1999. Warrants to purchase an
aggregate of 119,961 shares of Common Stock at $9.45 per share were issued in
July 1994 to various individuals in connection with the offering of Series E
Stock, of which warrants to purchase 6,538 shares were exercised during 1996.
The remaining warrants issued in connection with the offering of Series E Stock
are immediately exercisable and expire in July 1999. Warrants to purchase 10,527
shares of Common Stock at $14.25 per share were issued in June 1995 to Financing
for Science International, Inc. ("FSI") in connection with the equipment lease
agreement entered into with FSI, which warrants are immediately exercisable and
expire in June 2002. The exercise price and number of shares of Common Stock
issuable upon exercise of the aforementioned warrants are subject to adjustment
upon the occurrence of certain events, including stock splits, stock dividends,
reorganization, recapitalization, merger, or sale. The warrants and shares of
Common Stock issuable upon exercise of the warrants are subject to certain
registration rights as described under "Registration Rights of Certain Holders"
below.
Registration Rights of Certain Holders
After the consummation of this offering, the holders (the "Holders") of
3,236,423 shares of Common Stock and warrants to purchase 147,690 shares of
Common Stock (the "Registrable Securities") or their transferees, will be
entitled to certain registration rights with respect to the Registrable
Securities. These rights are provided under the terms of the Registrable
Securities and agreements between the Company and the Holders. Such agreements
and Registrable Securities provide that (i) Holders of 2,523,921 shares of
Common Stock and warrants to purchase 123,950 shares of Common Stock are
entitled, commencing 18 months after the date of the closing of the Company's
initial public offering in February 1996, to require the Company to use its best
efforts to register their Registrable Securities under the Securities Act and
(ii) Holders of 195,591 shares of Common Stock and warrants to purchase 23,740
shares of Common Stock are entitled, commencing one year after the date of the
closing of the Company's initial public offering, to require the Company to use
its best efforts to register their Registrable Securities under the Securities
Act (the "Demand Registration Rights"), provided, however, that Holders of
1,725,018 of these shares will be restricted from exercising such rights until
180 days after the date of this Prospectus. In addition, pursuant to these
agreements, Holders of 3,236,423 shares of Common Stock and warrants to purchase
147,690 shares of Common Stock are entitled, subject to certain limitations, to
require the Company to use its best efforts to include their Registrable
Securities in future registration statements filed by the Company under the
Securities Act (the "Piggyback Registration Rights"). Where applicable to this
offering, the Company intends to obtain waivers of such Piggyback Registration
Rights. The Holders of 1,725,018 shares of Common Stock also are entitled, upon
the request of any such Holder, subject to certain limitations, to require the
Company to use its best efforts to register their shares of Common Stock on Form
S-3 once the Company is eligible to use a Form S-3 in connection with such
registrations (the "S-3 Registration Rights"), provided, however, that Holders
of these shares will be restricted from exercising such rights until 180 days
after the date of this Prospectus. Registration of shares pursuant to the
exercise of Demand Registration Rights, S-3 Registration Rights or Piggyback
Registration Rights under the Securities Act would result in such shares
becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of such registration.
"Shares Eligible for Future Sale."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203") which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in certain business combinations with any
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting
57
<PAGE>
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (x) by persons who are directors and also officers and (y) by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such date,
the business combination is approved by the Board of Directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
the offering, or the possibility of such sales occurring, could adversely affect
prevailing market prices for the Common Stock or the future ability of the
Company to raise capital through an offering of equity securities.
After the offering, the Company will have 9,468,607 shares of Common
Stock outstanding. Of these shares, the 1,250,000 shares offered hereby and an
additional 6,212,809 shares of Common Stock outstanding will be freely tradable
in the public market without restriction under the Securities Act, unless such
shares are held by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. However, approximately 978,286 of these shares are
subject to a stockholders agreement whereby each holder who has signed the
stockholders agreement has agreed, until December 30, 1997, not to offer, sell
or otherwise dispose of, directly or indirectly, more than 2% per month, on a
cumulative basis, of the aggregate amount of shares held by such holder as of
the Company's initial public offering in February 1996, subject to certain
conditions.
The remaining 2,005,798 shares of Common Stock outstanding upon
completion of the offering will be "restricted securities" as that term is
defined in Rule 144 ("Restricted Shares"). The Restricted Shares were issued and
sold by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. Restricted Shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under the Securities Act, including an exemption under Rule
144, which is summarized below.
Pursuant to "lock-up" agreements, all of the Company's executive
officers and directors, who collectively hold 927,490 of such Restricted Shares,
have agreed not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any such shares for a period of 90 days from the date of
this Prospectus without the prior written consent of Vector Securities
International, Inc. The Company also has agreed that it will not offer, sell or
otherwise dispose of Common Stock for a period of 90 days from the date of this
Prospectus, other than pursuant to outstanding warrants and options, existing
stock option and employee stock purchase plans, and in connection with potential
corporate collaborations and acquisitions, without the prior written consent of
Vector Securities International, Inc. Upon termination of such lock-up
agreements, approximately 908,906 of the "locked-up" Restricted Shares will be
eligible for immediate sale, beginning 90 days after the date of this
Prospectus, in the public market subject to certain volume, manner of sale and
other limitations under Rule 144. Vector Securities International, Inc. may, at
its sole discretion and at any time without notice, release all or any portion
of the shares subject to such lock-up agreements.
The Commission has recently proposed amendments to Rule 144 and Rule
144(k) that would permit resale of restricted shares under Rule 144 after a
one-year, rather than a two-year holding period, subject to compliance with the
other provisions of Rule 144, and would permit resale of restricted shares by
non-affiliates under Rule 144(k) after a two-year, rather than a three-year
holding period. Adoption of such amendments could result in resale of Restricted
Shares sooner than would be the case under Rule 144 and Rule 144(k) as currently
in effect.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares of the Company are aggregated) who has beneficially owned
Restricted Shares for at least two years (including the holding period of any
prior owner who is not an affiliate of the Company) would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock
(approximately 94,686 shares immediately after the offering), or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale and notice requirements and to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least three years
59
<PAGE>
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
As of January 6, 1997, options to purchase a total of 1,199,643 shares
of Common Stock were outstanding, of which options to purchase 415,694 shares
were exercisable. Of such shares subject to options, approximately 708,963
shares are subject to lock-up agreements for a period of 90 days from the date
of this Prospectus. As of January 6, 1997, an additional 355,098 shares were
available for future option grants and employee stock purchases under the
Company's stock option and employee stock purchase plans. All of the shares
issued, issuable or reserved for issuance under the Company's stock option and
employee stock purchase plans or upon the exercise of options issued or issuable
under such plans are covered by an effective registration statement. Such shares
may be sold in the open market, subject, in the case of certain holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lock-up
agreements and vesting restrictions imposed by the Company.
After the closing of the offering, holders of an aggregate of 3,236,423
shares of Common Stock will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. In addition, the 147,690
shares issuable upon exercise of outstanding warrants have similar registration
rights. See "Description of Capital Stock -- Registration Rights of Certain
Holders," "Risk Factors -- Shares Eligible for Future Sale" and "Risk Factors --
Possible Volatility of Common Stock Price; Dilution."
60
<PAGE>
PLAN OF DISTRIBUTION
The Common Stock is being offered for sale by the Company on a best
efforts, all or nothing, basis to selected institutional investors. Vector
Securities International, Inc., the Placement Agent, has been retained pursuant
to a placement agency agreement to act as the exclusive agent for the Company in
connection with the arrangement of offers and sales of the Common Stock on a
best efforts basis.
The Placement Agent is not obligated to and does not intend to itself
take (or purchase) any of the shares of Common Stock. It is anticipated that the
Placement Agent will obtain indications of interest from potential investors for
the amount of the offering and that effectiveness of the Registration Statement
will not be requested until indications of interest have been received for the
amount of the offering. No investor funds will be accepted until indications of
interest have been received for the amount of the offering and no investor funds
will be accepted prior to effectiveness of the Registration Statement.
Confirmations and definitive prospectuses will be distributed to all investors
at the time of pricing, informing investors of the closing date, which will be
scheduled for three business days after pricing. After the Registration
Statement is declared effective and prior to the closing date, all investor
funds will promptly be placed in escrow with Citibank, N.A., as Escrow Agent, in
an escrow account established for the benefit of the investors. The Escrow Agent
will invest such funds in accordance with Rule 15c2-4 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Prior to the
closing date, the Escrow Agent will advise the Company that payment for the
purchase of the shares of Common Stock offered hereby has been affirmed by the
investors and that the investors have deposited the requisite funds in the
escrow account at the Escrow Agent. Upon receipt of such notice, the Company
will deposit with DTC the shares of Common Stock to be credited to the
respective accounts of the investors. Investor funds, together with interest
thereon, if any, will be collected by the Company through the facilities of the
Escrow Agent on the scheduled closing date. The offering will not continue after
the closing date. In the event that investor funds are not received in the full
amount necessary to satisfy the requirements of the offering, all funds
deposited in the escrow account will promptly be returned.
The Company has agreed (i) to pay to the Placement Agent 5.714% of the
proceeds of this offering as the selling commission, (ii) to indemnify the
Placement Agent against certain liabilities, including liabilities under the
Securities Act, and (iii) to reimburse the Placement Agent for up to $80,000 for
certain expenses incurred by it in connection with the offering.
The Company has agreed not to issue, and certain officers and directors
of the Company have agreed that they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable for, or any rights to purchase or acquire,
Common Stock for a period of 90 days from the date of this Prospectus, without
the prior written consent of Vector Securities International, Inc. See "Shares
Eligible for Future Sale."
61
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering will be
passed upon for the Placement Agent by Stroock & Stroock & Lavan, New York, New
York.
EXPERTS
The financial statements of the Company as of December 31, 1994 and
1995, for the years ended December 31, 1993, 1994, and 1995, and for the period
from inception (January 17, 1989) to December 31, 1995, included in this
Prospectus and in the Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the offices of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the following regional offices of the Commission: Seven World Trade Center,
13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material
also may be accessed electronically by means of the Commission's home page on
the Internet (http://www.sec.gov). In addition, such reports, proxy statements
and other information concerning the Company can be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on
Form S-1, including amendments thereto, under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which were omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and such Common Stock, reference is made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and, in each instance, if
such contract or document is filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description, each such
statement being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's Public Reference Section, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part
of such material may be obtained from the Commission at its principal office
above after payment of fees prescribed by the Commission.
62
<PAGE>
NEOSE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.......................... F-2
BALANCE SHEETS.................................................... F-3
STATEMENTS OF OPERATIONS.......................................... F-4
STATEMENTS OF STOCKHOLDERS' EQUITY................................ F-5
STATEMENTS OF CASH FLOWS.......................................... F-6
NOTES TO FINANCIAL STATEMENTS..................................... F-8
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Neose Technologies, Inc.:
We have audited the accompanying balance sheets of Neose Technologies, Inc. (a
Delaware corporation in the development stage), formerly Neose Pharmaceuticals,
Inc., as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995 and for the period from inception (January
17, 1989) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Neose Technologies, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 and for the
period from inception (January 17, 1989) to December 31, 1995, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
February 22, 1996
F-2
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,362,830 $ 11,189,001 $ 35,717,379
Restricted funds.......................................... 353,920 148,300 110,648
Prepaid expenses and other................................ 56,651 118,680 252,878
------------ ------------ ------------
Total current assets................................... 5,773,401 11,455,981 36,080,905
PROPERTY AND EQUIPMENT, net................................. 2,199,933 2,685,613 2,935,777
DEFERRED FINANCING COSTS.................................... -- 409,003 --
RESTRICTED FUNDS............................................ 219,199 73,066 --
OTHER ASSETS................................................ 3,400 15,049 15,049
------------ ------------ ------------
$ 8,195,933 $ 14,638,712 $ 39,031,731
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 369,254 $ 764,552 $ 753,901
Accounts payable.......................................... 218,156 301,023 311,102
Accrued compensation...................................... 369,294 191,318 208,000
Other accrued expenses.................................... 98,587 297,605 130,582
Deferred revenue.......................................... -- 41,667 354,167
------------ ------------ ------------
Total current liabilities.............................. 1,055,291 1,596,165 1,757,752
OTHER LIABILITIES........................................... 53,060 74,986 79,359
LONG-TERM DEBT.............................................. 736,035 1,234,527 682,500
COMMITMENTS (Note 9)
STOCKHOLDERS' EQUITY:
Convertible preferred stock............................... 44,762 57,802 --
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued................................ -- -- --
Common stock, $.01 par value, 30,000,000 shares
authorized; 2,523,250, 3,145,256 and 8,203,616 shares
issued and outstanding................................. 25,232 31,453 82,036
Additional paid-in capital................................ 20,597,026 31,385,927 60,704,631
Deferred compensation..................................... -- (359,900) (292,419)
Deficit accumulated during the
development stage...................................... (14,315,473) (19,382,248) (23,982,128)
------------ ------------ ------------
Total stockholders' equity............................. 6,351,547 11,733,034 36,512,120
------------ ------------ ------------
$ 8,195,933 $ 14,638,712 $ 39,031,731
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
NINE MONTHS ENDED (JANUARY 17, (JANUARY 17,
YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1989) TO 1989) TO
-------------------------------------- ------------------------- DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
---------- ----------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES FROM COLLABORATIVE
AGREEMENTS................... $ 2,600,000 $ 47,500 $ 1,198,863 $ 875,833 $ 1,006,100 $ 3,846,363 $ 4,852,463
----------- ----------- ----------- ----------- ----------- ------------ ------------
OPERATING EXPENSES:
Research and development..... 3,399,444 5,003,780 4,732,788 3,425,864 4,899,734 16,476,557 21,376,291
General and administrative... 1,576,864 1,318,884 1,665,320 1,171,781 1,788,343 6,688,728 8,477,071
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total operating expenses... 4,976,308 6,322,664 6,398,108 4,597,645 6,688,077 23,165,285 29,853,362
----------- ----------- ----------- ----------- ----------- ------------ ------------
Operating loss............. (2,376,308) (6,275,164) (5,199,245) (3,721,812) (5,681,977) (19,318,922) (25,000,899)
INTEREST INCOME................ 59,534 257,264 322,309 198,910 1,278,245 815,985 2,094,230
INTEREST EXPENSE............... (106,143) (194,349) (189,839) (126,116) (196,148) (879,311) (1,075,459)
----------- ----------- ----------- ----------- ----------- ------------ ------------
NET LOSS....................... $(2,422,917) $(6,212,249) $(5,066,775) $(3,649,018) $(4,599,880) $(19,382,248) $(23,982,128)
----------- ----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ----------- ------------ ------------
PRO FORMA NET LOSS PER SHARE... $ (1.05) $ (0.60)
----------- -----------
----------- -----------
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING............ 4,848,000 7,728,000
----------- -----------
---------- - -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
--------------------- --------------------- PAID-IN COMPEN-
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION
---------- ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 17, 1989 (inception)............ -- $ -- -- $ -- $ -- $ --
Initial issuance of common stock................ -- -- 1,302,000 13,020 (3,020) --
Shares issued for consulting and licensing...... -- -- 325,500 3,255 (1,255) --
Sale of common stock............................ -- -- 133,334 1,333 1,267 --
Shares issued pursuant to antidilutive
agreements.................................... -- -- 2,864 29 (29) --
Net loss........................................ -- -- -- -- -- --
---------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1990....................... -- -- 1,763,698 17,637 (3,037) --
Sale of Series A preferred stock................ 100,000 1,000 -- -- 269,000 --
Sale of Series B preferred stock................ 1,416,695 14,167 -- -- 4,195,952 --
Sale of common stock............................ -- -- 420,284 4,203 33,619 (7,264)
Shares issued for consulting services........... -- -- 7,584 76 606 --
Shares issued pursuant to antidilutive
agreements.................................... -- -- 137,193 1,372 (1,372) --
Capital contribution............................ -- -- -- -- 9,971 --
Dividends on Series A preferred stock........... -- -- -- -- (18,000) --
Net loss........................................ -- -- -- -- -- --
---------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1991....................... 1,516,695 15,167 2,328,759 23,288 4,486,739 (7,264)
Shares issued pursuant to exercise of stock
options....................................... -- -- 8,334 83 16,167 --
Sale of Series C preferred stock................ 235,295 2,353 -- -- 1,847,647 --
Sale of Series D preferred stock................ 25,000 250 -- -- 199,750 --
Shares issued pursuant to redemption of notes
payable....................................... -- -- 24,120 241 462,165 --
Exercise of stock warrants pursuant to
redemption of notes payable................... -- -- 83,339 833 220,609 --
Shares issued pursuant to exercise of
warrants...................................... -- -- 12,501 125 34,562 --
Dividends on Series A preferred stock........... -- -- -- -- (36,000) --
Sale of common stock............................ -- -- 16,989 170 295,458 --
Amortization of deferred compensation........... -- -- -- -- -- 4,843
Net loss........................................ -- -- -- -- -- --
---------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1992....................... 1,776,990 17,770 2,474,042 24,740 7,527,097 (2,421)
Sale of Series D preferred stock................ 250,000 2,500 -- -- 1,997,500 --
Dividends on Series A preferred stock........... -- -- -- -- (36,000) --
Shares issued to the University of
Pennsylvania.................................. -- -- 3,482 35 (35) --
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- -- 924 9 17,991 --
Amortization of deferred compensation........... -- -- -- -- -- 2,421
Net loss........................................ -- -- -- -- -- --
---------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1993....................... 2,026,990 20,270 2,478,448 24,784 9,506,553 --
Sales of Series D preferred stock............... 250,000 2,500 -- -- 1,997,500 --
Shares issued pursuant to exercise of stock
options....................................... -- -- 35,328 353 13,713 --
Sale of Series E preferred stock................ 2,199,238 21,992 -- -- 9,043,355 --
Dividends on Series A preferred stock........... -- -- -- -- (18,000) --
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- -- 9,474 95 53,905 --
Net loss........................................ -- -- -- -- -- --
---------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1994....................... 4,476,228 44,762 2,523,250 25,232 20,597,026 --
Sale of Series F preferred stock................ 2,720,656 27,207 -- -- 10,064,668 --
Dividends on Series A preferred stock........... -- -- -- -- (36,000) --
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- -- 3,158 32 17,968 --
Shares issued pursuant to exercise of stock
options....................................... -- -- 15,638 156 30,525 --
Shares issued to employees in lieu of cash
compensation.................................. -- -- 7,810 78 44,395 --
Shares issued pursuant to exercise of
warrants...................................... -- -- 99,751 998 298,235 --
Deferred compensation related to grant of stock
options....................................... -- -- -- -- 359,900 (359,900)
Shares issued to stockholder in connection with
the offering.................................. -- -- 23,400 234 (234) --
Conversion of Series B preferred stock into
common stock.................................. (1,416,695) (14,167) 472,249 4,723 9,444 --
Net loss........................................ -- -- -- -- -- --
---------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1995....................... 5,780,189 57,802 3,145,256 31,453 31,385,927 (359,900)
Sale of common stock in initial public offering,
net of offering costs (unaudited)............. -- -- 2,587,500 25,875 29,101,286 --
Conversion of Series A, C, D, E and F preferred
stock into common stock (unaudited)........... (5,780,189) (57,802) 2,410,702 24,107 33,695 --
Shares issued pursuant to exercise of stock
options (unaudited)........................... -- -- 52,001 520 141,974 --
Shares issued pursuant to exercise of warrants
(unaudited)................................... -- -- 2,526 25 (25) --
Shares issued pursuant to Employee Stock
Purchase Plan (unaudited)..................... -- -- 5,631 56 59,774 --
Dividends on Series A Preferred Stock
(unaudited)................................... -- -- -- -- (18,000) --
Amortization of deferred compensation
(unaudited)................................... -- -- -- -- -- 67,481
Net loss (unaudited)............................ -- -- -- -- -- --
---------- ---------- --------- ---------- ----------- ----------
BALANCE, SEPTEMBER 30, 1996 (unaudited).......... -- $ -- 8,203,616 $ 82,036 $60,704,631 $ (292,419)
---------- ---------- --------- ---------- ----------- ----------
---------- ---------- --------- ---------- ----------- ----------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
------------ -------------
BALANCE, JANUARY 17, 1989 (inception)............ $ -- $ --
Initial issuance of common stock................ -- 10,000
Shares issued for consulting and licensing...... -- 2,000
Sale of common stock............................ -- 2,600
Shares issued pursuant to antidilutive
agreements.................................... -- --
Net loss........................................ (460,307) (460,307)
------------ -----------
BALANCE, DECEMBER 31, 1990....................... (460,307) (445,707)
Sale of Series A preferred stock................ -- 270,000
Sale of Series B preferred stock................ -- 4,210,119
Sale of common stock............................ -- 30,558
Shares issued for consulting services........... -- 682
Shares issued pursuant to antidilutive
agreements.................................... -- --
Capital contribution............................ -- 9,971
Dividends on Series A preferred stock........... -- (18,000)
Net loss........................................ (1,865,026) (1,865,026)
------------ -----------
BALANCE, DECEMBER 31, 1991....................... (2,325,333) 2,192,597
Shares issued pursuant to exercise of stock
options....................................... -- 16,250
Sale of Series C preferred stock................ -- 1,850,000
Sale of Series D preferred stock................ -- 200,000
Shares issued pursuant to redemption of notes
payable....................................... -- 462,406
Exercise of stock warrants pursuant to
redemption of notes payable................... -- 221,442
Shares issued pursuant to exercise of
warrants...................................... -- 34,687
Dividends on Series A preferred stock........... -- (36,000)
Sale of common stock............................ -- 295,628
Amortization of deferred compensation........... -- 4,843
Net loss........................................ (3,354,974) (3,354,974)
------------ -----------
BALANCE, DECEMBER 31, 1992....................... (5,680,307) 1,886,879
Sale of Series D preferred stock................ -- 2,000,000
Dividends on Series A preferred stock........... -- (36,000)
Shares issued to the University of
Pennsylvania.................................. -- --
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- 18,000
Amortization of deferred compensation........... -- 2,421
Net loss........................................ (2,422,917) (2,422,917)
------------ -----------
BALANCE, DECEMBER 31, 1993....................... (8,103,224) 1,448,383
Sales of Series D preferred stock............... -- 2,000,000
Shares issued pursuant to exercise of stock
options....................................... -- 14,066
Sale of Series E preferred stock................ -- 9,065,347
Dividends on Series A preferred stock........... -- (18,000)
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- 54,000
Net loss........................................ (6,212,249) (6,212,249)
------------ -----------
BALANCE, DECEMBER 31, 1994....................... (14,315,473) 6,351,547
Sale of Series F preferred stock................ -- 10,091,875
Dividends on Series A preferred stock........... -- (36,000)
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- 18,000
Shares issued pursuant to exercise of stock
options....................................... -- 30,681
Shares issued to employees in lieu of cash
compensation.................................. -- 44,473
Shares issued pursuant to exercise of
warrants...................................... -- 299,233
Deferred compensation related to grant of stock
options....................................... -- --
Shares issued to stockholder in connection with
the offering.................................. -- --
Conversion of Series B preferred stock into
common stock.................................. -- --
Net loss........................................ (5,066,775) (5,066,775)
------------ -----------
BALANCE, DECEMBER 31, 1995....................... (19,382,248) 11,733,034
Sale of common stock in initial public offering,
net of offering costs (unaudited)............. -- 29,127,161
Conversion of Series A, C, D, E and F preferred
stock into common stock (unaudited)........... -- --
Shares issued pursuant to exercise of stock
options (unaudited)........................... -- 142,494
Shares issued pursuant to exercise of warrants
(unaudited)................................... -- --
Shares issued pursuant to Employee Stock
Purchase Plan (unaudited)..................... -- 59,830
Dividends on Series A Preferred Stock
(unaudited)................................... -- (18,000)
Amortization of deferred compensation
(unaudited)................................... -- 67,481
Net loss (unaudited)............................ (4,599,880) (4,599,880)
------------ -----------
BALANCE, SEPTEMBER 30, 1996 (unaudited).......... ($23,982,128) $36,512,120
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
NINE MONTHS (JANUARY 17, (JANUARY 17,
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, 1989) TO 1989) TO
--------------------------------------- ------------------------ DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss..................... $(2,422,917) $(6,212,249) $(5,066,775) $(3,649,018) $(4,599,880) $(19,382,248) $(23,982,128)
Adjustments to reconcile net
loss to cash used in
operating activities --
Depreciation and
amortization............. 194,454 309,303 389,331 278,244 484,467 1,175,595 1,660,062
Common stock issued for
non-cash charges and
other.................... 2,421 -- -- -- -- 34,962 34,962
Changes in operating
assets and liabilities --
Restricted funds......... 197,338 (112,466) 351,753 314,850 110,718 (221,366) (110,648)
Prepaid expenses and
other.................. (14,169) (20,686) (62,030) (65,459) (134,198) (118,681) (252,879)
Other assets............. 1,500 416 (11,649) (11,649) -- (15,049) (15,049)
Accounts payable......... 145,926 (112,219) 82,868 179,944 10,079 301,024 311,103
Accrued compensation..... 219,418 149,876 (135,880) (177,197) 16,682 13,996 30,678
Other accrued expenses... (32,754) 84,794 201,394 (5,287) (167,023) 519,399 352,376
Deferred revenue......... -- -- 41,667 250,000 312,500 41,667 354,167
Other liabilities........ 186,666 (133,606) 21,926 17,953 4,373 74,986 79,359
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net cash used in
operating activities... (1,522,117) (6,046,837) (4,187,395) (2,867,619) (3,962,282) (17,575,715) (21,537,997)
----------- ----------- ----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment.................. (490,894) (975,175) (875,010) (613,072) (667,150) (3,103,307) (3,770,457)
Purchase of short-term
investments................ -- -- -- -- -- (3,177,000) (3,177,000)
Proceeds from sale of short-
term investments........... -- -- -- -- -- 3,177,000 3,177,000
Proceeds from sale-leaseback
of equipment............... -- -- 1,382,027 829,589 -- 1,382,027 1,382,027
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net cash provided by
(used in) investing
activities............... (490,894) (975,175) 507,017 216,517 (667,150) (1,721,280) (2,388,430)
----------- ----------- ----------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
NINE MONTHS ENDED (JANUARY 17, (JANUARY 17,
YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1989) TO 1989) TO
--------------------------------- ----------------------- DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
---------- ----------- ----------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from the issuance
of notes................... $ -- $ -- $ -- $ -- $ -- $ 1,225,000 $ 1,225,000
Repayment of notes payable... (150,000) -- -- -- -- (565,250) (565,250)
Proceeds from issuance of
short-term debt............ -- -- -- -- -- 290,000 290,000
Repayment of short-term
debt....................... -- -- -- -- -- (290,000) (290,000)
Proceeds from issuance of
long-term debt............. 1,010,869 100,000 -- -- -- 1,110,869 1,110,869
Repayment of long-term
debt....................... (167,943) (294,324) (488,237) (326,146) (562,678) (998,267) (1,560,945)
Proceeds from issuance of
preferred stock, net....... 2,000,000 11,065,347 10,091,875 5,352,583 -- 29,497,297 29,497,297
Proceeds from issuance of
common stock, net.......... -- -- -- -- 59,830 320,835 380,665
Proceeds from Initial Public
Offering, net.............. -- -- (409,003) -- 29,536,164 (409,003) 29,127,161
Proceeds from exercise of
warrants, net.............. -- -- 299,233 37,500 -- 333,920 333,920
Proceeds from exercise of
stock options.............. -- 14,066 30,681 5,728 142,494 60,997 203,491
Dividends paid............... -- -- (18,000) (18,000) (18,000) (54,000) (72,000)
Issuance costs resulting from
conversion of notes to
common stock............... -- -- -- -- -- (36,402) (36,402)
---------- ----------- ----------- ---------- ----------- ----------- -----------
Net cash provided by
financing activities..... 2,692,926 10,885,089 9,506,549 5,051,665 29,157,810 30,485,996 59,643,806
---------- ----------- ----------- ---------- ----------- ----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS......... 679,915 3,863,077 5,826,171 2,400,563 24,528,378 11,189,001 35,717,379
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.......... 819,838 1,499,753 5,362,830 5,362,830 11,189,001 -- --
---------- ----------- ----------- ---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD.................... $1,499,753 $ 5,362,830 $11,189,001 $7,763,393 $35,717,379 $11,189,001 $35,717,379
---------- ----------- ----------- ---------- ----------- ----------- -----------
---------- ----------- ----------- ---------- ----------- ----------- -----------
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest....... $ 128,643 $ 158,575 $ 200,008 $ 141,967 $ 203,125 $ 793,193 $ 996,318
---------- ----------- ----------- ---------- ----------- ----------- -----------
---------- ----------- ----------- ---------- ----------- ----------- -----------
Noncash financing activities --
Issuance of common stock
for dividends............ $ 18,000 $ 54,000 $ 18,000 $ 18,000 $ -- $ 90,000 $ 90,000
---------- ----------- ----------- ---------- ----------- ----------- -----------
---------- ----------- ----------- ---------- ----------- ----------- -----------
Issuance of common stock
to employees in lieu of
cash compensation........ $ -- $ -- $ 44,473 $ 44,473 $ -- $ 44,473 $ 44,473
---------- ----------- ----------- ---------- ----------- ----------- -----------
---------- ----------- ----------- ---------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MINTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. BACKGROUND:
Neose Technologies, Inc., a development-stage company, formerly Neose
Pharmaceuticals, Inc. (the Company), is focused on the enzymatic synthesis of
complex carbohydrates and discovers and develops complex carbohydrates for
nutritional and pharmaceutical uses. The Company's products in development
include breast milk oligosaccharide additives to infant formula, and
pharmaceuticals to treat various bacterial infections, such as gastrointestinal
and pediatric ear infections and to prevent xenotransplant rejection. The
Company has developed proprietary technologies that it believes enables, for the
first time, the rapid and cost-efficient production of naturally-occurring
oligosaccharides.
The Company's initial public offering of common stock (the 'Offering')
closed on February 22, 1996. The Company sold 2,587,500 shares, including the
exercise of the underwriters' over-allotment option on March 4, 1996, of common
stock at a public offering price of $12.50 per share. The net proceeds to the
Company from the Offering after the underwriting discount and payment of
offering expenses were $29,127,000. In connection with the Offering all
outstanding shares of Series A, C, D, E, and F Convertible Preferred Stock
converted into 2,410,702 shares of common stock (Note 6).
The Company was incorporated in January 1989, and commenced operations in
August 1990. Since its inception, the Company has derived substantially all of
its revenues from its strategic alliance with Abbott Laboratories (Note 3); no
product revenues have been generated to date. The Company has incurred losses
since its inception. The Company anticipates incurring additional losses over at
least the next several years. Such losses may fluctuate significantly from
quarter to quarter and are expected to increase as the Company expands its
research and development activities. Substantial financing will be needed by the
Company to fund its operations and to commercially develop its products. There
is no assurance that such financing will be available when needed. Operations of
the Company are subject to certain risks and uncertainties including, among
others, uncertainty of product development, technological uncertainty,
dependence on Abbott Laboratories and other collaborative partners, uncertainty
regarding patents and proprietary rights, substantial competition, risk of
technological obsolescence, comprehensive government regulations, no assurance
of product approval, no commercial manufacturing, marketing, or sales capability
or experience, limited clinical trial experience, and dependence on key
personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements as of September 30, 1996 and for the nine months
ended September 30, 1995 and 1996 and the period from inception (January 17,
1989) to September 30, 1996 are unaudited and, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial condition and results of
operations for these interim periods. The results of operations for the nine
months ended September 30, 1996 are not necessarily indicative of the results to
be expected for any other interim period or the entire year.
F-8
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MINTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments consisting of purchases
with an original maturity of three months or less to be cash equivalents. Cash
equivalents at December 31, 1995 and September 30, 1996 consist of $10,114,000
and $35,144,000, respectively of overnight repurchase agreements secured by
United States Treasury Notes.
Property and Equipment
Property and equipment are stated at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets or the lease term, whichever is shorter. The Company uses
lives of two to seven years for office, research, and manufacturing equipment.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, 'Accounting for Income Taxes,'
the objective of which is to recognize the amount of current and deferred income
taxes payable or refundable at the date of the financial statements as a result
of all events that have been recognized in the financial statements as measured
by enacted tax laws.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $5,953,000. In addition, the
Company had federal research and development credit carryforwards of
approximately $561,000. The net operating loss and credit carryforwards begin to
expire in 2004 and are subject to review and possible adjustment by the Internal
Revenue Service. The Tax Reform Act of 1986 contains provisions that may limit
the net operating loss carryforwards available to be used in any given year in
the event of significant changes in ownership interest.
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Net operating loss carryforwards...................................... $ 1,569,788 $ 2,024,094
Research and development credit carryforwards......................... 454,727 561,058
Start-up costs........................................................ 1,487,248 2,027,935
Capitalized research and development.................................. 1,497,947 2,109,947
Deferred revenue...................................................... -- 14,167
Nondeductible accruals................................................ 38,284 --
Nondeductible depreciation and amortization........................... 265,395 397,768
Deferred rent......................................................... 18,040 25,495
Valuation allowance................................................... (5,331,429) (7,160,464)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
F-9
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has provided a full valuation allowance against this amount.
Revenue Recognition
The Company records revenue from collaborative agreements when the
specified services are performed or ratably over the respective terms of the
agreements.
Pro Forma Net Loss Per Share (unaudited)
Pro forma net loss per share was computed using the weighted average number
of common shares outstanding during the period, and includes all convertible
preferred stock which converted into shares of common stock immediately prior to
the closing of the Offering as if they were converted into common stock on their
original dates of issuance. In addition, pursuant to the requirements of the
Securities and Exchange Commission, common stock issued by the Company during
the twelve months immediately preceding the initial public offering has been
included in the calculation of shares used in computing pro forma net loss per
share as if it was outstanding for all periods in 1995. Common stock equivalents
were excluded for all periods presented because they are antidilutive.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, 'Accounting for Stock-Based Compensation.' The
Company is required to adopt this standard for the year ending December 31,
1996. The Company has elected to adopt the disclosure requirement of this
pronouncement. The adoption of this pronouncement will have no impact on the
Company's statements of operations.
Recapitalization
In December 1995, the Company's stockholders approved the following actions
which became effective upon the closing of the Offering: (i) a one-for-three
reverse stock split of the Company's common shares, (ii) a change in the number
of authorized shares of common stock and preferred stock to 30,000,000 and
5,000,000, respectively, and (iii) a change in the par value of common stock to
$.01 per share. All references in the financial statements to the number of
common shares, per share amounts, and stock options and warrants exercisable
into common stock have been retroactively restated to reflect these changes.
3. AGREEMENTS WITH ABBOTT LABORATORIES:
The Company and Abbott Laboratories ('Abbott') entered into collaborative
agreements (the 'Abbott Agreements') to develop breast milk oligosaccharides as
additives to infant formula and other nutritional products. Abbott has
manufacturing rights and further manufacturing development responsibilities for
the nutritional additives. Under this strategic alliance, the Company has
received approximately $4.7 million in contract payments, license fees, and
milestone payments through September 30, 1996. In addition, the Company is to
receive $500,000 in January 1997, and $5.0 million within 60 days of the first
commercial sale, if any, of infant formula containing the Company's nutritional
additive. Abbott will manufacture the nutritional additive for its own use and
has agreed to pay the Company ongoing fees based on the dry weight of the infant
formula sold containing the nutritional additive. The Company is required to
credit $3.75 million of the license fees against the ongoing fees in equal
amounts over four years. In addition, Abbott has agreed to renegotiate the fees
due the Company on the sale of products containing the nutritional
F-10
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
3. AGREEMENTS WITH ABBOTT LABORATORIES: -- (CONTINUED)
additive in any case where the Company has made a contribution that both parties
agree will result in a substantial commercial advantage. Abbott may, at any time
prior to the first commercial sale, if any, of infant formula containing the
Company's nutritional additive, elect to make its license agreement
non-exclusive, in which event the license fees payable by Abbott after
commercialization would be reduced by 50% and Abbott's obligations to make
contract and milestone payments, including the January 1997 payment, and the
$5.0 million milestone payment would be terminated. Abbott also has the right to
cancel the underlying license agreement upon 60 days' written notice and return
the technology, in which event it would have no further funding obligations to
the Company. Under the terms of the Abbott agreements, if Abbott fails to make
appropriate regulatory filings with the FDA for the addition of Neose
oligosaccharides in infant formula prior to December 31, 1997, Neose, at its
option, may elect to convert the license of Neose technology to a non-exclusive
license to Abbott, in which event the license fees payable by Abbott after
commercialization would be reduced by 50%, and Abbott's obligations to make
contract and milestone payments, including the $5.0 million milestone payment,
would be terminated. The Company anticipates that its manufacturing arrangement
with Abbott will assist the Company in developing its own manufacturing
capability. As part of the strategic alliance, in January 1993, and April 1994,
Abbott invested an aggregate of $4.0 million to acquire 500,000 shares of the
Company's Series D Convertible Preferred Stock at $8.00 per share. In February
1996, Abbott invested $2.0 million to acquire 160,000 shares of the Company's
common stock in the Company's Offering (Note 1).
During 1995, Abbott made contractual payments to the Company under the
Agreements totaling $1,000,000. In addition, Abbott purchased raw materials from
the Company for $105,000 which was included in revenue for the year ended
December 31, 1995. In the nine months ended September 30, 1996, Abbott made
additional contractual payments to the Company under the Abbott Agreements
totaling $1,000,000.
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Research equipment.................................................. $1,138,253 $1,413,646 $ 1,630,868
Leasehold improvements.............................................. 731,504 1,447,100 1,713,428
Construction in progress............................................ 220,709 -- 105,169
Manufacturing equipment............................................. 532,554 601,950 650,938
Computer and office equipment....................................... 173,134 208,469 237,912
---------- ---------- -----------
2,796,154 3,671,165 4,338,315
Less -- Accumulated depreciation and amortization................... (596,221) (985,552) (1,402,538)
---------- ---------- ----------
$2,199,933 $2,685,613 $ 2,935,777
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-11
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
4. PROPERTY AND EQUIPMENT: -- (CONTINUED)
Depreciation and amortization expense was $194,454, $309,303, $389,331,
$278,244 and $416,986 for the years ended December 31, 1993, 1994, and 1995 and
for the nine months ended September 30, 1995 and 1996, respectively.
During 1995, the Company financed certain property including leasehold
improvements, manufacturing equipment and construction in progress, in
accordance with the lease agreement described in Note 10. Total property and
equipment under this capital lease was $1,382,027 at December 31, 1995.
Amortization of assets recorded under the capital lease was included with
depreciation. Title to this property is owned by the leasing company. At
December 31, 1995, other property and equipment totaling $1,116,869 were pledged
as collateral for equipment loans (Note 5).
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Tenant improvement loan due to landlord, interest at 10%, monthly
principal and interest payments of $10,858 through April 1997...... $ 270,169 $ 162,018 $ 73,537
Equipment loan due to a finance company, interest at 15.5%, monthly
principal and interest payments for 48 months subsequent to
each drawdown of funds............................................. 739,550 496,729 288,414
Equipment loan due to a municipal development corporation, interest
at 5%, monthly principal and interest payments of $1,887 through
September 1999.................................................... 95,570 77,288 62,965
Capital lease obligation (Note 9).................................... -- 1,263,044 1,011,485
---------- ---------- -----------
1,105,289 1,999,079 1,436,401
Less -- Current portion.............................................. (369,254) (764,552) (753,901)
---------- ---------- -----------
$ 736,035 $1,234,527 $ 682,500
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The Company entered into a Master Equipment Loan ('Equipment Loan') with a
finance company. As of September 30, 1996, $1,010,869 had been borrowed. In
connection with the Equipment Loan, the Company granted the finance company
warrants to purchase 16,668 and 7,072 shares of common stock at $19.50 and
$14.85 per share, respectively (Note 7).
Minimum principal repayments of long-term debt as of December 31, 1995,
excluding capitalized lease obligations, were as follows:
1996........................................................ $421,971
1997........................................................ 273,994
1998........................................................ 23,436
1999........................................................ 16,634
--------
$736,035
--------
--------
F-12
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY:
Common Stock
The Company's initial public offering closed on February 22, 1996. The
Company sold 2,587,500 shares, including the exercise of the underwriters'
over-allotment option on March 4, 1996, of common stock at a public offering
price of $12.50 per share. The net proceeds to the Company from the Offering
after the underwriting discount and payment of offering expenses were
$29,127,000. In connection with the Offering all outstanding shares of Series A,
C, D, E, and F Convertible Preferred Stock converted into 2,410,702 shares of
common stock. Certain of these common shares have registration rights.
From 1991 through 1995, the Company sold 7,196,884 shares of Convertible
Preferred Stock Series A, B, C, D, E and F. On December 7, 1995, all outstanding
shares of Series B Convertible Preferred Stock converted into 472,249 shares of
common stock. As of December 31, 1995, 5,780,189 shares of convertible preferred
stock were outstanding (liquidation preference of $25,629,004 at December 31,
1995). As discussed above, in connection with the Offering, all outstanding
shares of Series A, C, D, E and F converted into 2,410,702 shares of common
stock (unaudited).
In 1991, the Company issued $1,225,000 in subordinated notes, with warrants
to purchase 204,180 shares of common stock at $3.00 per share. In 1992 and 1993,
the Company redeemed the subordinated notes and accrued interest of $183,750
with the Company's common stock or with cash, at the election of the holder.
This redemption resulted in the issuance of 107,459 shares of common stock and
the payment of $688,500.
During the year ended December 31, 1995, 99,751 shares of common stock were
issued at an exercise price of $3.00 per share, pursuant to the exercise of
warrants by the noteholders, 8,589 of the noteholders' warrants expired, 7,810
shares of common stock were issued at fair market value of $5.70 per share as
payment for bonuses and other compensation, and 23,400 shares of common stock
were issued to a stockholder in connection with the Offering. The deemed value
of the shares for accounting purposes were recorded as Offering costs.
In connection with the issuance of the Series E Convertible Preferred Stock
('Series E'), the Company issued warrants to the placement agent to purchase
Series E, which in connection with the Offering converted into warrants to
purchase 119,961 shares of common stock at $9.45 per share. During the nine
months ended September 30, 1996, 6,538 warrants were exercised to purchase 2,526
shares of common stock via a cashless exercise provision contained in the
warrant (Notes 7 and 10).
7. EQUITY PLANS:
Stock Option Plans
The Company has three Stock Option Plans, the 1991, 1992, and 1995 Plans,
under which maximums of 250,000, 333,333 and 933,333 options, respectively, may
be granted at prices not less than 100% of the fair market value of the
Company's common stock on the date of grant. The 1995 Stock Option Plan (the
'Plan') incorporates the two predecessor plans and provides for the granting of
both incentive stock options and non-qualified stock options to employees,
officers, directors, and consultants of the Company as well as issuing shares of
common stock directly either through the immediate purchase of shares or as a
bonus tied to the individual's performance or the Company's attainment of
prescribed milestones. In
F-13
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
7. EQUITY PLANS: -- (CONTINUED)
addition, the Plan includes stock appreciation rights to be provided at the Plan
administrator's discretion. The stock options are exercisable over a period
determined by the Board of Directors, but no longer than ten years after the
date of grant. Information with respect to options under the above plans is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
AVAILABLE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE PRICE
---------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992.............................. 191,307 383,692 $ .09-19.50 $1,481,128
Granted............................................... (119,659) 119,659 .90-19.50 392,887
Canceled.............................................. 43,832 (43,832) 1.95-19.50 (476,989)
---------- -------- ----------
Balance, December 31, 1993.............................. 115,480 459,519 .09- 9.00 1,397,026
Granted............................................... (201,750) 201,750 .09- 5.70 810,338
Exercised............................................. -- (35,328) .09- 5.70 (14,066)
Canceled.............................................. 113,895 (113,895) .90- 3.75 (321,467)
---------- -------- ----------
Balance, December 31, 1994.............................. 27,625 512,046 .09- 9.00 1,871,831
Authorized............................................ 933,333 -- -- --
Granted............................................... (349,644) 349,644 5.70-12.54 3,559,636
Granted outside the Plan.............................. -- 69,998 13.80-24.84 1,255,756
Exercised............................................. -- (15,638) .09- 9.00 (30,681)
Canceled.............................................. 5,389 (5,389) .09- 9.00 (21,439)
---------- -------- ----------
Balance, December 31, 1995.............................. 616,703 910,661 .09-24.84 6,635,103
Granted (unaudited)................................... (47,932) 47,932 12.13-21.00 852,060
Exercised (unaudited)................................. -- (52,001) .09- 9.00 (142,494)
Canceled (unaudited).................................. 10,998 (10,998) .90-18.25 (92,313)
---------- -------- ----------
Balance September 30, 1996 (unaudited).................. 579,769 895,594 $ .09-24.84 $7,252,356
---------- -------- ----------
---------- -------- ----------
</TABLE>
At December 31, 1995, options for the issuance of 298,630 shares were
exercisable at prices ranging from $.09 to $9.00 per share. At September 30,
1996, options for the issuance of 318,962 shares were exercisable at prices
ranging from $.09 to $18.00 (unaudited). At December 31, 1995 and September 30,
1996, the aggregate exercise price of these options was $1,150,815 and
$1,313,775, respectively.
During 1995, options were granted outside of the Plan for 69,998 shares of
Common Stock at a weighted average exercise price of $17.94 per share. In
December 1995, the Company issued options to employees and recorded deferred
compensation of $359,900 for the difference between the deemed value for
accounting purposes per share and the exercise price per share and will amortize
the deferred compensation amount over the four-year vesting period.
Stock Warrants
The following table summarizes outstanding warrants at September 30, 1996.
All warrants are currently exercisable and the exercise price is subject to
adjustment as set forth in the warrant agreement.
F-14
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
7. EQUITY PLANS: -- (CONTINUED)
OUTSTANDING EXERCISE
WARRANTS PRICE ISSUANCE DATE EXPIRATION DATE
- ----------- -------- ------------------- --------------------
16,668 $19.50 June 30, 1993 June 30, 1998
7,072 14.85 February 16, 1994 February 16, 1999
113,423 9.45 July 31, 1994 July 31, 1999
10,527 14.25 June 30, 1995 June 30, 2002
- ---------
147,690
- ---------
- ---------
8. 401(K) PLAN:
The Company has a 401(k) Savings Plan (the '401(k) Plan') for employees.
Employee contributions are voluntary and are determined on an individual basis
with a maximum annual amount equal to the lesser of the maximum amount allowable
under federal income tax regulations or 15% of the participant's compensation.
The Company matches employee contributions up to specified limits. The Company
contributed $28,300, $53,171, $62,270, $48,531, and $47,138 to the 401(k) Plan
for the years ended December 31, 1993, 1994, and 1995 and for the nine months
ended September 30, 1995 and 1996, respectively.
9. COMMITMENTS:
Agreements with the University of Pennsylvania:
License Agreement
In 1990, the Company entered into an agreement whereby the University of
Pennsylvania ('Penn') granted to the Company an exclusive license to use Penn's
patent rights and technology to produce certain products. In consideration, the
Company issued common stock to Penn pursuant to a Stock Purchase Agreement (see
below). In addition, the Company is required to pay Penn royalties based on
sales of applicable products. The Company is also required to reimburse Penn for
all reasonable fees incident to the acquisition and maintenance of Penn's patent
rights. The Company paid $89,530, $70,979, $21,469, $22,201, and $30,563 in
patent-related fees on Penn's behalf for the years ended December 31, 1993,
1994, and 1995 and for the nine months ended September 30, 1995 and 1996,
respectively. This agreement will terminate upon the expiration of the patent
rights.
Stock Purchase Agreement
Under the Stock Purchase Agreement, the Company in 1991 issued Penn 147,063
shares of the Company's common stock related to the license agreement and for
consulting services.
Sponsored Research Agreement
The Company had an agreement with Penn to support research and development
activities relating to oligosaccharides. This agreement expired in 1992. Under
the agreement, the Company paid Penn research grants of $206,000 in 1992.
F-15
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
9. COMMITMENTS: -- (CONTINUED)
Agreement with Bracco Research U.S.A., Inc.:
In September 1995, the Company entered into a collaborative research
agreement with Bracco Research U.S.A., Inc. ('Bracco'). Under the terms of the
agreement, the Company will supply Bracco with complex carbohydrates, which
Bracco will attach to diagnostically useful agents. The resulting new molecules
will be tested and developed. In consideration, Bracco committed to six
semiannual payments to Neose in the amount of $125,000, for a total of $750,000.
The Company recognized $83,333, $20,833, and $187,500 of revenue under this
agreement for the year ended December 31, 1995 and for the nine months ended
September 30, 1995 and 1996, respectively.
Employment Agreements
In November 1994, the Company entered into a three-year employment
agreement with its President and Chief Financial Officer which provides for
certain annual base salaries and bonuses of up to 50% of base salary at the
discretion of the Compensation Committee of the Board of Directors. In
connection with this agreement, the Company granted options to purchase 100,000
shares of common stock at $5.70 per share, 20,000 of which vested immediately
with the remainder vesting ratably over four years (Note 7).
In April 1996, the Company entered into a one-year employment agreement
with its Vice President of Drug Development. The employment agreement provides
for an annual base salary and a bonus of up to 25% of base salary at the
discretion of the Chief Executive Officer.
Leases
In January 1992, the Company entered into a ten-year operating lease for
office and laboratory facilities effective May 1992. The lease includes
escalation clauses and is cancelable by the Company after five or seven years.
Pursuant to this lease, the Company is required to maintain an escrow balance
which is reduced ratably over the lease term.
On August 30, 1996, the Company entered into a construction agreement for
the planned expansion of its manufacturing capabilities. For this expansion, the
Company expects to make capital expenditures totaling approximately $7.5
million, beginning in the fourth quarter of 1996. In connection with this
expansion, on December 5, 1996, the Company entered into a non-binding letter of
intent with the owner of the leased facility to purchase the facility for
approximately $3.8 million contingent upon, among other things, the Company
obtaining financing for the acquisition.
In June 1995, the Company entered into a master equipment lease agreement
with a finance company which provides for up to $1,500,000 in financing, of
which $1,382,027 had been drawn as of September 30, 1996. In connection with the
lease, the Company granted the lessor warrants to purchase 10,527 shares of
common stock at $14.25 per share (Note 7).
F-16
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
9. COMMITMENTS: -- (CONTINUED)
Future minimum lease payments under the Company's leases as of December 31,
1995 are as follows:
OPERATING CAPITAL
LEASES LEASES
--------- ----------
1996.................................................... $310,277 $ 527,382
1997.................................................... 107,862 527,382
1998.................................................... -- 563,695
-------- ----------
Total minimum lease payments............................ $418,139 1,618,459
--------
--------
Less -- Amount representing interest.................... (355,415)
----------
Present value of future minimum lease payments.......... 1,263,044
Less -- Current portion................................. (342,581)
----------
$ 920,463
----------
----------
Rent expense was $220,644, $322,275, $309,249, $231,937, and $231,937 for
the years ended December 31, 1993, 1994 and 1995, and for the nine months ended
September 30, 1995 and 1996, respectively. In addition, the Company has recorded
a deferred rent liability for escalating rent payments in future years of
$74,986 at December 31, 1995.
10. RELATED PARTY TRANSACTIONS:
In 1994, the Company entered into an agreement with Paramount Capital, Inc.
('Paramount') for the private placement of the Series E. The sole shareholder of
Paramount is a member of the Company's Board of Directors. The Company paid
$1,246,505 in commissions and expenses pursuant to the agreement. Additionally,
Paramount received warrants to purchase 216,780 shares of the Company's Series E
at $5.23 per share.
In 1995, Paramount acted as a placement agent for a portion of the Series F
Convertible Preferred Stock. The Company paid $425,247 in commissions to
Paramount in the year ended December 31, 1995. In addition, in December 1995 the
Company granted to an employee of Paramount options to purchase 49,999 shares of
Common Stock at a weighted average exercise price of $17.94 per share, vesting
in various amounts over five years, for financial advisory services.
In February 1994, a member of the Company's Board of Directors advanced the
Company $440,000 to fund the Company's restricted funds account held in escrow
pursuant to the Company's facility lease. In April 1994, the Company repaid this
balance.
F-17
<PAGE>
[This page intentionally left blank]
<PAGE>
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No dealer, sales representative or any other person has been authorized
to give any information or to make any representations in connection with this
offering, other than those made in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Placement Agent. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
shares of Common Stock to which it relates, or an offer to, or a solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof.
------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Price Range of Common Stock............................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 20
Business.................................................................. 25
Management................................................................ 42
Certain Transactions...................................................... 53
Principal Stockholders.................................................... 55
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 59
Plan of Distribution...................................................... 61
Legal Matters............................................................. 62
Experts................................................................... 62
Available Information..................................................... 62
Index to Financial Statements............................................. F-1
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1,250,000 Shares
[NEOSE TECHNOLOGIES, INC. LOGO]
Common Stock
-----------------
PROSPECTUS
-----------------
Vector Securities International, Inc.
January 23, 1997
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