SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Mark One:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-27324
SYNAPTIC PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
215 College Road
Paramus, NJ
(Address of principal executive offices)
22-2859704
(I.R.S. Employer Identification No.)
07652
(Zip Code)
(201) 261-1331
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Rights to Purchase Series A Junior Convertible Preferred Stock,
par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $97,500,000 as of March 3,
1997, based upon the closing price of the Common Stock as reported on The Nasdaq
Stock Market on such date. For purposes of this calculation, shares of Common
Stock held by directors, officers and stockholders whose ownership in the
registrant is known by the registrant to exceed five percent have been excluded.
This number is provided only for purposes of this report and does not represent
an admission by either the registrant or any such person as to the status of
such person.
As of March 3, 1997, there were 7,635,006 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Synaptic Pharmaceutical Corporation Proxy Statement, to
be filed not later than 120 days after December 31, 1996, in connection with the
registrant's 1997 Annual Meeting of Stockholders, referred to herein as the
"Proxy Statement," are incorporated by reference into Part III of this Report on
Form 10-K.
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996
Part I
Page
Item 1. Business 1
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 26
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 8. Financial Statements 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 58
Part III
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and Management 59
Item 13. Certain Relationships and Related Transactions 59
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 60
(i)
<PAGE>
Part I
Item 1. Business
Overview
Synaptic Pharmaceutical Corporation ("Synaptic" or the "Company") is a
biotechnology company engaged in the development of a broad platform of enabling
technology which it calls "human receptor-targeted drug design technology." The
Company is utilizing this technology both to discover and clone the genes that
code for human receptor subtypes associated with specific disorders and to
design compounds that can potentially be developed as drugs for treating these
disorders. Human receptor subtypes are protein molecules in the human body that
mediate cell-to-cell signaling. The Company believes that by designing compounds
that are selective for specific receptor subtypes, new drugs can be developed
that will be more effective and have fewer side effects than existing drugs. In
addition, because human receptor-targeted drug design technology has enabled the
Company to discover genes that code for previously undiscovered human receptor
subtypes, Synaptic is able to design compounds that act through novel mechanisms
and that are aimed at disorders that have historically been difficult or
impossible to manage. In order to maximize its resources and leverage its
scientific expertise, the Company focuses on the discovery and design phases of
the drug development process and collaborates with pharmaceutical companies
primarily to utilize their expertise in preclinical testing, clinical trials and
commercialization.
Synaptic is currently engaged in collaborations with Eli Lilly and
Company ("Lilly"), Merck & Co., Inc. ("Merck") and Novartis Pharma A.G.
("Novartis"). (Novartis is the pharmaceutical subsidiary of Novartis A.G., the
company that was recently formed through the consolidation of Synaptic's
original collaborative partner, Ciba-Geigy Limited ("Ciba-Geigy") and Sandoz
Limited.) These collaborations are focused principally on drug discovery
programs for five different therapeutic applications: migraine headache, smoking
cessation, depression, benign prostatic hyperplasia and obesity. In January
1995, the Company and Lilly extended for an additional four-year period their
collaboration, which began in 1991 and is related to the discovery and
development of serotonin receptor subtype-selective drugs for various
therapeutic applications, including migraine headache, smoking cessation and
depression. The Company and Lilly substantially increased the size of their
collaboration in October 1996. In November 1993, the Company and Merck began
collaborating on a program focused on the development of alpha-1a adrenergic
receptor subtype-selective compounds for the treatment of benign prostatic
hyperplasia. This collaboration was extended for an additional year in October
1996. In August 1994, the Company began a collaboration with Ciba-Geigy, one of
Novartis A.G.'s predecessors-in-interest, to discover and develop neuropeptide Y
receptor subtype-selective drugs for the treatment of obesity. The scope of this
collaboration was expanded in May 1996 to cover the discovery and development of
drugs that act through other, as yet undisclosed mechanisms for the treatment of
obesity. In connection with this expansion, the term of the collaboration was
extended for an additional year. Each of Lilly, Merck and Novartis provides the
Company with financial support for research. In addition, each of these
collaborative partners is required to make payments to the Company upon the
achievement of certain milestones and to pay the Company royalties based upon
net sales of any drugs resulting from its collaboration with the Company.
In addition to its collaborations with Lilly, Merck and Novartis, the
Company entered into a collaborative arrangement with The DuPont Merck
Pharmaceutical Company ("DuPont Merck") in February 1996 pursuant to which
DuPont Merck licensed and is utilizing certain technology of the Company to
discover and develop drugs that are selective for certain alpha adrenergic
receptor subtypes for certain undisclosed
1
<PAGE>
therapeutic indications. As part of its arrangement with the Company, DuPont
Merck is required to make payments to the Company upon the achievement of
certain milestones and to pay the Company royalties based upon net sales of any
drugs resulting from the collaboration.
The Company's human receptor-targeted drug design technology
encompasses three steps: (i) the discovery and cloning of the human genes that
code for the targeted receptor subtypes; (ii) the use of each of these genes to
create a cell line that can be used to measure, or assay, the pharmacological
properties of compounds that bind to the targeted receptor subtype and that are,
therefore, candidates for drug development; and (iii) the design, synthesis and
optimization of compounds that are highly selective for the targeted human
receptor subtype and that have low affinities for human receptor subtypes that
may be associated with undesirable side effects.
The receptors on which Synaptic focuses its receptor and drug discovery
efforts are members of a receptor superfamily known as "G protein-coupled
receptors." The Company selected this receptor family primarily for the
following reasons. First, many G protein-coupled receptors have been shown to be
effective drug targets, as evidenced by the commercial availability of drugs for
a wide variety of therapeutic applications that work by means of their
interactions with G protein-coupled receptors. Second, the G protein-coupled
receptor superfamily is extremely large and diverse, comprising according to
several estimates in excess of 1,000 receptors, with its members being involved
in the mediation of a broad array of physiological functions. Accordingly, the
Company believes that there are substantial opportunities to use many members of
the G protein-coupled receptor superfamily as targets for novel drugs.
Strategy
Synaptic's strategy is to develop, together with its collaborative
partners, a broad array of drugs based upon the Company's human
receptor-targeted drug design technology. This strategy consists of three
principal objectives:
To aggressively discover and clone G protein-coupled receptor
genes. The Company is aggressively seeking to expand its collection of
cloned genes that code for members of the G protein-coupled receptor
superfamily. As of March 3, 1997, Synaptic's collection included ten
receptor genes with respect to which Synaptic had received United
States patents. In addition, claims under an additional United States
patent application relating to another receptor gene had been allowed
and United States patent applications relating to other genes that
code for G protein-coupled receptors were pending. Several
corresponding patent applications have also been filed in other
countries.
To efficiently discover and design potential drugs through the
use of its human receptor-targeted drug design technology. Synaptic's
human receptor-targeted drug design technology is being used by the
Company and its collaborative partners to design, synthesize and
optimize compounds for further development. The Company's two
approaches to designing and synthesizing compounds include traditional
medicinal chemistry and the newer technology of combinatorial
chemistry, each of which is supported by the Company's expertise in
computer-assisted molecular modeling. With both approaches, the
Company's chemists and pharmacologists use their knowledge of the
structures of targeted receptor subtypes to design and synthesize
initial chemical structures that are then optimized. As of March 3,
1997, Synaptic's chemists were involved in a number of drug discovery
programs, two of which were being conducted in collaboration with the
Company's partners. Depending upon the specific terms of their
agreements with the Company, the Company's partners may select
compounds
2
<PAGE>
for testing in the Company's drug discovery systems from the Company's
existing libraries of compounds, their own existing libraries of
compounds or newly discovered or designed compounds.
To leverage resources through collaborations and licensing arrangements
with pharmaceutical companies. The Company's strategy is to focus
initially on the discovery and design phases of the drug development
process and to engage in collaborations and licensing arrangements with
pharmaceutical companies. Synaptic's collaborative partners participate
in the early phases of the drug development process and generally
assume principal responsibility for preclinical testing, clinical
trials and commercialization. This strategy allows Synaptic to gain
access to the expertise and resources of its partners and to maintain
relatively low capital requirements.
Synaptic was incorporated in Delaware in January 1987. The address and
telephone number for the executive offices of the Company are 215 College Road,
Paramus, New Jersey 07652, (201) 261-1331.
Background
Intercellular Communication: The Role of Receptors in Controlling
Cellular Function
The human body coordinates its activities through communication among
its great variety of cells and tissues. One of the principal means of
communication occurs through chemical signaling, when one cell releases a
chemical messenger, called a "ligand," which ultimately binds to and activates a
protein molecule, called a "receptor," on the surface of another cell. The
activation of the receptor on the surface of the receiving cell triggers a
cascade of events in which the message received by the receptor is, in turn,
transmitted to the interior of the cell, thereby causing some aspect of the
behavior of the receiving cell to change. The nature of this change depends upon
a number of factors, including the specific ligand and receptor involved in the
communication.
There exist in the human body many different kinds of receptors
involved in cellular communication. Receptors are first classified into
categories, called "superfamilies," based upon similarities in their biochemical
and structural properties. Of the principal superfamilies of receptors, Synaptic
focuses its receptor and drug discovery efforts on the G protein-coupled
superfamily of receptors. The receptors included within each superfamily are
then subcategorized into groups, called "families," based upon the specific
ligands with which they interact. Examples of receptor families within the G
protein-coupled receptor superfamily are the serotonin, adrenergic, neuropeptide
Y and galanin families of receptors. Each member of each family is called a
"receptor subtype."
Historically, it was believed that each family of receptors had only
one or two members. In recent years, however, scientists have discovered that
many families of receptors have more than two receptor subtypes. The number of
receptor subtypes within each family of receptors varies, with some families,
such as the serotonin family, comprising at least 14 known receptor subtypes,
and other families, such as the alpha adrenergic family, comprising at least six
known receptor subtypes.
In general, each receptor subtype is distributed differently throughout
the body and often controls physiological functions that are different from
those controlled by other receptor subtypes within the same family. By
interacting with all of its receptor subtypes that are located throughout the
body, a single ligand thus plays a role in numerous physiological functions. For
example, the ligand for adrenergic receptor subtypes, noradrenaline (also known
as norepinephrine), interacts with at least nine different receptor subtypes
(six alpha
3
<PAGE>
and three beta receptor subtypes), one of which has been shown to contract the
muscles surrounding the prostate and another of which has been shown to regulate
blood pressure. In some cases, the same receptor subtype is found in different
tissues of the human body. A compound designed to bind selectively to a receptor
subtype for treating a disorder in one tissue could, therefore, potentially
cause an adverse side effect in other tissues that contain the same receptor
subtype. The tissue affected by the disorder may, however, have certain other
characteristics that can be exploited to guide receptor subtype-targeted
compounds to that tissue.
Receptor-Based Drug Therapy -- The Traditional Approach
Many illnesses arise because of abnormalities in intercellular
communication, and the concept of receptor-based drug therapy was developed to
address this problem. The goal of receptor based-drug therapy is to develop
drugs that will interact with the receptor believed to be associated with the
targeted abnormality, thereby inhibiting or enhancing the cascade of events that
is mediated by the receptor. A number of receptor-based drugs have been
developed and are currently being used. In general, however, these drugs do not
differentiate among receptor subtypes and, while they may indeed interact with
the targeted receptor subtypes, thereby having some therapeutic effect, they may
also interact with other receptor subtypes within the same family as the
targeted receptor subtypes. These other receptor subtypes may be associated with
other physiological functions, and interactions of these drugs with them often
result in undesirable side effects. In addition, many of these drugs have
limited therapeutic utility because they must be used in suboptimal doses in
order to minimize these side effects.
The reason that most of these currently available drugs are unable to
differentiate among receptor subtypes stems from the fact that they were
discovered through traditional drug discovery methods. The traditional approach
to drug discovery involves the screening of compounds against animal tissues
containing multiple receptor subtypes to determine their relevant biological
activity. This approach is limited in its ability to yield optimally effective
drugs because of inherent limitations in the use of animal tissues to test drugs
intended for humans. First, by using animal tissues containing multiple receptor
subtypes, it is usually difficult and often impossible both to measure with
precision the effect of a compound on the receptor subtype that is the target of
a drug discovery effort and to determine whether the compound is binding to
other receptor subtypes in the tissue that are not the intended drug target.
Second, due to differences in the receptor systems of various species of animals
as compared to humans, there are often significant differences between a drug's
activity in animals and the same drug's activity in humans. In fact, there are
several examples of drug development candidate failures in human clinical trials
that were due to differences in the properties of such candidates in humans as
compared to their properties in the animal tissues that were initially used for
drug discovery. As a consequence, compounds initially tested against animal
tissues often do not have the desired effects when they are ultimately
administered to humans in clinical trials.
Synaptic's Human Receptor-Targeted Drug Design Technology
Synaptic believes that its human receptor-targeted drug design
technology can overcome the limitations of the traditional approach to drug
discovery. This technology involves three steps: (i) the discovery and cloning
of the human genes that code for the targeted receptor subtypes; (ii) the use of
each of these genes to create a cell line that can be used to measure, or assay,
the pharmaceutical properties of compounds that bind to the targeted receptor
subtype and that are, therefore, candidates for drug development; and (iii) the
design, synthesis and optimization of compounds that are highly selective for
the targeted human receptor subtype. In the first step, the Company's molecular
biologists employ genetic engineering techniques to clone the gene
4
<PAGE>
that codes for the receptor subtype of interest. In the second step, the
Company's cell biologists place the gene into a recipient cell which then
expresses the human receptor subtype on its surface. This recipient cell, which
expresses a single population of the targeted human receptor subtype and is
devoid of all other related receptor subtypes, is then propagated by the
Company's cell biologists, resulting in the establishment of a cell line.
Finally, this cell line is used as a drug discovery system by the Company's
pharmacologists to evaluate compounds synthesized by the Company's or its
collaborative partners' chemists. Since each of these cell lines expresses a
single receptor subtype, it is possible to design compounds with high affinity
for the ultimate target of a drug discovery program--the appropriate human
receptor subtype--and low affinity for those subtypes suspected of being
associated with side effects.
The Company's technology makes it possible not only to clone receptors
previously believed or known to exist, but also to discover and clone receptor
subtypes which had previously been undetectable in animal tissues because they
were present in concentrations too low to detect using traditional
pharmacological techniques. Many of these newly discovered receptor subtypes may
provide opportunities for the design of novel drugs. In addition, the Company
believes that its ability to access and to use individual cloned human receptor
subtypes in its drug design efforts will yield safer and more effective drugs
than those currently available. The Company's technology also enables the
Company and its collaborative partners to eliminate or redesign
non-subtype-selective compounds and compounds that react poorly with human
targets at an early stage of the drug development process rather than at the
costly later stages of preclinical testing and clinical trials. Finally, drugs
developed through the use of the Company's human receptor-targeted drug design
technology will be small molecule drugs which offer possibilities of avoiding
specialized delivery approaches and which may be delivered orally.
The Company also believes that its success in the discovery of receptor
subtypes will enable it to further refine the understanding of many disease
processes. There is increasing evidence to suggest that some disorders may
actually involve the malfunctioning of any one of a variety of receptor subtypes
included within different receptor families. For example, in the case of
obesity, there are pharmacological data indicating that several different
ligands, including neuropeptide Y and galanin, play a role in controlling
appetite. As a result, more than one drug could be developed to treat obesity,
but such drugs would work through different biological mechanisms by exerting
their therapeutic effects by interacting with receptor subtypes belonging to
different families. The Company believes that its human receptor-targeted drug
design technology may make it possible to discover two or more separate drugs
that could benefit distinct patient populations whose symptoms (for example,
obesity), while identical, stem from different physiological disorders and
therefore require different treatments. Consequently, it has initiated several
programs in which different receptor subtypes are being used as drug targets for
the same therapeutic application.
To date, the Company has not completed development of any drugs and
does not expect that drugs developed by it or its collaborative partners will be
commercially available for a significant number of years, if at all.
Receptor Gene Discovery and Cloning
To date, the Company's receptor cloning projects have included four
families of receptors within the G protein-coupled superfamily of receptors: the
serotonin, alpha adrenergic, neuropeptide Y and galanin receptor families. In
addition, projects directed toward other receptor families are ongoing.
5
<PAGE>
The Company's collection of cloned genes that code for receptors in the
G protein-coupled receptor superfamily comprises human genes, as well as genes
from various other mammalian species that correspond to the human genes. These
cloned receptor genes include genes that have been discovered by the Company and
genes that have been discovered by others about which information is publicly
available. In general, the Company seeks to patent those cloned receptor genes
and those drug discovery systems that it has discovered or invented. The Company
has been issued United States patents relating to the genes that code for ten G
protein-coupled receptors and related drug discovery systems. In addition,
claims under a United States patent application relating to the gene that codes
for another G protein-coupled receptor and related drug discovery system have
been allowed and patent applications relating to other gene discoveries and
related drug discovery systems of the Company are pending in the United States
Patent and Trademark Office. Several corresponding patent applications have also
been filed in other countries. There can be no assurance that the Company will
be awarded patents in respect of any of its pending patent applications.
Drug Discovery Systems
Once the Company clones the gene for a targeted receptor subtype, it
places the gene into a recipient cell which then expresses the targeted receptor
subtype on its surface. This cell, which expresses a single population of the
targeted human receptor subtype, is then propagated in the laboratory by the
Company's cell biologists, resulting in the establishment of a cell line. This
cell line, which constitutes a drug discovery system, is used in two different
types of assays: binding assays and functional assays. In Synaptic's binding
assays, the Company's pharmacologists measure the affinity of a compound for
both the receptor subtype that is the target of a particular drug discovery
program and the other receptor subtypes that could be associated with side
effects. These measurements help to predict the potency of a compound, as well
as the degree of selectivity that the compound has for the targeted receptor
subtype over other receptor subtypes. The data obtained from binding assays
enable the chemists to design compounds toward or away from one or more of the
relevant subtypes, as appropriate, for optimal therapeutic efficacy. In
Synaptic's functional assays, the Company's pharmacologists determine the nature
of the response of the receptor subtype to the compound. Data from the
functional assays show whether the compound is acting to inhibit or enhance the
activity of the receptor subtype. By enabling the Company's pharmacologists to
evaluate compounds rapidly at their ultimate human receptor subtype targets, the
Company's proprietary drug discovery systems serve as tools that the Company's
and its partners' chemists can use to rationally design drugs that will be more
effective and have fewer or substantially less severe side effects than existing
drugs. Although the Company believes that its drug discovery systems accurately
measure the properties of a compound's interaction with the human receptor
subtypes, there are many additional factors, such as the drug's stability in the
body or its ability to be administered orally, that impact the ultimate
pharmaceutical success of a compound.
Chemistry and Molecular Pharmacology
The Company employs two approaches to designing and synthesizing
receptor subtype-selective compounds, traditional medicinal chemistry and the
newer technology of combinatorial chemistry, both of which are supported by the
Company's expertise in computer-assisted molecular modeling. With both
approaches, the Company's chemists and pharmacologists use their knowledge of
the structures of the targeted receptor subtypes and known compounds to design
and synthesize chemical structures that will have activity at these subtypes.
6
<PAGE>
Combinatorial chemistry involves automated synthesis of a variety of
novel compounds by assembling them using different combinations of chemical
building blocks. The use of combinatorial chemistry greatly accelerates the
process of generating compounds. The resulting arrays of compounds are called
libraries and are used to screen for compounds ("lead compounds") that
demonstrate a sufficient level of activity at receptors of interest. The Company
is using combinatorial chemistry to synthesize "focused" libraries of compounds
anticipated to be highly biased toward the Company's drug discovery targets. The
Company's scientists have successfully generated lead compounds through the use
of these combinatorial chemistry techniques.
Once lead compounds are identified, whether through the use of
combinatorial chemistry or traditional medicinal chemistry, a variety of
analogues are prepared to facilitate an understanding of the relationship
between chemical structure and biological activity. These studies help define
structure activity relationships which can then be used to design drug
candidates with improved potency, selectivity and pharmacokinetic properties.
Combinatorial chemistry is used to rapidly generate a variety of structures for
lead optimization. Traditional medicinal chemistry, which involves the synthesis
of compounds one at a time, is also used for further refinement and to generate
compounds not accessible by automated techniques.
The G Protein-Coupled Receptor Superfamily
The superfamily of receptors to which the Company has chosen to apply
its human receptor-targeted drug design technology is the G protein-coupled
receptor superfamily, so called because the cascade of events that ensues within
the receiving cell following the occurrence of the ligand-receptor interaction
is mediated by a class of proteins called "GTP-binding regulatory proteins," or
"G proteins," found within the cell.
The Company chose to focus on the G protein-coupled receptor
superfamily because it believes that this superfamily provides the optimum
opportunity for the exploitation of its human receptor-targeted drug design
technology. First, it is known that G protein-coupled receptors play a major
role in intercellular communication and that drugs that block ("antagonists") or
enhance ("agonists") their activity have therapeutic utility. Examples of such
drugs include: Tagamet(R), a histamine receptor antagonist for the treatment of
ulcers; Imitrex(R), a serotonin receptor agonist for the treatment of migraine
headache; and Hytrin(R), an adrenergic receptor antagonist for the treatment of
hypertension and benign prostatic hyperplasia. Second, there is a large body of
knowledge about some of the basic structural elements of drugs that interact
with these receptors that has accumulated over the years from which the Company
and its collaborative partners can draw in beginning their drug discovery
programs. Third, the G protein-coupled receptor superfamily is extremely large,
comprising by several estimates in excess of 1,000 receptor subtypes belonging
to more than 40 families. Fewer than half of the genes that code for these
subtypes have been cloned. G protein-coupled receptors are included among the
most important components needed for cellular signaling in the body and, as a
result, influence a broad array of physiological functions.
Receptor and Drug Discovery Programs
At any point in time the Company is generally pursuing several receptor
discovery programs. Among the receptor discovery programs currently being
pursued by the Company are the programs focused on the neuropeptide Y family of
receptors and on the galanin family of receptors.
The Company is also pursuing several drug discovery programs based on
certain of its receptor discoveries. The Company's primary drug discovery
programs are focused on human serotonin, adrenergic,
7
<PAGE>
neuropeptide Y and galanin receptor subtypes. Serotonin receptor subtypes are
associated with a variety of disorders, including migraine headache, anxiety,
depression, eating disorders, sexual dysfunction, gastro-intestinal disorders
and alcoholism. Adrenergic receptor subtypes are associated with a variety of
disorders, including urinary retention resulting from benign prostatic
hyperplasia, hypertension, atherosclerosis, nasal congestion and genito-urinary
disorders, and may be useful as targets for the design of new classes of
anesthetics, analgesics and sedatives. Neuropeptide Y receptor subtypes are
associated with eating disorders, cardiovascular disease, pain, anxiety and
depression. Galanin receptor subtypes are also associated with a variety of
disorders, including obesity, dementia, depression and pain.
The serotonin programs are being conducted by the Company in
collaboration with Lilly. Of the Company's three adrenergic programs, one is
being conducted by the Company in collaboration with Merck, one is the subject
of the Company's agreement with DuPont Merck and one is currently being
conducted by the Company independently. Of the Company's three neuropeptide Y
programs, one is being conducted by the Company in collaboration with Novartis
and two are currently being conducted by the Company independently. The galanin
program is also currently being conducted by the Company independently.
Research and development spending by the Company for each of the fiscal
years 1994, 1995 and 1996 was $9,308,917, $9,863,769 and $11,336,756,
respectively, of which 32%, 17% and 26%, respectively, was spent on those of the
Company's receptor and drug discovery programs that were not being conducted
with a collaborative partner. The decrease in internal research and development
spending from 1994 to 1995 was due principally to the Company's reallocation of
manpower from internal programs to the collaborative program with Novartis which
began in August 1994. In order to conserve funds, the Company determined not to
increase its internal research and development spending in 1995 from the level
which resulted from the manpower reallocation in connection with the Novartis
collaboration. While internal research and development spending in 1995
decreased, the research funding support and other revenue generated by the
Novartis collaboration has allowed the Company to expand its infrastructure more
rapidly than it would have in its absence. Following the completion of its
initial public offering in December 1995, the Company increased its internal
research and development spending during 1996 and intends to further increase
such spending during 1997.
The Company's receptor and drug discovery programs are summarized in
the following table:
8
<PAGE>
Synaptic Pharmaceutical Corporation
Receptor and Drug Discovery Programs
PROGRAM(1) PRIMARY INDICATIONS STATUS(2) PARTNERS
- ---------- ------------------- --------- --------
SEROTONIN PROGRAMS
- ------------------
Serotonin 1F Migraine Phase I Clinical Lilly
Serotonin 1A Smoking Cessation Early Preclinical Lilly
Serotonin (3) Depression Early Preclinical Lilly
ALPHA ADRENERGIC PROGRAMS
- -------------------------
Alpha-1a Adrenergic Benign Prostatic
Hyperplasia Late Preclinical Merck
Alpha Adrenergic (3) (4) Discovery DuPont Merck
Alpha 2 Adrenergic (3) Pain Leads Identified --
NEUROPEPTIDE Y PROGRAMS
- -----------------------
Neuropeptide Y5 Obesity Early Preclinical Novartis
Neuropeptide Y2 Agonist Pain Discovery --
Neuropeptide Y2 Antagonist Anxiety and
Depression Leads Identified --
GALANIN PROGRAM
- ---------------
Galanin (3) Obesity, Dementia,
Depression
and Pain Cloning and Discovery --
- --------------------------------------------------------------------------------
(1) The Company is working on receptor and drug discovery programs in addition
to those programs referenced in the above table. In general, the drug discovery
and receptor discovery programs that are specifically referenced in the above
table are at more advanced stages of development than those that are not
specifically referenced in the table.
(2) "Cloning" refers to the stage at which the Company is attempting to
discover, identify and clone the genes for specific receptor subtypes.
"Discovery" refers to the stage at which chemists are attempting to identify
receptor subtype-selective compounds through the use of the Company's drug
discovery systems. "Leads Identified" refers to the stage at which receptor
subtype-selective compounds have been identified through the use of the
Company's drug discovery systems. "Early Preclinical" refers to the stage at
which one or more leads have been identified and are being tested in in vitro or
in vivo model systems for one or more indications. In addition, at this stage
lead compounds may have been shown to be active in animal models for one or more
indications and preliminary toxicology and pharmacokinetic studies will also
have been concluded. "Late Preclinical" refers to the stage at which a clinical
candidate has been selected, scale-up of such candidate is underway or
completed, and toxicology and pharmacokinetic studies are planned or underway.
"Phase I Clinical" refers to the stage at which a drug candidate is administered
to a small group of healthy human subjects for the purpose of testing for safety
(adverse effects), dose tolerance, absorption, bio- distribution, metabolism,
excretion and clinical pharmacology.
(3) The specific receptor subtype that is the target of this program is
confidential to the Company and, if applicable, its collaborative partners.
(4) The primary indications of this program are confidential to the Company and
DuPont Merck.
9
<PAGE>
Serotonin Programs
Serotonin is one of the major neurotransmitters, a type of ligand, of
the body. It affects mood, sleep rhythms, sexual functions, appetite,
temperature control, gastro-intestinal movement and the cardiovascular,
pulmonary and genito-urinary systems. Drugs that inhibit or enhance the actions
of serotonin have proven to be effective in the treatment of an array of
disorders, such as migraine headache, depression and anxiety. However, none of
the limited number of serotonergic drugs currently available was designed with
the use of cloned serotonin receptor subtype genes and some of these drugs have
undesirable side effect profiles. It is generally believed that the poor side
effect profiles stem from the interaction of these drugs with multiple serotonin
receptor subtypes. The serotonin family is extremely large, comprising at least
14 receptor subtypes. While each of these receptor subtypes may be implicated in
a physiological function distinct from the other subtypes, all of the receptor
subtypes respond to the neurotransmitter serotonin--and may be responding to
non-subtype-selective drugs. As a consequence, a non-subtype-selective drug
intended to exert its effects on one physiological function may in fact have the
unintended consequence of exerting its effects on other physiological functions,
thereby causing the undesirable side effects.
Of the 14 serotonin receptor subtype genes reported to have been
discovered and cloned, the Company believes that it is responsible for the
discovery and cloning of seven. The Company has been granted United States
patents covering five of these genes and related drug discovery systems, and has
received a notice of allowance from the United States Patent and Trademark
Office covering the sixth of these genes and the related discovery system. A
patent application covering the seventh of these genes and the related drug
discovery system and additional patent applications relating to all of these
genes have been filed. The Company has found, through the use of these cloned
receptor genes and related drug discovery systems, that the serotonin system is
significantly more complex than had previously been understood and believes that
the use of its technology to design serotonin subtype-selective drugs will
result in new serotonergic drugs with improved efficacy and side effect
profiles, as well as serotonergic drugs for new therapeutic applications. There
can be no assurance that the Company will be successful in designing a serotonin
receptor subtype-selective drug that will achieve the foregoing desired effect.
The Company, in collaboration with Lilly, is currently conducting drug
discovery programs focused on a number of serotonin receptor subtypes and
therapeutic applications. As part of the collaboration, compounds supplied by
Lilly are assayed by the Company and by Lilly using the Company's serotonin
receptor subtype drug discovery systems. To date, receptor subtype-selective
compounds have been identified for a number of serotonin programs. The program
focused on the discovery and development of drugs for the treatment of migraine
headache is currently in Phase I clinical trials and as of March 3, 1997, Lilly
confirmed that, based upon currently available information, it intends to begin
the Phase II stage of development with this program during the second or third
quarter of 1997. In connection with the collaboration, Lilly received an
exclusive worldwide license to use all but two of the Company's existing
serotonin drug discovery systems for the development and commercialization of
serotonergic drugs. Certain of the serotonin programs are described below.
Migraine Headache
Migraine headaches are periodic throbbing headaches often accompanied
by nausea and vomiting. One of the newer drugs available for the treatment of
migraine, Imitrex(R), is an agonist of certain serotonin receptor subtypes that
was discovered using the traditional approach to drug discovery. Although
effective in most patients, the drug has been associated with the tightening of
the coronary blood vessels. As a result, the drug
10
<PAGE>
is contraindicated both in patients with ischemic heart disease and in patients
with symptoms of ischemic heart disease. In addition, because of the
cardiovascular risks, it is recommended that, in the case of any patient in whom
unrecognized coronary disease is comparatively likely, the first dose of the
drug be administered in a physician's office. Finally, the drug is poorly
absorbed from the gastrointestinal tract. Therefore, to be most effective, it
must be given by injection.
The Company and Lilly are focused on developing anti-migraine compounds
with increased efficacy and reduced side effects. Through the use of its
serotonin receptor subtype drug discovery systems, Synaptic scientists
discovered that Imitrex(R) reacted strongly with three serotonin receptor
subtypes, serotonin 1D[alpha] and 1D(beta), both of which were long thought to
be the targets for anti-migraine effects, as well as serotonin 1F. Synaptic
scientists proposed that the appropriate serotonin receptor subtype for the
treatment of migraine is the serotonin 1F receptor subtype. Together with
scientists at Lilly, Synaptic scientists identified compounds that are selective
agonists of the serotonin 1F receptor subtype. These compounds were tested in
animal models at Lilly and shown to be orally active and to have a long duration
of action. The compounds were also shown to be potent in an animal model that is
thought by many scientists in the field to be predictive of therapeutic utility
for the treatment of migraine. Furthermore, these compounds were inactive in
vasoconstriction assays at Lilly, thereby suggesting that the possible adverse
events reported for Imitrex(R) would not limit the treatment potential of a
1F-selective agonist for migraine. Lilly is currently conducting Phase I
clinical trials with one of these compounds in Europe and as of March 3, 1997,
confirmed that, based upon currently available information, it intends to begin
Phase II clinical trials with the compound during the second or third quarter of
1997.
Smoking Cessation
There are more than 150 million smokers in major market countries, more
than 30 million of whom attempt each year to quit smoking. Chronic use of
tobacco is causally linked to a variety of serious diseases, including coronary
heart disease, cancer and emphysema. Nicotine patches and nicotine gum have been
used as smoking cessation aids, but have met with limited success. Moreover,
there are not any oral smoking cessation aids currently on the market.
The Company and Lilly are engaged in a program to identify and develop
serotonin 1A antagonists which ameliorate the withdrawal symptoms frequently
suffered in connection with smoking cessation. As part of the program, the
Company and Lilly have designed novel compounds which are highly selective for
and are potent antagonists of the serotonin 1A receptor subtype. These compounds
have been shown to be effective in an animal model of nicotine withdrawal and
may lead to drugs which are more effective as smoking cessation aids than those
currently available.
Depression
A number of different pharmacologic strategies have been developed to
treat depression. The early drugs shown to be effective in the treatment of
depression, such as the tricyclic antidepressants, lithium and the monoamine
oxidase inhibitors, have side effects associated with their use that limit their
effectiveness. Recently, selective serotonin reuptake inhibitors (SSRI), such as
Prozac(R), have been shown to be highly effective in the treatment of many forms
of depression. A number of SSRI compounds are now approved for marketing, and
these drugs have captured a significant market share. However, all of these
currently available drugs have significant deleterious side effects in many
patients which may limit their use. In addition, these drugs have a lag time
before their beneficial clinical effects can be seen. This lag time can be a
serious
11
<PAGE>
problem, especially in the depressed suicidal patient. Furthermore, there are a
significant number of patients that do not adequately respond to any of the
currently available drug therapies.
Scientists at Synaptic and Lilly have identified novel serotonin
receptor-subtype selective compounds that may have rapid onset of efficacy in
the treatment of depression and that may also have better side effect profiles
than drugs currently available.
Other Serotonin Programs
The Company has cloned additional serotonin receptor subtypes that are
either not currently being pursued by it and Lilly as drug targets in their
collaborative drug discovery programs or are being so pursued but are focused on
therapeutic applications which are currently confidential to the Company and
Lilly. In addition, there is evidence to suggest that one or more serotonin
receptor subtypes that are the targets of the drug discovery programs currently
being conducted by the Company and Lilly may be relevant as targets for other
therapeutic applications. The Company expects that it and Lilly will establish
additional drug discovery programs focused on these other serotonin receptor
subtypes or therapeutic applications in the future. There can be no assurance
that the Company will establish additional drug discovery programs with Lilly.
Alpha Adrenergic Programs
Alpha adrenergic receptors are activated by the neurotransmitter
norepinephrine (noradrenaline). The alpha adrenergic receptors serve a critical
control function in regulating involuntary physiological functions, such as
blood pressure, heart rate and smooth muscle tone, and thus may serve as
important tools in the management of many disorders, such as benign prostatic
hyperplasia ("BPH") and hypertension.
Until 1982, only two alpha adrenergic receptors (alpha-1 and alpha-2)
were believed to exist. Since then, scientists have discovered that the alpha
adrenergic receptor family contains six subtypes (alpha-1a, 1b and 1d and
alpha-2a, 2b and 2c). The Company believes it was responsible for the discovery
of the genes that code for four of the six alpha adrenergic subtypes in humans.
The Company has received three United States patents relating to two of these
genes and related drug discovery systems.
There are a number of adrenergic drugs on the market today which are
effective in the treatment of a variety of disorders. However, most of these
drugs were discovered in the 1970's prior to the discovery of the six alpha
adrenergic subtypes and are not selective for any one of these receptor
subtypes. The Company believes that many of the side effects associated with
these drugs may be traced to a lack of selectivity for the appropriate receptor
subtypes. The Company is using its alpha adrenergic drug discovery systems to
discover compounds with increased receptor subtype selectivity and is involved
in three separate programs involving alpha adrenergic receptor subtypes: the
Alpha-1a Antagonist Program, the Alpha Adrenergic Program and the Alpha 2
Adrenergic Program.
The Company and Merck are collaborating on the Alpha-1a Antagonist
Program to develop drugs for the treatment of BPH. The Company is involved with
DuPont Merck in the Alpha Adrenergic Program, the purpose of which is to develop
drugs that are selective for one or more alpha adrenergic receptor subtypes for
one or more therapeutic indications that are confidential to the Company and
DuPont Merck. The Alpha 2 Adrenergic Program is being conducted by the Company
independently, although the Company is seeking a
12
<PAGE>
partner with which to collaborate on this drug discovery program or a licensee
to pursue the program. The Alpha-1a Antagonist Program and the Alpha 2
Adrenergic Program are discussed below.
Benign Prostatic Hyperplasia
BPH is a pathology of the prostate, a walnut-sized gland in men that
surrounds the urethra as it exits the bladder. As men age, cells in the prostate
proliferate, causing growth in the prostatic tissue which in turn results in
pressure on the urethra. Common symptoms of BPH include urinary retention,
hesitancy or difficulty initiating the stream of urine, urinary frequency, a
sense of urgency and a sensation of incomplete emptying of the bladder. The
incomplete emptying of the bladder caused by BPH can also lead to urinary tract
infections and bladder damage. In severe cases, the flow of urine can become
completely blocked and lead to kidney failure.
There are currently three types of treatments available for BPH:
surgery and two different pharmaceutical treatments. Although frequently
recommended as a treatment for BPH, surgery may be an unattractive alternative
for many patients because of its potential adverse consequences and may not be
recommended for elderly patients due to the potential for complications.
Two different non-surgical alternatives for the treatment of BPH are
currently available to patients who either are not candidates for or elect not
to have surgery. The first alternative is a type of drug that acts by inhibiting
the enzyme 5[alpha]-reductase, which is responsible for the conversion of
testosterone to dihydrotestosterone in the prostate. By reducing levels of
dihydrotestosterone, which plays a role in growth of prostatic tissue, this type
of drug is intended to shrink the gland. An example of this type of drug is
Proscar(R). Although there is a rapid regression of the enlarged gland in most
patients, less than 50% of patients experience an increase in urine flow and
improvement of symptoms when treated with Proscar(R) for 12 months. A minimum of
six months' treatment may be necessary to determine whether an individual may
respond to the drug.
The second type of drug for the treatment of BPH involves the use of
alpha-1 adrenergic antagonists, such as Hytrin(R), that act by blocking alpha
adrenergic stimulation of the prostate. This blocking activity causes a
relaxation of the musculature of the prostate, thereby improving urinary flow
and providing other symptomatic relief of BPH. These drugs were initially
developed as antihypertensive agents in the mid-1970's prior to the discovery
that there existed three distinct subtypes of the alpha-1 receptor, and are not
selective for any particular alpha-1 subtype. While rapid symptomatic
improvement in approximately 70% of patients treated with this type of drug has
been observed, dose-dependent side effects, including hypotension (which causes
dizziness), headache, weakness, nasal congestion and peripheral edema, are
commonly associated with the treatment. The side effects limit the recommended
dose for these drugs. The most significant side effect, hypotension, is
particularly detrimental to elderly patients.
Through the use of its alpha adrenergic drug discovery systems and by
means of in vivo studies, Synaptic has discovered that different receptor
subtypes are involved in the control of the prostate musculature and blood
pressure: the alpha-1a receptor subtype is responsible for contraction of
prostate musculature and other alpha-1 subtypes are involved in the regulation
of blood pressure. This discovery confirmed the Company's hypothesis that many
of the side effects caused by alpha-1 adrenergic antagonists currently available
for the treatment of BPH stemmed from their lack of selectivity for the receptor
subtype involved in relaxation of prostate musculature. In April 1995, the
Company was awarded a United States patent covering the use of selective
alpha-1a antagonists for the treatment of BPH. In addition, in September 1996,
Synaptic
13
<PAGE>
was awarded a United States patent covering the use of genetically engineered
cells expressing the human alpha-1a adrenergic receptor subtype to identify
compounds that bind to the receptor subtype.
The Company, in collaboration with Merck, is using the Company's drug
discovery systems to design compounds that block the activity of the alpha-1a
receptor subtype, thereby producing the desired effects on the prostate, but
that have minimal affinity for alpha-1b and alpha-1d receptor subtypes, thereby
substantially reducing the cardiovascular effects seen with currently available
non-selective alpha-1 adrenergic antagonists. A compound has been selected by
Merck for possible development and is undergoing late preclinical testing. Other
leads have also been identified and are in the early preclinical stage of
testing.
As part of the collaboration, Synaptic granted Merck an exclusive
worldwide license to its alpha-1 adrenergic technology, alpha-1a selective
compounds and certain patents to develop an alpha-1a selective drug for the
treatment of BPH. In addition, Synaptic granted Merck a nonexclusive worldwide
license under certain other patents for the same purpose.
Pain
Analgesic agents are used to relieve pain (analgesia). Analgesics most
commonly used for severe pain are narcotics. Although very effective, narcotic
analgesic agents carry the risk of depressing respiration and causing nausea and
diarrhea, and their repeated use may lead to addiction. It is believed that
non-narcotic analgesics would be beneficial to many patient populations
suffering from severe pain.
Alpha-2 agonists have been broadly used and are highly effective as
veterinary analgesics. Animal data indicate that these agents do not cause
respiratory depression. In addition, their action can be reversed with
appropriate drugs. However, they cause both sedation and hypotension when
administered within the analgesic dose range. Alpha-2 agents have not yet been
developed as analgesics for human use, in part due to concerns regarding
potential deleterious side effects, such as sedation and hypotension. Synaptic
believes that its drug discovery systems for the three human alpha-2 adrenergic
receptor subtypes can be used to discover alpha-2 analgesics which have
significantly fewer deleterious side effects than currently available analgesics
and the effects of which may be rapidly reversed. The Company has identified
alpha-2 agonists with analgesic activity in laboratory animal models and is
seeking a partner with which to collaborate on this drug discovery program or a
licensee to pursue the program. There can be no assurance that the Company will
be successful in consummating a collaborative or licensing arrangement with
another company with respect to this drug discovery program.
Neuropeptide Y Programs
Neuropeptides are neurotransmitters. Unlike neurotransmitters that are
small molecules, such as norepinephrine and serotonin, neuropeptides are much
larger molecules. The mode of action of neuropeptides, however, resembles that
of small molecule neurotransmitters in that they function by means of an
interaction with specific families of receptors, including families within the G
protein-coupled receptor superfamily. Although current knowledge of
neuropeptides and their receptors is significantly less extensive than knowledge
of small molecule neurotransmitters and their receptors, subtypes have been
shown to exist for several families of neuropeptide receptors.
14
<PAGE>
One focus of the Company in its receptor and drug discovery efforts in
this area has been on the neuropeptide Y ("NPY") family of receptors. Although
the natural ligand for this family, neuropeptide Y, is a large molecule, the
goal of this drug discovery program is, as is the case in all of the Company's
other drug discovery programs, to design a small molecule drug. Large
peptide-like molecules would not be stable in the body and thus would have short
durations of action and would not be orally available, thus requiring delivery
by injection. To date, there is pharmacological evidence for the existence in
animals of at least five NPY receptor subtypes, named Y1, Y2, Y3, Y4 and Y5.
However, the discovery and cloning of the genes for only four of these subtypes
have been reported. In 1996 and 1997, the Company was awarded United States
patents covering the genes that code for the Y2, Y4 and Y5 receptor subtypes and
related drug discovery systems. Synaptic has filed additional patent
applications relating to these discoveries in the United States and in other
countries. At the present time, the Company is conducting one NPY receptor and
drug discovery program in collaboration with Novartis and is seeking a
collaborative partner to work with the Company on its other two NPY drug
discovery programs involving pain and anxiety. There can be no assurance that
the Company will be successful in consummating a collaborative arrangement with
respect to either of these NPY drug discovery programs.
Obesity
Drug treatment for obesity has traditionally been used as a short-term
adjunct to diet and exercise. Most drugs approved for the treatment of obesity
act centrally through the catecholaminergic or serotonergic pathways and were
approved for the treatment of obesity based on the results of short-term (four
to six week) clinical efficacy trials. Many of these drugs are plagued by
problems of addiction, habituation and drug abuse, while safety concerns have
been an issue with the other agents.
Animal studies have shown that NPY is the most potent stimulator of
food intake identified to date. As little as one billionth of a gram of NPY
injected directly into the hypothalamus causes well-fed, satiated rats to
overeat. Repeated administration of NPY causes continual overeating and obesity.
A Y5 receptor was initially isolated by the Company's scientists from
rat hypothalamus, a key brain area that controls appetite. In laboratory tests,
the activity of NPY and related peptides on the Y5 receptor mirrored the ability
of these peptides to stimulate feeding in animals. As part of its collaboration
with the Company, Ciba-Geigy then showed that several peptides that activated
the Y5 receptor preferentially over other known NPY receptors increased food
intake in rats. Additional studies by Synaptic and Ciba-Geigy showed that small
molecules that selectively block the Y5 receptor significantly reduce food
intake in rats. Based upon these studies, Synaptic believes that the Y5 receptor
is a "feeding" receptor, and that compounds that are selective for this receptor
subtype may lead to new approaches to the treatment of obesity. The Company and
Novartis (Ciba-Geigy's successor-in-interest) are thus focused on discovering
and developing potent and selective Y5 antagonists for evaluation in animal
models of food intake and obesity. As part of its collaboration with the
Company, Novartis has an exclusive license to use the Company's NPY receptor
subtype drug discovery systems for the development and commercialization of such
drugs, as well as drugs for the treatment of eating disorders and cardiovascular
disease.
Pain
As part of its efforts to discover non-narcotic drugs for the treatment
of pain, the Company is conducting a program focused on the design and
development of analgesics that stimulate the Y2 receptor
15
<PAGE>
subtype. Direct injection of NPY into the spinal cord produces a high level of
analgesia in laboratory animals. This effect is believed to be related to NPY's
ability to stimulate Y2 receptors. These receptors control the release of
chemical messengers, such as Substance P, which mediate the transmission of pain
responses. Synaptic believes that orally active small molecule agonists which
would mimic the effects of NPY at the Y2 receptor may offer a new approach to
the treatment of pain that would not result in the side effects typically
associated with narcotic analgesics.
The Company is seeking a partner with which to collaborate on this drug
discovery program. There can be no assurance that the Company will be successful
in consummating a collaborative arrangement with another company with respect to
this program.
Anxiety
Anxiety is a sense of irrational fear or dread and is one of the most
frequent psychiatric diagnoses in the United States. There is a variety of
pharmacologic treatments for anxiety, the most commonly used of which belong to
the class of compounds called benzodiazepines, an example of which is Valium(R).
This class of compounds, however, is associated with significant side effects,
including drowsiness, impairment of motor skills, memory loss and the
exacerbation of intoxication by alcohol. Another serious side effect associated
with the benzodiazepines is their potential to be addictive.
Behavioral studies have suggested that NPY can produce anxiety in rats
by activating the Y2 receptor subtype, raising the prospect that a small
molecule Y2 receptor antagonist may provide a novel treatment for anxiety devoid
of the side effects commonly associated with currently available anxiolytics.
Thus, the goal of this drug discovery program is to design compounds that
selectively block the Y2 receptor subtype.
The Company is seeking a partner with which to collaborate on this drug
discovery program. There can be no assurance that the Company will be successful
in consummating a collaborative arrangement with another company with respect to
this program.
Galanin Program
Galanin is a neurotransmitter which, like NPY, is a neuropeptide.
Galanin is widely distributed in the gastrointestinal tract and the brain.
Pharmacologic studies suggest the existence of multiple receptor subtypes for
this neuropeptide. There are a number of possible therapeutic applications for
drugs that modulate galanin receptors. These include the treatment of
Alzheimer's disease, depression, pain and endocrine disorders. However, most of
the research done to date with galanin has focused on its role in the control of
food intake. Injection of galanin into the brain has been shown to produce an
increase in food intake in satiated rats. As a result, galanin receptor
antagonists might result in a reduction of food intake and may thus be useful in
the treatment of obesity.
To date, the Company has discovered and cloned genes that code for
galanin receptor subtypes and has filed patent applications relating to these
discoveries. At the present time, the Company is conducting a drug discovery
program involving its receptor discoveries and is seeking a partner with which
to collaborate on this program. There can be no assurance that the Company will
be successful in consummating a collaborative arrangement with another company
with respect to this program.
16
<PAGE>
Collaborative and Licensing Arrangements
The Company's business strategy is to leverage its resources by
entering into collaborative and licensing arrangements with pharmaceutical
companies. To date, the Company has entered into four collaborative arrangements
pursuant to: the Research, Option and License Agreement dated as of January 25,
1991, as amended, with Lilly (the "Lilly Agreement"); the Research Collaboration
and License Agreement dated as of November 30, 1993, as amended, with Merck (the
"Merck Agreement"); the Research and License Agreement dated as of August 4,
1994, as amended (the "First Novartis Agreement"), and the Research and License
Agreement dated as of May 31, 1996 (the "Second Novartis Agreement," and
together with the First Novartis Agreement, the "Novartis Agreements"), each
with Novartis; and the Collaborative Research Agreement dated as of February 5,
1996, with DuPont Merck (the "DuPont Merck Agreement," and together with the
Lilly Agreement, the Merck Agreement and the Novartis Agreements, the
"Collaborative Agreements"). While the Company evaluates on an ongoing basis
potential collaborative and licensing arrangements with pharmaceutical
companies, there can be no assurance that it will be able to enter into
acceptable collaborative or licensing arrangements in the future or that any
such arrangement, whether existing or future, will be successful. The following
summarizes the Company's existing collaborative and licensing arrangements.
Lilly Agreement
In January 1991, the Company and Lilly entered into the Lilly Agreement
to promote the discovery and development of serotonin receptor subtype-selective
drugs for the treatment of serotonin-related disorders. The original term of the
collaboration was four years, but was extended in January 1995 for an additional
four-year period. In October 1996, the size of the collaboration was
substantially increased.
During the original term, Lilly provided the Company with an aggregate
of approximately $9.3 million of funding to support a specified number of the
Company's scientists who conducted research as part of the collaboration. During
the second four-year period, Lilly was originally required to provide the
Company with an aggregate of approximately $7.8 million to continue such
research support. However, as a result of the October 1996 expansion, the
aggregate amount of research support to be provided by Lilly during the second
four-year period is expected to be approximately $13.2 million. All development,
manufacturing, marketing and sales of drugs resulting from the collaboration
will be conducted by Lilly.
The Company is also entitled to receive from Lilly payments upon the
achievement of certain drug development milestones and royalties on sales of all
drugs developed through the use of the Company's technology. Such royalties will
be payable in respect of sales in any country over the period commencing with
the date of the first commercial sale of a drug and ending with the expiration
of related patent rights in that country.
Lilly paid the Company a one-time fee of $2.5 million for an exclusive
worldwide license to use all but two of the Company's existing serotonin drug
discovery systems for the development and commercialization of drugs that affect
serotonergic transmission. The Company retains the unlimited right to use two of
its existing serotonin drug discovery systems and a limited right to use all of
its other serotonin drug discovery systems in furtherance of its collaboration
with Lilly and for cross-reactivity screening in its and its other
collaborators' non-serotonin drug discovery programs. As part of the
collaboration, Lilly was also granted certain rights under several of the
Company's patents and patent applications.
17
<PAGE>
In addition, in June 1991, Lilly purchased $2.5 million of equity in
Synaptic pursuant to the terms of the Lilly Agreement, and in December 1995,
Lilly purchased an additional $2.5 million of equity in Synaptic in its initial
public offering pursuant to the terms of the 1995 extension. Lilly has since
sold all of such shares.
Merck Agreement
In November 1993, the Company and Merck entered into the Merck
Agreement pursuant to which they agreed to collaborate in the identification and
development of alpha-1a antagonists, principally for the treatment of BPH. The
initial term of the collaboration was three years. In October 1996, the term of
the collaboration was extended for an additional one-year period.
As part of the collaboration, Merck received an exclusive worldwide
license to use the Company's alpha adrenergic drug discovery systems for the
development and commercialization of alpha-1a antagonists, as well as an
exclusive worldwide license under several of the Company's related patents and
patent applications. The Company retained the right to use its alpha adrenergic
technology for the development of alpha adrenergic and other agents that are not
alpha-1a antagonists.
In consideration for this license, Merck originally agreed to provide
the Company with up to $20 million in research funding, license fees and
milestone payments, as well as to pay the Company royalties on product sales. As
part of the October 1996 extension, the Company agreed to continue to provide
Merck research support and, in consideration for such support, Merck agreed to
provide the Company with continued funding. The amount of research funding to be
paid by Merck during such period is expected to be, at a minimum, approximately
$1.1 million.
Merck has the right to terminate the Merck Agreement at any time upon
90 days' prior written notice. In the event of any such termination, Merck will
not be required to provide the Company with any research funding that has not
come due prior to such termination or make certain other payments to the Company
that have not come due prior to such termination.
Novartis Agreements
In August 1994, the Company and Ciba-Geigy, one of Novartis A.G.'s
predecessors-in-interest, entered into the First Novartis Agreement pursuant to
which they agreed to collaborate in the identification and development of
neuropeptide Y drugs for the treatment of obesity and eating disorders, as well
as cardiovascular disorders. In May 1996, the Company and Ciba-Geigy entered
into the Second Novartis Agreement and an amendment to the First Novartis
Agreement pursuant to which the term of the collaboration was extended by one
year and the scope of the collaboration was expanded to provide for research on
additional targets for the design of drugs for the treatment of obesity and
eating disorders.
The term of the collaboration under the two Novartis Agreements expires
in August 1998, and may be extended by mutual agreement of the parties. During
the term, Novartis is required to provide the Company with funding to support a
specified number of the Company's scientists dedicated to work on the
collaboration. In July 1995, Ciba-Geigy made a $1,000,000 payment to the Company
for achieving a research milestone. Novartis is also required to make additional
payments to the Company upon the achievement by Novartis of certain drug
development milestones and, subject to certain limitations, to pay the Company
royalties on the sale of drugs developed through the use of the Company's
technology.
18
<PAGE>
In addition, at the commencement of the collaboration, Ciba-Geigy made
a $7.5 million equity investment in the Company and in December 1995, as part of
the Company's initial public offering, it made an additional $2.0 million equity
investment in the Company. As of December 31, 1996, the 695,715 shares of Common
Stock acquired by Ciba-Geigy as a result of these investments were held by
Novartis Produkte A.G., a subsidiary of Novartis A.G. Such shares represented
9.1% of the outstanding shares of Common Stock of the Company as of such date.
As part of the collaboration, Novartis has an exclusive worldwide
license to use the Company's NPY receptor subtype drug discovery systems for the
development and commercialization of NPY receptor subtype-selective drugs for
the treatment of obesity and eating disorders, as well as cardiovascular
disorders. Novartis also has an exclusive worldwide license to use any
proprietary technology of the Company that relates to the subject matter of the
Second Novartis Agreement to design drugs for the treatment of obesity and
eating disorders. In addition, Novartis has certain rights under several of the
Company's patents and patent applications. The Company retained the right to use
its NPY receptor subtype drug discovery systems and other technology for all
other therapeutic indications, although Novartis has a right of first
negotiation in the event the Company determines to seek a collaborative partner
or licensee for any such other indication.
DuPont Merck Agreement
In February 1996, the Company and DuPont Merck entered into the DuPont
Merck Agreement pursuant to which the Company granted DuPont Merck a
nonexclusive license to use certain of the Company's alpha adrenergic drug
discovery systems for the development of alpha adrenergic subtype-selective
drugs. Under the terms of the DuPont Merck Agreement, DuPont Merck will screen
its chemical libraries for lead compounds that may subsequently be optimized by
DuPont Merck or Synaptic for chosen therapeutic indications. The initial term of
the license is two years.
In the event DuPont Merck develops any drugs based upon the use of the
Company's alpha adrenergic drug design technology, DuPont Merck will pay the
Company drug development milestones and royalties on sales with respect to such
drugs. In the event the Company optimizes and develops, independently or in
collaboration with other pharmaceutical companies, compounds identified in the
collaboration, it will pay DuPont Merck drug development milestones and
royalties on sales with respect to such drugs.
Patents, Proprietary Technology and Trade Secrets
Protection of the Company's proprietary technology is essential to the
Company's business. The Company's policy is to seek, when appropriate,
protection for its gene discoveries, compounds and other proprietary technology
by filing patent applications in the United States and other countries. The
Company has filed numerous patent applications covering its inventions both in
the United States and in other countries. To date, the Company has been issued
United States patents relating to the genes that code for the human serotonin
1D[alpha], serotonin 1D(beta), serotonin 1E, serotonin 1F, alpha-1a adrenergic,
alpha-2b adrenergic, neuropeptide Y2, neuropeptide Y4 and neuropeptide Y5
receptor subtypes and related drug discovery systems, as well as a United States
patent covering the rat serotonin 4a receptor subtype and related drug discovery
system. These patents expire at various times from 2008 to 2014. In addition,
claims under United States patent applications relating to the gene that codes
for another receptor and related drug discovery systems have been allowed and
additional patent applications relating to other gene discoveries and related
drug discovery systems
19
<PAGE>
are pending in the United States. Several corresponding patent applications have
also been filed in other countries.
In April 1995, the Company was issued its first functional use patent.This
patent covers the use of alpha-1a selective compounds for the treatment of BPH.
This patent expires in April 2012. Corresponding patent applications are on file
in other countries.
The Company has also filed patent applications in the United States and
in other countries covering its neurotransmitter transporter discoveries.
Whereas receptors are protein molecules which bind to and are activated by
certain ligands, transporters are protein molecules which serve to terminate the
action of certain ligands by carrying them back into the cells from which they
are released. The Company recently received correspondence from the United
States Patent and Trademark Office to the effect that claims under three United
States patent applications covering four different transporters have been
allowed. While the Company is no longer actively working on its transporter
program, it is seeking to license its transporter technology to another company.
Additional patent applications covering the Company's compound
discoveries and other inventions have been filed in the United States and in
other countries and the Company intends to file additional patent applications
in the near future.
The Company has granted certain rights under several of its patents and
patent applications to Lilly, Merck, Novartis and DuPont Merck pursuant to the
Collaborative Agreements.
Patent law as it relates to inventions in the biotechnology field is
still evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. No firm predictions can be made regarding
the breadth or enforceability of claims allowed in the patents that have been
issued to the Company or in patents that may be issued to the Company in the
future. Accordingly, no assurance can be given that the claims in such patents,
either as initially allowed by the United States Patent and Trademark Office or
any of its non-United States counterparts or as may be subsequently interpreted
by courts inside or outside the United States, will be sufficiently broad to
protect the Company's proprietary rights, will be commercially valuable or will
provide competitive advantages to the Company and its present or future
collaborative partners or licensees. Further, there can be no assurance that
patents will be granted with respect to any of the Company's pending patent
applications or with respect to any patent applications filed by the Company in
the future.
The field of gene discovery has become intensely competitive. A number
of pharmaceutical companies, biotechnology companies, universities and research
institutions have significantly expanded their gene discovery efforts in recent
years and have filed patent applications or received patents covering their gene
discoveries. Some of these applications or patents may be competitive with the
Company's applications or conflict in certain respects with claims made under
the Company's applications. Moreover, because patent applications in the United
States are maintained in secrecy until patents issue, because patent
applications in certain other countries generally are not published until more
than eighteen months after they are filed and because publication of
technological developments in the scientific or patent literature often lags
behind the date of such developments, the Company cannot be certain that it was
the first to invent the subject matter covered by its patents or patent
applications or that it was the first to file patent applications for such
inventions. If an issue regarding priority of inventions were to arise with
respect to any of the Company's patents or patent applications, the Company
might have to participate in litigation or interference proceedings declared by
the United States Patent and Trademark Office or similar agencies in other
countries to determine
20
<PAGE>
priority of invention. One of the Company's patent applications on file outside
the United States is the subject of an opposition recently filed by a
pharmaceutical company. In addition, the Company is seeking to provoke an
interference by the United States Patent and Trademark Office between one of its
patent applications and an issued patent of a third party. The potential
consequences of this opposition proceeding and the anticipated interference
proceeding are described in Part II below under the caption "Disclosure
Regarding Forward Looking Statements."
In some cases, litigation or other proceedings may be necessary to
defend against or assert claims of infringement, to enforce patents issued to
the Company, to protect trade secrets, know-how or other intellectual property
rights owned by the Company, or to determine the scope and validity of the
proprietary rights of third parties. Such litigation or other proceedings could
result in substantial costs to and diversion of resources by the Company and
could have a material adverse impact on the Company. There can be no assurance
that any of the Company's issued or licensed patents would ultimately be held
valid or that efforts to defend any of its patents, trade secrets, know-how or
other intellectual property rights would be successful. An adverse outcome in
any such litigation or proceeding could subject the Company to significant
liabilities, require the Company to cease using the subject technology or
require the Company to license the subject technology from the third party, all
of which could have an adverse effect on the Company's business.
In addition to patent protection, the Company relies upon trade
secrets, proprietary know-how and continuing technological advances to develop
and maintain its competitive position. To maintain the confidentiality of its
trade secrets and proprietary information, the Company requires its employees,
consultants and collaborative partners to execute confidentiality agreements
upon the commencement of their relationships with the Company. In the case of
employees, the agreements also provide that all inventions resulting from work
performed by them while in the employ of the Company will be the exclusive
property of the Company. There can be no assurance, however, that these
agreements will not be breached, that the Company would have adequate remedies
in the event of any such breach or that the Company's trade secrets or
proprietary information will not otherwise become known or developed
independently by others.
In addition to the foregoing proprietary rights, the Company licenses
certain technology owned by Stanford University and the University of
California, jointly, and Columbia University. The Stanford University/University
of California license is a worldwide perpetual non-exclusive license to use
certain recombinant DNA technology that includes three issued United States
patents. In consideration for such license, the Company pays an annual fee of
$10,000 and will pay royalties (net of previously paid annual fees) on sales of
drugs the manufacture, use or sale of which is covered by claims of the licensed
patents. The Columbia University license is a worldwide non-exclusive license
under certain patents and patent applications and under certain related
information to manufacture, use, sell and sublicense drugs derived from the use
of certain recombinant DNA technology. In consideration for such license, the
Company has agreed to pay royalties on sales of drugs developed through the use
of such technology. The term of the license extends until the expiration of the
last to expire of the patent rights covered by the license.
Competition
The biotechnology and pharmaceutical industries are intensely
competitive. Many companies, including large, multinational biotechnology and
pharmaceutical companies, are actively engaged in activities similar to those of
the Company. Many of these companies may employ in such activities greater
financial and other resources, including larger research and development staffs
and more extensive marketing and manufacturing organizations, than the Company
or its collaborative partners. There are also academic
21
<PAGE>
institutions, governmental agencies and other research organizations that are
conducting research in areas in which the Company is working.
The Company also expects to encounter significant competition with
respect to the drugs that it and its collaborative partners plan to develop.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sales of their drugs before their competitors
may achieve a significant competitive advantage. In order to compete
successfully, the Company's goal is to obtain patent protection for its gene
discoveries and drug discovery systems and to make these systems available to
pharmaceutical companies through collaborative and licensing arrangements for
use in discovering drugs for major markets which have historically been
difficult to address using the traditional approach to drug discovery. There can
be no assurance, however, that the Company will obtain patents covering its
technology that protect it against competitors. Moreover, there can be no
assurance that the Company's competitors will not succeed in developing
technologies that circumvent the Company's technology or that such competitors
will not succeed in developing technologies and drugs that are more effective
than those developed by the Company and its collaborative partners or that would
render technology or drugs of the Company and its collaborators less competitive
or obsolete.
Government Regulation
The development, manufacturing and marketing of drugs developed through
the use of the Company's technology are subject to regulation by numerous
governmental agencies in the United States and in other countries. The United
States Food and Drug Administration (the "FDA") and similar agencies in other
countries in which drugs developed through the use of the Company's technology
may be tested and marketed (each of such Federal, state, local and other
authorities and agencies, a "Regulatory Agency") impose mandatory procedures and
standards for the conduct of certain preclinical testing and clinical trials and
the production and marketing of drugs for human therapeutic use. Product
development and approval of a new drug are likely to take a number of years and
involve the expenditure of substantial resources.
The steps required by the FDA before new drugs may be marketed in the
United States include: (i) preclinical studies; (ii) the submission to the FDA
of a request for authorization to conduct clinical trials on an investigational
new drug (an "IND"); (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug for its intended use; (iv)
submission to the FDA of a new drug application (an "NDA"); and (v) review and
approval of the NDA by the FDA before the drug may be shipped or sold
commercially.
In the United States, preclinical testing includes both in vitro and in
vivo laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Preclinical testing results are submitted to the FDA
as part of the IND and are reviewed by the FDA prior to the commencement of
human clinical trials. Unless the FDA objects to an IND, the IND will become
effective 30 days following its receipt by the FDA. There can be no assurance
that submission of an IND will result in the commencement of human clinical
trials.
Clinical trials, which involve the administration of the
investigational drug to healthy volunteers or to patients under the supervision
of a qualified principal investigator, are typically conducted in three
sequential phases, although the phases may overlap with one another. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the
22
<PAGE>
FDA as part of the IND. Further, each clinical study must be conducted under the
auspices of an independent Institutional Review Board (the "IRB") at the
institution where the study will be conducted. The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, preclinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company, its collaborative partners
or the FDA may suspend clinical trials at any time if it is believed that
individuals participating in such trials are being exposed to unacceptable
health risks. Even assuming that clinical trials are completed and that an NDA
is submitted to the FDA, there can be no assurance that the NDA will be reviewed
by the FDA in a timely manner or that once reviewed, the NDA will be approved.
The approval process is affected by a number of factors, including the severity
of the targeted indications, the availability of alternative treatments and the
risks and benefits demonstrated in clinical trials. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, or may require additional
testing or information with respect to the investigational drug. Even if initial
FDA approval is obtained, further studies, including post-market studies, may be
required in order to provide additional data on safety and will be required in
order to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. The FDA
will also require post-market reporting and may require surveillance programs to
monitor the side effects of the drug. Results of post-marketing programs may
limit or expand the further marketing of the drug. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process or labeling, an NDA supplement may be required to be submitted to the
FDA.
There can be no assurance that the regulatory framework described above
will not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. Moreover, because the Company's present
collaborative partners are, and it is expected that the Company's future
collaborative partners will be, responsible for preclinical testing, clinical
trials, regulatory approvals, manufacturing and commercialization of drugs, the
ability to obtain and the timing of regulatory approvals are not within the
control of the Company.
23
<PAGE>
Prior to the commencement of marketing a product in other countries,
approval by the Regulatory Agencies in such countries is required, whether or
not FDA approval has been obtained for such product. The requirements governing
the conduct of clinical trials and product approvals vary widely from country to
country, and the time required for approval may be longer or shorter than the
time required for FDA approval. Although there are some procedures for unified
filings for certain European countries, in general, each country has its own
procedures and requirements.
The Company is also subject to regulation under other Federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by Federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
Employees
As of March 3, 1997, the Company had 112 full-time employees, 40 of
whom hold Ph.D. or M.D. degrees. Of the Company's full-time employees,
approximately 96 are engaged directly in scientific research and 16 are engaged
in general and administrative functions. The Company's scientific staff members
have diversified experience and expertise in molecular and cell biology,
biochemistry, molecular pharmacology and medicinal, structural, combinatorial
and computer-assisted chemistry.
All employees have entered into agreements with the Company pursuant to
which they are prohibited from disclosing to third parties the Company's
proprietary information and assign to the Company all rights to inventions made
by them during their employment with the Company.
The Company's employees are not covered by a collective bargaining
agreement, and the Company believes that its relationship with its employees is
good.
Item 2. Properties
The Company leases laboratory and office space in a facility at 215
College Road in Paramus, New Jersey. The total square footage currently leased
by the Company is 41,274. The lease will expire on December 31, 1999. The
Company is currently converting a portion of its previously underutilized space
into research laboratories. The Company may renovate other portions of its
currently underutilized space in 1997 for additional laboratories and offices.
The Company believes that the space it currently leases is adequate to
accommodate the anticipated administrative and research needs of the Company for
the foreseeable future.
Item 3. Legal Proceedings
Other than as described in Item 1 above under the caption "Patents,
Proprietary Technology and Trade Secrets," the Company is not a party to any
legal proceedings.
24
<PAGE>
Item 4. Submission of Matters to a Vote of Securityholders
None.
25
<PAGE>
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Common Stock of Synaptic Pharmaceutical Corporation has traded on
The Nasdaq Stock Market under the symbol SNAP since its initial public offering
on December 13, 1995. As of March 3, 1997, there were approximately 900 holders
of record of the Company's Common Stock. No dividends have been paid on the
Common Stock to date, and the Company does not currently intend to declare or
pay dividends for the foreseeable future.
The following tables set forth the high and low last trade prices for
the Common Stock as reported by The Nasdaq Stock Market for the period from
December 13, 1995, through December 31, 1996.
1996 Fiscal Year
----------------
High Low
---- ---
1st Quarter 1996 20 12 1/2
2nd Quarter 1996 17 3/4 12 1/4
3rd Quarter 1996 14 9 1/2
4th Quarter 1996 13 10 1/2
1995 Fiscal Year
----------------
High Low
---- ---
Period December 13, 1995,
through December 31, 1995 13 1/2 12 1/2
Since January 1, 1994, the Company has sold the following securities
which were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
1. From January 1, 1994, through December 31, 1995, the Company issued
and sold, pursuant to restricted stock purchase agreements under the Company's
1988 Amended and Restated Incentive Plan (the "1988 Incentive Plan"), 23,115
shares of Common Stock to 25 officers, employees, consultants and former
employees and consultants of the Company. The aggregate purchase price of such
shares was $42,401 in cash. Since December 31, 1995, there have not been any
additional sales of Common Stock pursuant to restricted stock purchase
agreements under the 1988 Incentive Plan. All of these sales were effected in
reliance upon the exemption from the registration requirements provided by Rule
701 under the Securities Act for offers and sales of securities pursuant to
certain compensatory benefit plans and contracts relating to compensation.
26
<PAGE>
2. From January 1, 1994, through December 31, 1996, the Company issued
and sold 11,350 shares of Common Stock pursuant to the exercise of options
granted under the 1988 Incentive Plan. Such shares were sold to an officer and
two former employees of the Company. The aggregate purchase price of such shares
was $20,001 in cash. All of these sales were effected in reliance upon the
exemption from the registration requirements provided by Rule 701 under the
Securities Act for offers and sales of securities pursuant to certain
compensatory benefit plans and contracts relating to compensation.
3. Pursuant to a placement agency agreement relating to a preferred
stock financing in January 1993, the Company issued and sold warrants (the
"Warrants") to Oppenheimer & Co., Inc. ("Oppenheimer") and Prudential Securities
Incorporated ("Prudential") for an aggregate purchase price of $3,849.15 in
cash. The Warrants entitle the holders thereof to purchase at any time before
January 19, 1998, an aggregate of 192,458 shares of Common Stock at a price per
share of $9.50, or $1,828,351 in the aggregate. In May 1996, Prudential
exercised all of its Warrants and purchased an aggregate of 48,114 shares of
Common Stock for an aggregate purchase price of $457,088. This transaction was
effected in reliance upon the exemption from the registration requirements
provided by Section 4(2) of the Securities Act on the basis that such
transaction did not involve any public offering. Warrants to purchase 144,344
shares of Common Stock remain outstanding and exercisable by the holders
thereof.
4. In January 1995, the Company issued and sold 39,483 shares of Common
Stock to 18 of its investors pursuant to their exercise of warrants. The
aggregate purchase price for such shares was $224,451. These sales were effected
in reliance upon the exemption from the registration requirements provided by
Section 4(2) of the Securities Act on the basis that such sales did not involve
any public offering.
5. The Company issued and sold an aggregate of 1,071,429 shares of
Series 4 Convertible Preferred Stock, $.01 par value, to Ciba-Geigy in August
1994. The aggregate purchase price of such shares was approximately $7,500,000
in cash. This sale was effected in reliance upon the exemption from the
registration requirements provided by Section 4(2) of the Securities Act on the
basis that such sale did not involve any public offering. Such shares
automatically converted into 535,715 shares of Common Stock upon completion of
the Company's initial public offering in December 1995. This transaction was
effected in reliance upon the exemption from the registration requirements
provided by Section 3(a)(9) of the Securities Act.
6. Upon completion of the Company's initial public offering in December
1995, shares of convertible redeemable preferred stock issued and sold by the
Company in private placements during the period from 1988 through 1993
automatically converted into 4,392,667 shares of Common Stock. Immediately
following such conversion, the shares of Common Stock were held by 92 investors.
This transaction was effected in reliance upon the exemption from the
registration requirements provided by Section 3(a)(9) of the Securities Act.
Except as set forth above, the Company has not made any sales of its
securities, other than sales that were registered under the Securities Act.
There were no underwriters employed in connection with any of the
transactions set forth above.
27
<PAGE>
Item 6. Selected Financial Data
The following table presents selected information relating to the
financial condition and results of operations of the Company for the past five
years. The following data should be read in conjunction with the Company's
financial statements.
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total revenues $9,480,688 $7,977,491 $ 5,043,124 $ 8,794,288 $ 3,605,821
Total expenses 14,319,205 12,078,666 11,220,998 10,752,893 8,540,939
Other income,
net 2,205,462 733,824 651,153 408,604 362,051
Net loss (2,633,055) (3,367,351) (5,526,721) (1,550,001) (4,573,067)
Net loss per
share (0.35) (4.76) -- -- --
Supplementary
net loss per
share * -- (0.62) -- -- --
Total assets 40,354,594 40,912,743 20,023,727 19,754,082 5,988,476
Long term debt -- 106,472 258,754 383,427 496,085
Convertible
redeemable
preferred stock -- -- 36,199,096 28,905,739 14,869,988
Accumulated
deficit (23,969,520) (21,336,465) (17,969,114) (12,442,393) (10,892,392)
Shareholders'
equity
(deficiency) 39,040,361 38,669,187 (17,591,851) (11,929,253) (10,571,012)
*Computed on the basis described in Note 1 of the Notes to Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Synaptic Pharmaceutical Corporation is a biotechnology company engaged
in the development of a broad platform of enabling technology which it calls
"human receptor-targeted drug design technology." It is utilizing this
technology both to discover and clone the genes that code for human receptor
subtypes associated with specific disorders and to design compounds that can
potentially be developed as drugs for treating these disorders. The Company is
engaged in collaborations with four pharmaceutical companies: Eli Lilly and
Company, Merck and Co., Inc., Novartis Pharma A.G. and The Dupont Merck
Pharmaceutical Company. Since inception, the Company has financed its operations
primarily through the sale of stock and through funds provided by its
collaborative partners Lilly, Merck and Novartis under collaborative agreements.
Under its collaborative agreements, the Company may receive one or two
types of revenue from its collaborative partners: contract revenue and license
revenue. Contract revenue includes research funding to support a specified
number of the Company's scientists and payments upon the achievement of
specified research and development milestones. Research funding revenue is
recognized ratably over the period of the agreement to which it relates and is
based upon predetermined funding requirements. Research milestone payment
revenue is recognized when the related research milestone is achieved. License
revenue represents
28
<PAGE>
non-refundable payments for licenses to the Company's technology and drug
discovery systems. Non-refundable payments for licenses are recognized at such
time as they are received or, if earlier, become guaranteed. In addition to
contract revenue, if a drug is developed as a result of any of the collaborative
agreements between the Company and its collaborative partners, the Company is
entitled to receive royalty payments based upon the sale of such drugs.
The Company also receives revenues from government grants under the
Small Business Innovative Research ("SBIR") program of the National Institutes
of Health.
To date, the Company's expenditures have been for research and
development related expenses, general and administrative related expenses, fixed
asset purchases and various patent related expenditures incurred in protecting
the Company's technologies. The Company has been historically unprofitable and
had an accumulated deficit of $23,969,520 at December 31, 1996. The Company
expects to continue to incur operating losses for a significant number of years
and may not become profitable, if at all, until it begins to receive royalty
revenue. To date, the Company has not received any royalty revenue and does not
expect to receive such revenue for a significant number of years, if at all.
Results of Operations
Comparison of Fiscal Years Ended December 31, 1996, 1995 and 1994
Revenues. The Company recognized revenue of $9,480,688, $7,977,491 and
$5,043,124 for the fiscal years of 1996, 1995 and 1994, respectively. The
increase of $1,503,197 from 1995 to 1996 was attributable primarily to the
recognition of $2,000,000 of license revenue from one of the Company's
collaborative partners in 1996 and an increase of approximately $231,000 of
grant revenue over the comparable period in 1995, both of which were partially
offset by a decrease in contract revenue of approximately $728,000. This
decrease in contract revenue was attributable to the receipt in 1995 of a
one-time $1,000,000 payment from one of the Company's collaborative partners for
the achievement of a specific scientific milestone that was partially offset by
increases in 1996 in the rates charged to the Company's collaborative partners
per full time equivalent scientist.
The increase of $2,934,367 from 1994 to 1995 was attributable primarily
to an increase in contract revenue of $2,907,367. The increase in contract
revenue was primarily due to the recognition of five months of research funding
from Novartis in 1994 as compared to twelve months of such funding in 1995 as
well as the receipt of a $1,000,000 payment from one of the Company's
collaborators for the achievement of a specific scientific milestone. Grant
revenue increased from $280,000 in 1994 to $307,000 in 1995.
Research and Development Expenses. The Company incurred research and
development expenses of $11,336,756, $9,863,769 and $9,308,917 for the fiscal
years of 1996, 1995 and 1994, respectively. The increase of $1,472,987 in
research and development expenses from 1995 to 1996 was attributable primarily
to: an increase of approximately $656,000 in compensation expense resulting from
an increase in average headcount year-to-year, annual salary and bonus increases
and an associated increase in fringe benefit expense, as well as an increase in
amortization of deferred compensation; an increase in approximately $482,000 in
research supply costs; an increase of approximately $112,000 in research
equipment costs related to research funded by government grants; approximately
$92,000 in increased depreciation expense; and an increase of approximately
$53,000 in software license fees.
29
<PAGE>
The increase of $554,852 in research and development expenses from 1994
to 1995 was attributable primarily to: an increase of approximately $340,000
resulting from an increase in average headcount year-to-year as well as annual
salary and bonus increases and an associated increase in fringe benefit expense;
an increase of approximately $290,000 in research supply cost; and an increase
of approximately $112,000 related to depreciation of fixed assets as well as
amortization of patents, all of which were partially offset by a decrease of
approximately $186,000 due to the assumption by one of the Company's
collaborative partners in 1995 of certain preclinical testing activities.
General and Administrative Expenses. The Company incurred general and
administrative expenses of $2,982,449, $2,214,897 and $1,912,081 for the fiscal
years of 1996, 1995 and 1994, respectively. The increase of $767,552 in general
and administrative expenses from 1995 to 1996 was attributable primarily to: an
increase of approximately $292,000 in expenses associated with being a public
company; an increase of approximately $193,000 in compensation expense resulting
from an increase in average headcount and annual salary and bonus increases and
an associated increase in fringe benefit expense; an increase of approximately
$171,000 in patent and patent related costs; and an increase of approximately
$64,000 in certain supply and computer related expenses.
The increase of $302,816 in general and administrative expenses from
1994 to 1995 was attributable primarily to: an increase of approximately
$161,000 in rent expense resulting from the full year cost of an additional
12,800 square feet of space which was leased in August 1994; and an increase of
approximately $139,000 in compensation expense resulting from an average
headcount increase as well as annual salary and bonus increases and an
associated increase in fringe benefit expense.
Other Income, Net. The Company received other income, net of interest
expense, of $2,205,462, $733,824 and $651,153 for the fiscal years of 1996, 1995
and 1994, respectively. The increases of $1,471,638 from 1995 to 1996 and of
$82,671 from 1994 to 1995 in other income, net of interest expense, were
primarily attributable to an increase in interest income as a result of an
increase in the average cash, cash equivalent and marketable security balances
maintained during the three years.
Net Loss. The net loss incurred by the Company was $2,633,055,
$3,367,351 and $5,526,721 for the fiscal years of 1996, 1995 and 1994,
respectively. The decrease of $734,296 in net loss from 1995 to 1996 was
attributable primarily to: the increase in revenue and other income, offset by
higher research and development and general and administrative expenses.
The decrease of $2,159,370 in net loss from 1994 to 1995 was
attributable primarily to: the increase in revenue and other income, offset by
higher research and development and general and administrative expenses.
Net Loss Per Share and Supplementary Net Loss Per Share. The net loss
per share incurred by the Company was $0.35 and $4.76 for the fiscal years of
1996 and 1995, respectively. The supplementary net loss per share, as computed
as described in Note 1 of Notes to Financial Statements, was $0.62 for 1995. The
decrease of $0.27 per share ($0.35 vs. $0.62) was primarily attributable to: the
decrease in net loss from 1995 to 1996, as well as an increase in the number of
shares used to calculate per share loss from 1995 to 1996.
Operating Trends. It is expected that research funding from existing
collaborations will increase from approximately $6,900,000 in 1996 to $9,000,000
in 1997 and then decrease to $6,700,000 in 1998. It is also expected that
operating expenses will increase in order to further support existing
collaborations and internal research efforts. Operating expenses are expected to
continue to grow, at a minimum, consistent with historical
30
<PAGE>
trends. Patent related expenditures are expected to grow at a rate that is
faster than the historical operating expense growth rate.
Other income, net is expected to decline in 1997 and 1998 as existing
funds are utilized to support the Company's operations.
Property and equipment costs are expected to continue to increase as
the Company's currently underutilized space is converted into laboratory space.
The Company does not believe that inflation has had a material impact
on its results of operations.
Liquidity and Capital Resources
At December 31, 1996 and 1995, cash, cash equivalents and marketable
securities aggregated $34,684,282 and $36,017,666 respectively. The decrease of
$1,333,384 in 1996 was attributable primarily to the net loss for the year of
approximately $2,633,000, the purchase of capital equipment of approximately
$1,106,000 and patent costs of approximately $518,000, all of which were
partially offset by the Company's receipt of funds in the aggregate amount of
approximately $3,000,000 from the sale of common stock pursuant to the exercise
by the underwriters of the Company's initial public offering in January 1996 of
their overallotment option, the exercise by an investment banking firm of
certain warrants relating to a prior private placement, and the exercise of
certain stock options under the Company's 1988 Incentive Plan.
To date, the Company has met its cash requirements through the sale of
its stock, through licensing fees, research funding and milestone payments
received under the Collaborative Agreements, through SBIR grants and through
interest earned on its investments. As of December 31, 1996, the Company had
received: approximately $62,000,000 from the sale of its stock; approximately
$38,000,000 in licensing fees, research funding and milestone payments under the
Collaborative Agreements; approximately $2,600,000 in SBIR grants; and
approximately $4,700,000 in other income, net. To date, the portion of these
funds that has been expended by the Company has been used principally to fund
research and development, purchase fixed assets used primarily in its research
activities, to create its patent estate and to pay general and administrative
support costs.
At December 31, 1996, the Company was involved in collaborative
arrangements with Lilly, Merck, Novartis and Dupont Merck. Lilly, Merck and
Novartis are expected to provide research funding to the Company during 1997 and
Lilly and Novartis are expected to provide funding to the Company during 1998.
The aggregate amount of research funding under these arrangements which the
Company expects to receive during 1997 and 1998 is approximately $9,000,000 and
$6,700,000, respectively. In February 1996, the Company entered into a
collaborative arrangement with DuPont Merck. The Company does not anticipate any
funding from this arrangement during 1997 or 1998. Research funding under the
Lilly Agreement is scheduled to expire on December 31, 1998. Research funding
under the Merck Agreement is scheduled to expire on November 30, 1997, but Merck
has the right to terminate the collaboration earlier by terminating the Merck
Agreement upon 90 days' prior written notice. Except in the case of any such
termination, Merck is obligated to make payments to Synaptic for its research
support through November 30, 1997. Under the Novartis Agreements, Novartis is
obligated to provide Synaptic with research funding through August 3, 1998.
At December 31, 1996, the Company had invested an aggregate of
$5,559,321 in property and equipment. Included within the $5,559,321 is $658,077
of equipment under capital leases. The net present value of obligations under
capital leases at December 31,1996, was $106,472. This amount is secured by
31
<PAGE>
investment securities of the Company which are, to the extent of the $112,000,
recorded in the balance sheet as "Restricted Securities." The last of these
lease agreements will expire on December 5, 1997. At December 31, 1996, the
Company had committed approximately $1,800,000 to provide for increased capacity
in the Company's assay systems, certain improvements in data base management and
the construction and equipping of a laboratory related to the expansion in the
Lilly collaboration. During 1997, it is likely that the Company will commit
additional resources for the construction and equipping of additional laboratory
space.
The Company leases laboratory and office facilities under an agreement
expiring on December 31, 1999. The minimum annual payment under the lease is
$691,000. A standby letter of credit for $580,000 has been issued to the
Company's landlord as a security deposit and is secured by investment securities
of the Company which are, to the extent of $600,000, recorded in the balance
sheet as "Restricted Securities." This standby letter of credit must be renewed
annually during the life of the lease.
At December 31, 1996, the Company had approximately $34,684,282 in
cash, cash equivalents and marketable securities. The Company intends to utilize
these funds primarily to conduct its current and future research programs and to
make leasehold improvements to its facilities beyond the level which existed on
December 31, 1996. It is anticipated that the Company will continue to incur
significant operating losses for a number of years and will require the use of
cash to finance its capital programs. The Company believes that its cash on
hand, together with the funds that it expects to receive from its collaborative
partners, interest income and funds received under SBIR grants, will be
sufficient to fund an increased operating expense level and an increased level
of capital spending through June 30, 1999.
Disclosure Regarding Forward Looking Statements
This Report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward looking statements
include, but are not limited to, those relating to future cash and spending
plans, amounts of future research funding, patent-related plans, additional drug
discovery programs, the effectiveness, efficacy, or other results of any of the
Company's technology or drugs, any other statements regarding future growth,
future cash needs, future operations, business plans and financial results, and
any other statements which are not historical facts. When used in this document,
the words "anticipate," "estimate," "expect," "may," "project," and similar
expressions are intended to be among the statements that identify
forward-looking statements. Such statements involve risks and uncertainties,
including, but not limited to, those risks and uncertainties relating to those
described below, as well as other factors detailed elsewhere in this Report
("Cautionary Statements"). Such Cautionary Statements qualify the forward
looking statements included in this Report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated. All subsequent written
and oral forward looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements.
Absence of Developed Products; Early Stage of Product Development. The
Company was founded in January 1987, has not completed development of any drugs
and does not expect that any drugs resulting from its and its collaborative
partners' research and development efforts will be commercially available for a
significant number of years, if at all. Since inception, the Company has focused
its activities on the discovery and cloning of receptor genes and the use of
such genes as tools in the design of precisely targeted compounds for a broad
range of therapeutic applications. All compounds discovered by the Company and
its collaborative partners will require extensive preclinical and clinical
testing prior to submission of any regulatory application for commercial use.
Extensive preclinical and clinical testing required to establish safety and
efficacy will take
32
<PAGE>
several years, and the time required to commercialize new drugs cannot be
predicted with accuracy. There can be no assurance that the Company's approach
to drug discovery, or the efforts of Lilly, Merck, Novartis or DuPont Merck or
any future collaborative partner or licensee of the Company, will result in the
development of any drugs, or that drugs, if successfully developed, will be
proven to be safe and effective in clinical trials, meet applicable regulatory
standards, be capable of being manufactured in commercial quantities at
reasonable costs or be successfully commercialized. Product development of new
pharmaceuticals is highly uncertain, and unanticipated developments, clinical or
regulatory delays, unexpected adverse effects or inadequate therapeutic efficacy
would slow or prevent product development efforts of the Company or its
collaborative partners and have a material adverse effect on the Company's
operations.
Dependence on Collaborative Partners for Development, Regulatory
Approvals, Manufacturing, Marketing and Other Resources. The Company's business
strategy is to leverage its resources by entering into collaborative and
licensing agreements with pharmaceutical companies. Under the Collaborative
Agreements, the Company's collaborative partners are generally responsible for
preclinical testing and clinical trials of compounds developed through the use
of the Company's technology, regulatory approvals thereof and the manufacturing
and commercialization of resulting drugs. As a result, the Company's receipt of
revenues (whether in the form of continued research funding, drug development
milestones or royalties on sales) under the Collaborative Agreements is
dependent upon the activities and the development, manufacturing and marketing
resources of its collaborative partners. The amount and timing of resources
dedicated by the Company's collaborative partners to their respective
collaborations with the Company is not within the Company's control. Moreover,
there can be no assurance that the interests of the Company will continue to
coincide with those of its collaborative partners, that some of the Company's
collaborative partners will not develop independently or with third parties
drugs that could compete with drugs of the types covered by the collaborations,
or that disagreements over rights or technology or other proprietary interests
will not occur.
The Company is dependent on its collaborative partners to fund a
substantial portion of its activities over the next couple of years. Merck can
terminate the Merck Agreement at any time upon 90 days' prior written notice. If
any of the Company's collaborative partners terminates or breaches its agreement
with the Company, or fails to devote adequate resources to or to conduct in a
timely manner its collaborative activities, the research program under the
applicable Collaborative Agreement or the development and commercialization of
drug candidates subject to such collaboration would be materially adversely
affected. Further, there can be no assurance that the Company's collaborations
with Lilly, Merck, Novartis and DuPont Merck will be successful. Nor can there
be any assurance that the Company will be able to enter into acceptable
collaborative or licensing arrangements with other pharmaceutical companies in
the future, or that, if negotiated, such arrangements would be successful.
Future Capital Needs; Uncertainty of Additional Funding. The operation
of the Company's business will require substantial capital resources. No
assurance can be given that its existing capital resources, together with future
interest income and payments due under the Collaborative Agreements, will be
sufficient. Moreover, there can be no assurance that the Company will receive
the expected level of funding under the Collaborative Agreements. The Company
expects that it will, in the future, seek to raise additional funding from other
sources, including other collaborative partners and licensees, and through
public or private financings, including sales of equity or debt securities. Any
such collaborative or licensing arrangement could result in limitations on the
Company's ability to control the research and development of potential drugs and
the commercialization of resulting drugs, if any, as well as its profits
therefrom. Any such equity financing could result in dilution to the Company's
then existing stockholders. There can be no assurance that additional funds will
be available on favorable terms or at all, or that such funds, if raised, would
be sufficient to permit
33
<PAGE>
the Company to continue to conduct its operations. If adequate funds are not
available, the Company may be required to curtail significantly or eliminate one
or more of its receptor or drug discovery programs.
History of Operating Losses and Accumulated Deficit. The Company has
incurred net losses every year since its inception in January 1987. At December
31, 1996, the Company's accumulated deficit was $23,969,520. Losses have
resulted principally from costs incurred in connection with the Company's
research and development activities and from general and administrative costs
associated with the Company's operations. The Company expects to continue to
incur substantial operating losses. The only revenues generated by the Company
to date have resulted from payments under the Collaborative Agreements, interest
income and funds from government grants. The Company's revenues, expenses and
losses may fluctuate from quarter to quarter and year to year. Research payments
under the Lilly Agreement, the Merck Agreement and the Novartis Agreements are
scheduled to expire in December 1998, November 1997 and August 1998,
respectively, unless the research programs under such agreements are extended by
mutual agreement of the Company and Lilly, Merck or Novartis. The Company does
not receive research payments under the DuPont Merck Agreement. The Company does
not expect to achieve revenues or royalties from sales of drugs for a
significant number of years, if at all. The Company will not achieve revenues or
royalties from drug sales unless it or one of its collaborative partners
successfully completes clinical trials with respect to a drug candidate, obtains
regulatory approvals for that drug candidate and commercializes the resulting
drug. Failure to achieve significant revenue or profitable operations could
impair the Company's ability to sustain operations and there can be no assurance
that the Company will ever achieve significant revenues or profitable
operations.
Company's Dependence on Proprietary Technology and Unpredictability of
Patent Protection. The Company's success depends, in part, on its ability to
establish, protect and enforce its proprietary rights relating to its
technology. The Company files patent applications in the United States and in
other countries in order to protect its gene discoveries, compound discoveries
and other inventions. However, the patent position of biotechnology and
pharmaceutical companies is highly uncertain and involves many complex legal and
technical issues. There can be no assurance that patents will be granted with
respect to any of the Company's patent applications currently pending in the
United States or in other countries, or with respect to applications filed by
the Company in the future.
Also, there can be no assurance that the Company's patent applications
will not be challenged by way of interference proceedings or opposed by third
parties or that the Company will not be required to participate in interference
proceedings or oppose the patents or patent applications of third parties in
order to protect its rights. Interference proceedings and oppositions can be
expensive to prosecute and defend. One of the Company's patent applications on
file outside the United States is the subject of an opposition filed by a
pharmaceutical company. In addition, the Company is seeking to provoke an
interference by the United States Patent and Trademark Office between one of its
patent applications and an issued patent of a third party. There can be no
assurance that the outcome of the pending opposition proceeding and the
anticipated interference proceeding will be favorable to the Company. In the
event that the outcome of the opposition proceeding were unfavorable to the
Company, the Company would not be issued the patent in the country in which the
proceeding is taking place and would not be able to prevent third parties from
practicing the subject matter of the opposed application in that country.
Moreover, the opponent may seek to file similar oppositions in other countries.
In the event that the outcome of the interference proceeding were unfavorable to
the Company, the Company might not be able to practice the subject matter of the
relevant patent application in the United States. Even if the eventual outcome
of the pending opposition proceeding and the anticipated interference proceeding
were favorable to the Company, the Company's participation in them could result
in substantial cost to the Company.
34
<PAGE>
There is no clear policy involving the breadth of claims allowed in
patents or the degree of protection afforded thereunder. There can be no
assurance that claims in the Company's patents, either as initially allowed by
the United States Patent and Trademark Office or any of its non-United States
counterparts or as subsequently interpreted by courts inside or outside the
United States, will be sufficiently broad to protect the Company's proprietary
rights. Further, no assurance can be given that patents issued to the Company
will not be infringed, challenged, invalidated or circumvented by others, or
that the rights granted thereunder will provide competitive advantages to the
Company. The field of gene discovery has become intensely competitive. A number
of pharmaceutical companies, biotechnology companies, universities and research
institutions have significantly expanded their gene discovery efforts in recent
years and have filed patent applications or received patents covering their gene
discoveries. Some of these applications or patents may be competitive with the
Company's applications or conflict in certain respects with claims made under
the Company's applications. Moreover, because patent applications in the United
States are maintained in secrecy until patents issue, because patent
applications in certain other countries generally are not published until more
than eighteen months after they are filed and because publication of
technological developments in the scientific or patent literature often lags
behind the date of such developments, the Company cannot be certain that it was
the first to invent the subject matter covered by its patents or patent
applications or that it was the first to file patent applications for such
inventions. If an issue regarding priority of inventions were to arise with
respect to any of the Company's patents or patent applications, the Company
might have to participate in litigation or interference proceedings declared by
the United States Patent and Trademark Office or similar agencies in other
countries to determine priority of invention. Litigation to establish the
validity of patents, to defend against patent infringement claims and to assert
infringement claims against others can be expensive and time-consuming, even if
the outcome is favorable to the Company. If the outcome of patent prosecution or
litigation is not favorable to the Company, the Company could be adversely
affected.
In addition to patent protection, the Company relies on trade secrets,
proprietary know-how and technological advances which it seeks to protect, in
part, by confidentiality agreements with its collaborative partners, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any such breach, or
that the Company's trade secrets, proprietary know-how and technological
advances will not otherwise become known or be independently discovered by
others.
The commercial success of the Company also depends on the Company's
ability to operate without infringing patents and proprietary rights of third
parties. The Company is aware of a large number of patents and patent
applications of third parties that contain claims to genes that code for G
protein-coupled receptors and/or compounds that interact with G protein-coupled
receptors. Patents issued to others may preclude the Company from using or
licensing its technology or may preclude the Company or its collaborative
partners from commercializing drugs developed with the use of the Company's
technology. The Company has acquired licenses to use certain technologies
covered by patents owned by Stanford University and the University of
California, jointly, and Columbia University and may be required to obtain
additional licenses to patents or other proprietary rights of other parties in
order to pursue its own technologies. No assurance can be given that any such
additional licenses would be made available on terms acceptable to the Company,
if at all. The failure to obtain such licenses could result in delays in the
Company's or its collaborative partners' activities, including the development,
manufacture or sale of drugs requiring such licenses, or preclude such
development, manufacture or sale.
Risk of Technological Obsolescence and Highly Competitive Industry. The
Company operates in a field in which new developments occur and are expected to
continue to occur at a rapid pace. Competition from biotechnology and
pharmaceutical companies, joint ventures, academic and other research
institutions and others is intense and is expected to increase. Many of the
Company's competitors have substantially
35
<PAGE>
greater financial, technical and personnel resources than the Company. Although
the Company believes that many elements of human receptor-targeted drug design
technology and the manner in which the Company has integrated these elements are
proprietary to the Company, one or more of such elements are currently employed
by several other pharmaceutical and biotechnology companies in their drug
discovery efforts. Moreover, although the Company believes that it has
identified new and distinct approaches to drug discovery, there are other
companies with drug discovery programs at least some of the objectives of which
are the same as or similar to those of the Company. The Company is aware of many
pharmaceutical and biotechnology companies that are engaged in efforts to
develop compounds that interact with G protein-coupled receptors subtypes,
including receptor subtypes with which the Company is working. There can be no
assurance that competitors of the Company will not develop competing
technologies or drugs that are more effective than those developed by the
Company and its collaborative partners or obtain regulatory approvals of their
drugs more rapidly than the Company and its collaborative partners, thereby
rendering the Company's and its collaborative partners' technologies and drugs
obsolete or noncompetitive. Moreover, there can be no assurance that the
Company's competitors will not obtain patent protection or other intellectual
property rights that would limit the Company's or its collaborative partners'
ability to use the Company's technology or commercialize its or their drugs.
Stringent Government Regulation and Need for Product Approvals. The
preclinical testing and clinical trials of compounds developed through the use
of the Company's technology and the manufacturing and marketing of any drugs
resulting therefrom are subject to regulation by numerous Federal, state and
local governmental authorities in the United States, the principal one of which
is the FDA, and by similar Regulatory Agencies in other countries in which drugs
developed through the use of the Company's technology may be tested and
marketed. Any compound developed by the Company or its collaborative partners
must receive Regulatory Agency approval before it may be marketed as a drug in a
particular country. The regulatory process, which includes preclinical testing
and clinical trials of each compound in order to establish its safety and
efficacy, can take many years and requires the expenditure of substantial
resources. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations which could delay, limit or prevent
Regulatory Agency approval. In addition, delays or rejections may be encountered
based upon changes in Regulatory Agency policy during the period of drug
development and/or the period of review of any application for Regulatory Agency
approval for a compound. Delays in obtaining Regulatory Agency approvals could
adversely affect the marketing of any drugs developed by the Company or its
collaborative partners, impose costly procedures upon the Company's and its
collaborative partners' activities, diminish any competitive advantages that the
Company or its collaborative partners may attain and adversely affect the
Company's ability to receive royalties. There can be no assurance that, even
after such time and expenditures, Regulatory Agency approvals will be obtained
for any compounds developed by or in collaboration with the Company. Moreover,
even if Regulatory Agency approval for a compound is granted, such approval may
entail limitations on the indicated uses for which it may be marketed. Further,
approved drugs and their manufacturers are subject to continual review, and
discovery of previously unknown problems with a drug or its manufacturer may
result in restrictions on such drug or manufacturer, including withdrawal of the
drug from the market. Regulatory Agency approval of prices is required in many
countries and may be required for the marketing of any drug developed by the
Company or its collaborative partners.
Dependence on Key Personnel. The Company is highly dependent on its
management and scientific staff. Loss of the services of any key individual
could have an adverse effect on the Company. The Company believes that its
future success will depend, in part, on its ability to attract and retain highly
talented managerial and scientific personnel and consultants. The Company faces
intense competition for such personnel from, among others, biotechnology and
pharmaceutical companies, as well as academic and other research institutions.
There can be no assurance that it will be able to attract and retain the
personnel it requires on acceptable terms.
36
<PAGE>
Item 8. Financial Statements
SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors..............................................38
Balance Sheets at December 31, 1996 and 1995................................39
Statements of Operations for the years ended December 31,
1996, 1995 and 1994.......................................................40
Statements of Stockholders' Equity (Deficiency) for the years
ended December 31, 1996, 1995 and 1994....................................41
Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.......................................................43
Notes to Financial Statements...............................................44
37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SYNAPTIC PHARMACEUTICAL CORPORATION
We have audited the accompanying balance sheets of Synaptic
Pharmaceutical Corporation as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1996. 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 Synaptic
Pharmaceutical Corporation at December 31, 1996 and 1995 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Hackensack, New Jersey
February 18, 1997
38
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
BALANCE SHEETS
December 31, 1996 and 1995
Assets 1996 1995
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 4,588,731 $ 27,680,969
Marketable securities--current maturities 21,418,869 7,932,322
Revenue receivable under license agreement 191,666 129,208
Restricted securities 712,000 770,000
Other current assets 457,915 351,296
---------- ----------
Total current assets 27,369,181 36,863,795
Property and equipment, net 2,664,129 2,232,418
Marketable securities 8,676,682 404,375
Patent and patent application costs,
net of accumulated amortization
(1996--$729,798; 1995--$443,986) 1,644,602 1,412,155
----------- ------------
$40,354,594 $ 40,912,743
=========== ============
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of capital lease obligations $ 106,472 $ 152,282
Accounts payable 638,751 196,750
Accrued liabilities 189,010 660,481
Accrued compensation 380,000 306,851
Unearned revenue under research agreements -- 820,720
--------- ----------
Total current liabilities 1,314,233 2,137,084
Capital lease obligations, less current portion -- 106,472
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value;
authorized--1,000,000 shares in
1996 and 1995 -- --
Common Stock, $.01 par value; authorized--
25,000,000 shares in 1996 and 1995; issued--
7,633,543 shares in 1996 and 7,326,368 shares
in 1995; outstanding--7,633,543 shares in
1996 and 7,325,493 shares in 1995 76,335 73,264
Additional paid-in capital 63,231,188 59,952,735
Net unrealized gains (losses) on securities (1,162) 196,384
Deferred compensation (296,480) (208,952)
Note receivable from stockholder -- (6,134)
Accumulated deficit (23,969,520) (21,336,465)
----------- -----------
39,040,361 38,670,832
Less: Treasury stock, at cost -- (1,645)
--------- -----------
Total stockholders' equity 39,040,361 38,669,187
---------- ----------
$40,354,594 $40,912,743
=========== ===========
See notes to financial statements.
39
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
REVENUES:
Contract revenue $ 6,942,928 $ 7,670,491 $ 4,763,124
License revenue 2,000,000 -- --
Grant revenue 537,760 307,000 280,000
----------- ----------- ---------
Total revenues 9,480,688 7,977,491 5,043,124
EXPENSES:
Research and development 11,336,756 9,863,769 9,308,917
General and administrative 2,982,449 2,214,897 1,912,081
----------- ----------- -----------
Total expenses 14,319,205 12,078,666 11,220,998
----------- ----------- -----------
Loss from operations (4,838,517) (4,101,175) (6,177,874)
OTHER INCOME, NET:
Interest income 2,012,847 748,395 692,985
Interest expense (19,545) (32,975) (45,223)
Gain on sale of securities 212,160 18,404 3,391
----------- ----------- -----------
Other income, net 2,205,462 733,824 651,153
----------- ----------- -----------
NET LOSS $(2,633,055) $(3,367,351) $(5,526,721)
=========== =========== ===========
NET LOSS PER SHARE $(0.35) $(4.76)
====== ======
Shares used in computation
of net loss per share 7,577,610 707,094
========= =======
See notes to financial statements.
40
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) -- (Continued)
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Unrealized Notes Total
Gains Receivable Stock-
Additional (Losses) Deferred From Accumu- holders'
Common Stock Paid-In on Compen- Stock- lated Treasury Equity
Shares Amount Capital Securities sation holders Deficit Stock (Deficiency)
------ ------ ------- ---------- ------ ------- ------- ----- ------------
Balance at January 1, 1994 329,181 $ 3,292 $ 624,864 $ 55,370 $(151,448) $(16,993) $ (12,442,393) $(1,945) $(11,929,253)
Purchase of 848 shares
of Treasury Stock at cost -- -- -- -- -- -- -- (705) (705)
Payments received on notes
receivable from stockholders -- -- -- -- -- 5,207 -- -- 5,207
Deferred Compensation related
to Stock Incentive Plan -- -- 14,955 -- (14,955) -- -- -- --
Forfeiture of Deferred
Compensation related to
Stock Incentive Plan -- -- (607) -- 607 -- -- -- --
Amortization of Deferred
Compensation -- -- -- -- 60,554 -- -- -- 60,554
Issuance of 3,293 shares
of Treasury Stock -- -- 3,725 -- -- -- -- 2,070 5,795
Issuance of 11,012 shares
of common stock 11,012 110 19,272 -- -- -- -- -- 19,382
Adjustment to reflect net
unrealized holding loss on
securities -- -- -- (226,110) -- -- -- -- (226,110)
Net loss for the year ended
December 31, 1994 -- -- -- -- -- -- (5,526,721) -- (5,526,721)
------ ------ ------- ---------- ------ ------- ------- ----- ------------
Balance at December 31, 1994 340,193 3,402 662,209 (170,740) (105,242) (11,786) (17,969,114) (580) (17,591,851)
Purchase of 1,893 shares of
Treasury Stock at cost -- -- -- -- -- -- -- (3,449) (3,449)
Payments received on notes
receivable from stockholders -- -- -- -- -- 5,652 -- -- 5,652
Deferred Compensation related
to Stock Incentive Plan -- -- 190,674 -- (190,674) -- -- -- --
Forfeiture of Deferred
Compensation related to
Stock Incentive Plan -- -- (1,075) -- 1,075 -- -- -- --
Amortization of Deferred
Compensation -- -- -- -- 85,889 -- -- -- 85,889
Issuance of 1,646 shares
of Treasury Stock -- -- 736 -- -- -- -- 2,384 3,120
Issuance of 57,769 shares of
common stock to employees
and consultants 57,769 578 257,978 -- -- -- -- -- 258,556
Issuance of 2,000,000 shares
of common stock in initial
public offering 2,000,000 20,000 22,692,401 -- -- -- -- -- 22,712,401
Conversion of preferred stock 4,928,382 49,284 36,149,812 -- -- -- -- -- 36,199,096
Adjustment to reflect net
unrealized holding gain on
securities -- -- -- 367,124 -- -- -- -- 367,124
Net loss for the year ended
December 31, 1995 -- -- -- -- -- -- (3,367,351) -- (3,367,351)
Fractional shares issued in
reverse stock split 24 -- -- -- -- -- -- -- --
------ ------ ------- ---------- ------ ------- ------- ----- -----------
Balance at December 31, 1995 7,326,368 $73,264 $59,952,735 $196,384 $(208,952) $ (6,134) $(21,336,465) $(1,645) $38,669,187
========= ======= =========== ======== ========= ======== ============ ======= ===========
</TABLE>
See notes to financial statements.
41
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) -- (Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Unrealized Notes Total
Gains Receivable Stock-
Additional (Losses) Deferred From Accumu- holders'
Common Stock Paid-In on Compen- Stock- lated Treasury Equity
Shares Amount Capital Securities sation holders Deficit Stock (Deficiency)
------ ------ ------- ---------- ------ ------- ------- ----- ------------
Balance at December 31, 1995 7,326,368 $73,264 $59,952,735 $196,384 $(208,952) $ (6,134) $(21,336,465) $(1,645) $38,669,187
Purchase of 1,190 shares of
Treasury Stock at cost -- -- -- -- -- -- -- (2,275) (2,275)
Payments received on notes
receivable from stockholders -- -- -- -- -- 6,134 -- -- 6,134
Deferred Compensation related
to Stock Incentive Plan -- -- 388,100 -- (388,100) -- -- -- --
Forfeiture of Deferred
Compensation related to
Stock Incentive Plan -- -- (121,200) -- 121,200 -- -- -- --
Amortization of Deferred
Compensation -- -- -- -- 179,372 -- -- -- 179,372
Issuance of 48,126, shares
of Common Stock pursuant
to exercise of stock options 46,061 460 80,952 -- -- -- -- 3,920 85,332
Issuance of 48,114 shares of
common stock pursuant to
exercise of stock warants 48,114 481 456,606 -- -- -- -- -- 457,087
Issuance of 213,000 shares
of common stock pursuant to
overallotment option 213,000 2,130 2,473,995 -- -- -- -- -- 2,476,125
Adjustment to reflect net
unrealized holding loss on
securities -- -- -- (197,546) -- -- -- -- (197,546)
Net loss for the year ended
December 31, 1996 -- -- -- -- -- -- (2,633,055) -- (2,633,055)
--------- ------- ----------- ---------- --------- ------- ------------ ----- ------------
Balance at December 31, 1996 7,633,543 $76,335 $63,231,188 $ (1,162) $(296,480) $ -- $(23,969,520) $ -- $39,040,361
========= ======= =========== ========== ========= ======== ============ ===== ============
</TABLE>
See notes to financial statements.
42
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- ------------
OPERATING ACTIVITIES:
Net loss $(2,633,055) $(3,367,351) $(5,526,721)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 959,835 791,855 674,486
Amortization of (discounts)/
premiums on securities (157,759) 42,465 16,440
Amortization of deferred
compensation and other 179,372 86,253 64,735
Gain on sale of securities (212,160) (18,404) (3,391)
Changes in operating assets and
liabilities:
(Increase) decrease in other assets (106,619) 355,928 (453,850)
Increase in accounts payable,
accrued liabilities and
accrued compensation 43,679 131,027 60,619
(Increase) decrease in license
agreement revenue receivable (62,458) 1,903,876 1,695,093
(Decrease) increase in deferred
revenue (820,720) 820,720 (1,309,075)
----------- ----------- -----------
Net cash (used in) provided by
operating activities (2,809,885) 746,369 (4,781,664)
INVESTING ACTIVITIES:
Proceeds from sale or maturity
of investments 10,710,000 6,318,507 11,221,728
Purchases of investments (32,238,481) (3,669,005) (13,431,922)
Purchases of property
and equipment (1,105,734) (529,035) (416,792)
Increase in patent and patent
application costs (518,259) (601,741) (596,750)
Issuance of loans to
employee/stockholder -- -- (400,000)
Principal payments made by
employee/stockholders -- 365 404,182
----------- ----------- -----------
Net cash (used in) provided by
investing activities (23,152,474) 1,519,091 (3,219,554)
FINANCING ACTIVITIES:
Issuance of common stock,
net of repurchases 3,016,269 22,970,628 24,472
Issuance of Series 4
Convertible Preferred Stock -- -- 7,293,357
Payments on capital lease (152,282) (124,673) (112,658)
Payments on notes receivable
from stockholders 6,134 5,652 5,207
----------- ----------- -----------
Net cash provided by
financing activities 2,870,121 22,851,607 7,210,378
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents (23,092,238) 25,117,067 (790,840)
Cash and cash equivalents at
beginning of period 27,680,969 2,563,902 3,354,742
----------- ----------- -----------
Cash and cash equivalents at end
of period $ 4,588,731 $27,680,969 $ 2,563,902
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 19,545 $ 32,975 $ 45,223
========== ========== ===========
See notes to financial statements.
43
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
Note 1 -- Summary of Significant Accounting Policies
Organization. Synaptic Pharmaceutical Corporation (the "Company") is
engaged in the development of a broad platform of enabling technology which it
calls "human receptor-targeted drug design technology". The Company is utilizing
this technology both to discover and clone the genes that code for human
receptor subtypes associated with specific disorders and to design compounds
that can potentially be developed as drugs for treating these disorders. The
Company makes available this technology to its pharmaceutical partners through
licensing and research agreements from which the Company derives the principal
portion of its revenue.
Net Loss Per Share. Except as noted below, net loss per share is
computed using the weighted average number of shares of common stock
outstanding. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is anti-dilutive, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares issued at prices below the offering price
during the twelve-month period prior to the Company's initial public offering in
December 1995 have been included in the calculation as if they were outstanding
for periods prior to the initial public offering (using the treasury stock
method and the initial public offering price). Additionally, the effect of
common shares issued upon conversion of the convertible redeemable preferred
stock on December 19, 1995 is included in net loss per share on a weighted
average basis. Historical net loss per share information prior to 1995 is not
considered meaningful due to the significant changes in the Company's capital
structure which occurred upon the closing of the initial public offering.
Accordingly, such per share information is not presented.
Supplementary Net Loss Per Share. Except as noted below, 1995
supplementary net loss per share of $(0.62) is computed using the weighted
average number of shares of common stock and convertible redeemable preferred
stock amounting to 5,430,127. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect is anti-dilutive,
except that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares issued at prices below the
offering price during the twelve-month period prior to the initial public
offering have been included in the calculation as if they were outstanding for
all periods presented prior to the initial public offering (using the treasury
stock method and the initial public offering price). Additionally, the effect of
common shares issuable upon conversion of convertible redeemable preferred stock
is included in supplementary net loss per share as outstanding for all of 1995.
Revenue Recognition. Research funding revenue is recognized ratably over
the period of the contract to which it relates. Payments received in advance
under such contracts is recorded as deferred revenue until the research is
performed. Research milestone payment revenue is recognized at the time the
related research milestone is achieved. License revenue represents
non-refundable payments for licenses to the Company's technology and drug
discovery systems. Non-refundable payments for licenses are recognized at such
time as they are received or, if earlier, become guaranteed. Government grant
receipts are recorded as revenue in the period in which the related research is
performed.
Cash Equivalents. Cash equivalents consist of highly liquid investments
with a maturity of three months or less when purchased.
44
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
Available-for-Sale Securities. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses reported as a separate
component of stockholders' equity. The cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary, if any, are included in
other income. The cost of securities sold is based on the specific
identification method. Investments held as of December 31, 1996 consist
primarily of U.S. Government and Federal Agency obligations, U.S. corporate
securities and mortgage-backed securities. The maturities range from January 31,
1997 through August 15, 1998.
The Company has established guidelines relative to diversification,
credit ratings and maturities to maintain safety and liquidity. The guidelines
are periodically reviewed and modified to take advantage of trends in yields and
interest rates.
Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets (principally 7 years). Depreciation of assets
acquired pursuant to capital lease arrangements and leasehold improvements is
over the shorter of the estimated useful life or the lease term.
Patents. Prior to October 1, 1996, patent and patent application costs
were capitalized and amortized over 7 years or the estimated life of the patent,
if less, using the straight-line method. Capitalized costs through October 1,
1996, will continue to be amortized over the remaining portions of their
seven-year lives. Effective October 1, 1996, patent and patent application costs
are expensed as incurred. The effect in 1996 of this change in accounting
estimate was to increase expenses and net loss by $171,000, or $0.02 per share.
Accrued Liabilities. Included in accrued liabilities at December 31, 1996
and 1995 are accrued professional fees totaling $68,000 and $252,000,
respectively.
Stock-Based Compensation. The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), in accounting for its employee stock options. Under APB No. 25,
compensation expense is recognized only when the exercise price of options is
below the market price of the underlying stock on the date of grant. Such
expense is recognized ratably over the vesting period.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these
estimates.
Reclassifications. Certain prior year amounts have been reclassified to
conform with the current year presentation.
45
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
Note 2 -- Investments
The following is a summary of all of the Company's securities. All of
the Company's securities are classified as available-for-sale securities.
Determination of estimated fair value is based on quoted market prices:
December 31, 1996: Gross Gross
Unrealized Unrealized Estimated
Cost Gain (Loss) Fair Value
U.S. Treasury obligations ----------- -------- -------- -----------
and obligations of U.S.
government agencies $20,846,307 857 $ (3,841) $20,843,323
U.S. corporate securities 6,990,759 5,462 (8,591) 6,987,630
Mortgage-backed securities 2,971,647 4,951 -- 2,976,598
----------- -------- -------- -----------
$30,808,713 $ 11,270 $(12,432) $30,807,551
=========== ======== ======== ===========
December 31, 1995:
U.S. Treasury obligations
and obligations of U.S.
government agencies $ 8,910,313 $200,012 $ (3,628) $ 9,106,697
=========== ======== ======== ===========
The gross realized gains on sale of available-for-sale securities for
the years ending December 31, 1996, 1995 and 1994 totaled $212,160, $23,958 and
$5,821, respectively, and the gross realized losses totaled $0, $5,554 and
$2,430, respectively. The net adjustment to unrealized gains (losses) on
available-for-sale securities included as a separate component of stockholders'
equity totaled $(197,546) in 1996, $367,124 in 1995 and $(226,110) in 1994.
Included in cash equivalents at December 31, 1996 is approximately
$4,383,000 related to investments in money market funds. At December 31, 1995,
this amount totaled $27,272,000.
46
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
Note 3 -- Collaborative Research Agreements
The Company is engaged in four collaborative research agreements, three
of which account for all of its contract and license revenues. Details of all
four of these agreements are as follows:
Eli Lilly and Company. In January 1991, the Company and Eli Lilly and
Company ("Lilly") entered into an agreement to promote the discovery and
development of serotonin receptor subtype-selective drugs for the treatment of
serotonin-related disorders. The original term of the collaboration was four
years, but was extended in January 1995 for an additional four-year period. In
October 1996, the size of the collaboration was increased. As part of this
agreement, Lilly is providing funding to the Company to support a specified
number of the Company's scientists who conduct research as part of the
collaboration.
Revenue recognized in the accompanying financial statements is not
subject to repayment. Lilly will also provide the Company with milestone
payments and royalties on sales of any products resulting from the collaboration
for a period of time based upon the term of the related patents.
During 1996, 1995 and 1994, the Company recognized $2,011,000,
$1,960,000, and $1,903,000, respectively, in revenue under this agreement.
Merck & Co., Inc. In November 1993, the Company and Merck and Co., Inc.
("Merck") entered into an agreement pursuant to which they agreed to collaborate
in the identification and development of alpha-1a antagonists, principally for
the treatment of BPH. The initial term of the collaboration was three years. In
October 1996, the term of the collaboration was extended for an additional
one-year period. Under the terms of the agreement, Merck is providing funding to
the Company to support a specified number of the Company's scientists who
conduct research as part of the collaboration. In addition, Merck is required to
pay royalties on sales of any products resulting from the collaboration and is
required to make payments upon the achievement of certain milestones.
As part of the collaboration, Merck received an exclusive worldwide
license to use the Company's alpha adrenergic drug discovery systems for the
development and commercialization of alpha-1a antagonists, as well as an
exclusive worldwide license under several of the Company's related patents and
patent applications. The Company retained the right to use its alpha adrenergic
technology for the development of alpha adrenergic and other agents that are not
alpha-1a antagonists.
Merck has the right to terminate the Merck Agreement at any time upon 90
days' prior written notice. In the event of any such termination, Merck will not
be required to provide the Company with any research funding that has not come
due prior to such termination or make certain other payments to the Company that
have not come due prior to such termination.
During 1996, 1995 and 1994, the Company recognized approximately
$3,613,000, $1,477,000 and $1,556,000, respectively, in revenue under this
agreement.
At December 31, 1996 and 1995, the Company had a receivable amounting to
approximately $192,000 and $129,000, respectively, for certain reimbursable
expenditures incurred during the respective periods.
47
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
Novartis Pharma A.G. (a subsidiary of the successor-in-interest of
Ciba-Geigy Limited). In August 1994, the Company and Ciba-Geigy Limited
("Ciba-Geigy") entered into an agreement pursuant to which they agreed to
collaborate in the identification and development of neuropeptide Y drugs for
the treatment of obesity and eating disorders, as well as cardiovascular
disorders. In May 1996, the Company and Ciba-Geigy entered into a second
agreement and an amendment to the first agreement pursuant to which the term of
the collaboration was extended by one year and the scope of the collaboration
was expanded to provide for research on additional targets for the design of
drugs for the treatment of obesity and eating disorders. In December 1996,
Ciba-Geigy and Sandoz Limited consolidated to form a new company, Novartis A.G.,
the pharmaceutical subsidiary of which is Novartis Pharma A.G. ("Novartis").
Novartis assumed Ciba-Geigy's rights and obligations relating to the
collaboration. The term of the collaboration will expire on August 4, 1998, but
may be further extended by mutual agreement of the parties. As part of the
agreements, Novartis is providing funding to the Company to support a specified
number of the Company's scientists who conduct research as part of the
collaboration. In return for this research support, the Company has granted
Novartis an exclusive world-wide license to use the Company's neuropeptide Y
technology to develop, manufacture and sell compounds that work through
neuropeptide Y receptor subtypes for the treatment of obesity and eating
disorders. Novartis is also required to provide the Company with milestone
payments and royalties on sales of any products resulting from the
collaboration.
During August 1994, Novartis made a $7,500,000 equity investment in the
Company. During December 1995, Novartis made an additional $2,000,000 equity
investment in the Company, bringing its aggregate ownership of outstanding
shares at December 31, 1996 to 9.1%.
During 1996, 1995 and 1994, the Company recognized approximately
$3,319,000, $4,234,000 and $1,304,000, respectively, in revenue under this
agreement.
At December 31, 1995, the Company had recorded approximately $821,000 in
deferred revenue representing advance funding for research to be performed in
the first quarter of 1996.
The DuPont Merck Pharmaceutical Company. In February 1996, the Company
and The DuPont Merck Pharmaceutical Company ("DuPont Merck") entered into an
agreement pursuant to which the Company granted DuPont Merck a nonexclusive
license to use certain of the Company's alpha adrenergic drug discovery systems
for the development of alpha adrenergic subtype-selective drugs. Under the terms
of the agreement, DuPont Merck will screen its chemical libraries for lead
compounds that may subsequently be optimized by DuPont Merck or Synaptic for
chosen therapeutic applications. The initial term of the license is two years.
As part of the agreement, DuPont Merck will provide the Company with
milestone payments and royalties on sales of any products resulting from the
collaboration for a period of time based upon the term of related patents. In
the event the Company optimizes and develops, independently or in collaboration
with other pharmaceutical companies, compounds identified in the collaboration,
it is required to pay DuPont Merck drug development milestones and royalties on
sales with respect to such drugs.
48
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
Note 4 -- Property and Equipment
Property and equipment consists of the following as of December 31, 1996
and 1995:
1996 1995
---------- ----------
Scientific equipment $2,960,011 $2,036,843
Furniture and fixtures 183,902 171,452
Office equipment 432,941 383,509
Leasehold improvements 1,224,850 1,168,550
Software 99,540 47,700
Equipment under capitalized leases 658,077 658,077
---------- ----------
5,559,321 4,466,131
Accumulated depreciation and amortization (2,895,192) (2,233,713)
---------- ----------
$2,664,129 $2,232,418
========== ==========
Note 5 -- Capital Leases
The Company and a bank are parties to a master lease agreement under
which $112,000 in securities in the Company's investment account, which is
maintained by the bank, was restricted as to use at December 31, 1996.
In connection with this master lease, the Company leased laboratory and
computer equipment with a cost basis of $658,077 under capital leases, the last
of which will expire on December 5, 1997. The effective interest rate on the
leases approximates 10.5%. The assets are being depreciated over the related
lease terms. At the end of each lease term, the Company can exercise a purchase
option to acquire the equipment under capital lease at a price equal to 10% of
the original cost of such equipment.
Minimum future lease payments under these capital leases as of December
31, 1996, are as follows:
Year ending December 31, 1997 $112,585
Less amount representing interest (6,113)
--------
Present value of minimum lease payments $106,472
========
Accumulated amortization on leased equipment as of December 31, 1996 and
1995 was $622,882 and $499,125, respectively.
49
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
Note 6 -- Stockholders' Equity
Common Stock. In December 1995, the Company completed an initial public
offering of 2,000,000 shares of its common stock. During January 1996, the
underwriters of the initial public offering exercised their over-allotment
option to purchase an additional 213,000 shares of common stock. As part of the
initial public offering, the then existing convertible redeemable preferred
stock automatically converted into 4,928,382 shares of common stock.
In connection with the sale of certain convertible redeemable preferred
stock which was converted into common stock upon completion of the Company's
initial public offering, the placement agents of certain convertible redeemable
preferred stock received warrants to purchase 192,458 shares of the Company's
common stock at an exercise price of $9.50 per share. During May 1996, 48,114 of
these warrants were exercised. At December 31, 1996, 144,344 shares of common
stock were reserved for issuance upon exercise of the remaining warrants which
have an expiration date of January 19, 1998.
Stockholders' Rights Plan. In November 1995, the Company's Board of
Directors approved the adoption of a stockholders' rights plan (the "Rights
Plan"). The Rights Plan provides for the distribution of one right (a "Right")
with respect to each share of outstanding common stock and any new issuances of
common stock. Upon completion of the initial public offering in December 1995,
the Board of Directors designated Series A Junior Participating Preferred Stock
and declared a dividend of one Right with respect to each share of common stock
outstanding. Each Right will become exercisable to purchase from the Company, at
an exercise price of $160.00, 1/1000th of a share of Series A Junior
Participating Preferred Stock or that number of shares of common stock having a
market value equal to two times the exercise price of the Right. The Rights
generally become exercisable for the Series A Junior Participating Preferred
Stock ten days following the announcement by any person or group of an intention
to make a tender offer or exchange offer, the consummation of which would cause
any person or group to become the owner of 15% or more of the outstanding common
stock, and generally become exercisable for common stock ten days following the
acquisition by any person or group of more than 15% of the outstanding common
stock. The Rights will expire in the year 2005. The Rights Plan may discourage
certain types of transactions involving an actual or potential change in control
of the Company.
Each 1/1000th of a share of Series A Junior Participating Preferred
Stock will have one vote. Each share of Series A Junior Participating Preferred
Stock will be entitled to a preferential quarterly dividend per share equal to
the larger of (i) an amount equal to any dividend declared on the common stock
and (ii) $.00025. Additionally, in the event of a liquidation, each 1/1000th of
a share of the Series A Junior Participating Preferred Stock would be entitled
to a preferential liquidation payment equal to $0.01 plus an amount equal to the
amount that would be distributed with respect to each share of common stock.
Preferred Stock. The Company is authorized to issue up to 1,000,000
shares of preferred stock, 200,000 of which is designated as Series A Junior
Participating and 800,000 of which is undesignated. The Board of Directors is
authorized to provide for the issuance of preferred stock in one or more classes
or series and to fix the number of shares constituting any such class or series,
and the voting powers, designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, including the dividend rights, dividend rate, terms of redemption,
redemption price or
50
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
prices, conversion rights and liquidation preferences of the shares constituting
any class or series, without any further vote or action by the shareholders of
the Company.
Note 7 -- Incentive/Stock Plans
The Company currently has three stock incentive plans; the 1996
Incentive Plan (the "1996 Plan"), the 1988 Amended and Restated Incentive Plan
(the "1988 Plan" and, together with the 1996 Plan, the "Incentive Plans") and
the 1996 Nonemployee Director Stock Option Plan (the "Director Plan").
The Company has elected to follow APB No. 25 in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement No.
123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, compensation expense is required to be
recognized when the exercise price of the Company's employee stock options is at
a price below the market price of the underlying stock on the date of grant.
Incentive Plans. The 1996 Plan and the 1988 Plan were adopted in October
1995 and June 1988, respectively. Under both plans, a committee of the Company's
Board of Directors (the "Committee") approves the sale of shares and the
granting of nonstatutory or incentive stock options. In addition, under the 1996
Plan, the committee may grant stock appreciation rights to employees and
consultants of the Company. The purchase price for shares and the exercise price
of options are determined by the Committee (although, the exercise price of
incentive stock options may be no less than the fair market value of the common
stock on the date of grant). The 1996 Plan replaced the 1988 Plan, effective as
of January 1, 1996, with respect to all future stock and option awards by the
Company to its employees and consultants.
In general, options granted under the Incentive Plans vest over a
four-year period. Unvested options are forfeited upon termination of the
employee or consulting relationship. Vested options, if not exercised within a
specified period of time following the termination of the employment or
consulting relationship, are also forfeited. Options generally expire 10 years
from the date of grant. Shares of common stock sold under the Incentive Plans
are also generally subject to vesting. Unvested shares of common stock which are
sold under the Incentive Plans may be repurchased by the Company, at its option,
at the original sale price upon termination of the employment or consulting
relationship of the holder with the Company. Options granted and shares sold to
employees under the Incentive Plans generally become fully vested upon the
occurrence of a change in control of the Company (as defined) if the holders
thereof are terminated in connection with such change in control other than for
cause (as defined). The maximum number of shares subject to the 1996 Plan is
1,100,000. At December 31, 1996, 681,738 shares remain available for future
awards under the 1996 Plan. As of December 31, 1996, no stock appreciation
rights had been awarded under the 1996 Plan.
Director Plan. The Director Plan was adopted by the Board of Directors
in March 1996 and approved by the stockholders in June 1996. In general, under
the Director Plan, each nonemployee director of the Company is automatically
granted an option on the date that he or she first becomes a member of the Board
of Directors. In addition, on June 1 of each year, commencing in 1997, each
nonemployee director is granted an additional option to purchase 2,500 shares of
common stock at an exercise price equal to the fair market
51
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
value on the date of grant. The maximum number of shares subject to the Director
Plan is 250,000. In general, options granted under the Director Plan become
exercisable as to 1/24th of the total number of shares subject to the option for
each calendar month elapsed after the date of the option grant. In the event of
a change in control of the Company (as defined) or the death or disability of
the optionee, any unvested portion of the options will become exercisable in
full. Options granted under the Director Plan will expire upon the earliest to
occur of the following: (a) the expiration of ten years from the date of grant
of the option, (b) one year after the optionee ceases to be a director of the
Company by reason of death or disability of the optionee, or (c) three months
after the date the optionee ceases to be a director of the Company for any
reason other than death or disability.
Option activities under the Incentive Plans and the Director Plan are
detailed in the following table:
Weighted
Average
1996 1988 Director Option Price
Plan Plan Plan Per Share
------- ------ ------ --------
Outstanding at January 1, 1994 -- 226,179 -- $ 1.76
Granted -- 105,066 -- $ 1.78
Exercised -- (225) -- $ 1.76
Forfeited -- (3,675) -- $ 1.76
------- ------ ------ ------
Outstanding at December 31, 1994 -- 327,345 -- $ 1.77
Granted -- 36,328 -- $ 2.00
Exercised -- (11,125) -- $ 1.76
Forfeited -- (12,773) -- $ 1.77
------- ------ ------ ------
Outstanding at December 31, 1995 -- 339,775 -- $ 1.79
Granted 443,762 -- 17,500 $13.24
Exercised (2,500) (45,626) -- $ 1.77
Forfeited (25,500) (2,638) -- $11.26
------- ------ ------ ------
Outstanding at December 31, 1996 415,762 291,511 17,500 $ 8.55
======= ======= ====== ======
Exercisable at December 31, 1996 8,375 189,549 5,034 $ 2.72
======= ======= ====== ======
Exercisable at December 31, 1995 -- 184,125 -- $ 1.76
======= ======= ====== ======
Exercisable at December 31, 1994 -- 149,555 -- $ 1.76
======= ======= ====== ======
52
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
At December 31, 1996, for each of the following classes of options as
determined by range of exercise price, the information regarding
weighted-average exercise prices and weighted-average remaining contractual
lives of each said class is as follows:
Weighted Weighted
Weighted Average Average
Average Remaining Exercise
Exercise Contractual Number Of Price of
Number Of Price of Life Of Options Options
Options Outstanding Outstanding Currently Currently
Option Class Outstanding Options Options Exercisable Exercisable
------------ ----------- ------- ------- ----------- -----------
Prices ranging
from
$1.76 - $2.00 307,011 $ 1.80 6.0 years 189,675 $ 1.77
Prices ranging
from
$10.125 - $13.00 236,262 $11.67 9.9 years -- --
Prices ranging
from 181,500 $16.57 9.3 years 13,283 $16.75
$16.50 - $16.75
The following table discloses for each of the years ending December 31,
1996 and 1995, the number of options granted net of same-year forfeitures, the
weighted-average fair values and the weighted-average exercise prices for those
options with exercise prices that equaled or were less than the market price of
the common stock on the date of grant. There were no options granted with an
exercise price above the market price of the common stock on the date of grant.
1996 1995
--------------------------- ---------------------------
Number Number
of Fair Exercise of Fair Exercise
Options Value Price Options Value Price
------- ----- ----- ------- ----- -----
Exercise price
equals market price 414,262 $ 5.75 $13.80 -- -- --
Exercise price less
than market price 20,500 $14.44 $ 3.34 35,678 $5.12 $1.97
During 1995 and 1994, the Company sold shares of common stock under the
1988 Plan totaling 8,810 and 14,305, respectively, at prices ranging from $1.76
to $2.00 per share. At December 31, 1996, 8,773 of the shares sold under the
1988 Plan remain subject to repurchase at an aggregate price of approximately
$16,000.
Other Disclosures. Pro forma information regarding net income and
earnings per share is required by SFAS No. 123, and has been determined as if
the Company had been accounting for its employee stock options under the fair
value method of SFAS No. 123. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions for 1996 and 1995, respectively: weighted average risk-free interest
rates of 6.34% and 6.50%; no dividends; volatility factors of the expected
market price of the Company's common stock of .352; and for both periods a
weighted-average expected life of the options of 5 years. Options granted in
1995 were issued prior to the initial public offering.
53
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1996 1995
---------- ----------
Pro forma net loss ($2,847,122) ($3,380,614)
Pro forma loss per share ($0.38) ($4.78)
The pro forma information above is not likely to be representative of
the effects on reported net loss for future years as options are generally
granted each year and vest over several years.
For certain options granted during 1996, the Company has recorded
pursuant to APB No. 25 approximately $388,000 of deferred compensation expense
representing the difference between the exercise price thereof and the market
value of the common stock as of the date of grant. This compensation expense is
amortized over the vesting period of each option granted. Amortization of
deferred compensation under the Incentive Plans amounted to approximately
$179,000 and $86,000 during 1996 and 1995, respectively. In addition,
approximately $121,000 of deferred compensation as it relates to the Incentive
Plans was reversed during 1996 due to the forfeiture of the unvested options.
Note 8 -- Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
At December 31, 1996 and 1995, the Company had net operating loss
carryforwards of approximately $21,000,000 and $19,000,000, respectively, for
Federal income tax purposes that will expire principally in the years 2002
through 2011. In addition, the Company had research and development credit
carryforwards which will expire principally in 2002 through 2009. For financial
reporting purposes, a valuation allowance has been recognized to offset the
deferred tax assets related to these carryforwards. Due to the limitations
imposed by the Tax Reform Act of 1986, and as a result of a significant change
in the Company's ownership in 1993, the utilization of approximately $6,000,000
of net operating loss carryforwards is subject to annual limitation. The
utilization of the research and development credits is similarly limited.
54
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
A reconciliation of the Company's income tax expense (benefit) at U.S.
federal statutory tax rates to recorded income tax expense (benefit) is as
follows:
1996 1995 1994
---------- ----------- -----------
Tax at U.S. statutory rates $ (895,000) $(1,145,000) $(1,879,000)
State income taxes (156,000) (200,000) (328,000)
Research and development credit -- -- (330,000)
Other 8,000 37,000 23,000
Valuation allowance recorded 1,043,000 1,308,000 2,514,000
---------- ----------- -----------
Recorded tax provision $ -- $ -- $ --
========== =========== ===========
Significant components of the Company's deferred tax assets as of
December 31, 1996 and 1995 are as follows:
1996 1995
------------ -----------
Deferred tax assets:
Net operating loss
carryforwards $ 8,579,000 $ 7,643,000
Research and development
credit carryforwards 1,500,000 1,500,000
Book over tax amortization 271,000 164,000
------------ -----------
Total deferred tax assets 10,350,000 9,307,000
Valuation allowance $(10,350,000) $(9,307,000)
------------ -----------
Net deferred tax assets -- --
============ ===========
Note 9 -- Commitments
The Company leases facilities under an agreement expiring on December
31, 1999.
Rent expense for the years ended December 31, 1996, 1995 and 1994
approximated $674,000, $654,000, and $544,000, respectively, and included
executory costs of $93,000, $80,000 and $66,000, respectively. In November,
1996, a standby letter of credit for $580,000 was issued to the landlord as a
security deposit (expires November, 1997). The Company is to renew the letter of
credit annually during the duration of the lease. As of December 31, 1996, a
bank imposed restriction has been placed on $600,000 in securities held in the
Company's investment account to secure the letter of credit.
55
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
As of December 31, 1996, future minimum annual payments under the lease
are as follows:
1997 $ 691,000
1998 691,000
1999 691,000
----------
$2,073,000
==========
The lease includes an escalation clause which provides for increased
payments tied to increases in the Consumer Price Index.
The Company is a party to two license agreements with major research
universities. Under the terms of the agreements, the Company received world-wide
non-exclusive licenses under patents issued in December 1980 and January 1991,
which patents expire in 1997 through 2008. One of these agreements requires a
$10,000 annual payment. The Company is also committed under these agreements to
pay royalties on future net sales of products employing the technology or
falling under claims of the patents covered by these agreements.
The Company has an employment agreement with its Chairman, President and
Chief Executive Officer which provides for severance payments of up to one year
of base salary upon the occurrence of certain events, including early
termination and termination upon a change in control, as defined. In addition to
severance payments, under certain circumstances, the agreement calls for
immediate vesting of any unvested shares of common stock and stock options.
At December 31, 1996, the Company had entered into agreements with each
of its Senior Vice President and Chief Financial Officer, Senior Vice President
for Research and Development, Vice President and General Counsel and Vice
President of Business Development which provide for severance payments in
amounts equal to 50% of annual base salary, on substantially the same terms as
stated above. In addition to severance, under certain circumstances, the
agreements call for immediate vesting of any unvested shares of common stock and
stock options.
At December 31, 1996, the Company had committed approximately $1,800,000
to provide for increased capacity in the Company's assay systems, certain
improvements in data base management and the construction and equipping of a
laboratory related to the expansion in the Lilly collaboration. During 1997, it
is likely that the Company will commit additional resources for the construction
and equipping of additional laboratory space.
Note 10 -- Employee Benefit Plans
The Company established a defined contribution employee retirement plan
(the "Plan") effective January 1, 1990, conforming to Section 401(k) of the
Internal Revenue Code ("IRC"). All eligible employees
56
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996
with six months service may elect to have a portion of their salary deducted and
contributed to the Plan up to the maximum allowable limitations of the IRC.
Effective January 1, 1996, the Company increased its matching contribution from
25% to 50% of each participant's contribution up to the first 5% of annual
compensation (as defined) with a maximum employer contribution of 2.5% of a
participant's compensation. The Company's matching portion, which amounted to
approximately $103,000, $42,300 and $40,400 for the years ended December 31,
1996, 1995 and 1994, respectively, vests over a six-year period.
The Company currently provides medical, dental, long-term disability and
life insurance benefits for its full-time employees. The Company does not
presently provide any post-retirement health benefits.
Note 11 -- Related Party Transactions
On June 14, 1994, an executive officer was advanced $400,000, evidenced
by a secured note bearing interest at an annual rate of 6.7%. The note,
including interest thereon, was repaid in full during December 1994.
57
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
58
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference
from the information under the captions "ELECTION OF DIRECTORS" and
"COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN
STOCKHOLDERS" contained in the Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
from the information under the caption "COMPENSATION AND OTHER INFORMATION
CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained in the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
from the information under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
from the information under the caption "COMPENSATION AND OTHER INFORMATION
CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained in the Proxy
Statement.
59
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
Reference is made to the Index to Financial Statements under Item 8, Part II
hereof.
(2) Financial Statement Schedules
The Financial Statement Schedules have been intentionally omitted either
because they are not required or because the information has been included in
the notes to the Financial Statements included in this Report on Form 10-K.
(3) Exhibits
Exhibit
No. Description
3.1(a) Amended and Restated Certificate of Incorporation of the
Company, filed December 19, 1995 (incorporated by reference to
Exhibit 3.1(a) to the Company's Quarterly Report on Form 10-Q
filed for the quarter ended June 30, 1996, Commission File
Number 0-27324)
3.1(b) Certificate of Designations of Series A Junior Participating
Preferred Stock filed December 19, 1995 (incorporated by
reference to Exhibit 3.1(b) to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended December 31, 1995,
Commission File Number 0-27324)
3.1(c) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company, filed June 5,
1996 (incorporated by reference to Exhibit 3.1(c) to the
Company's Quarterly Report on Form 10-Q filed for the quarter
ended June 30, 1996, Commission File Number 0-27324)
3.2 Amended and Restated By-Laws of the Company, as amended on
June 4, 1996 (incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q filed for the quarter
ended June 30, 1996, Commission File Number 0-27324)
4.1 Specimen of Certificate of Common Stock of the Company
(incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
60
<PAGE>
4.2 Rights Agreement dated as of December 11, 1995, between the
Company and Chase Mellon Shareholder Services, as Rights Agent
(incorporated by reference to Exhibit 4.2 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1995, Commission File Number 0-27324)
*10.1 Research, Option and License Agreement dated as of January 25,
1991, between the Company and Eli Lilly and Company, as
amended by Addendum dated as of January 1, 1995 (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
*10.2 Research Collaboration and License Agreement dated as of
November 30, 1993, between the Company and Merck & Co., Inc.,
as amended by Amendment No. 1 dated as of February 15, 1995,
and as modified by the Letter Agreement dated August 25, 1995
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
*10.3 Research and License Agreement dated as of August 4, 1994,
between the Company and Ciba-Geigy Limited
(predecessor-in-interest of Novartis A.G., the parent of
Novartis Pharma A.G.) (incorporated by reference to Exhibit
10.3 to the Company's Registration Statement on Form S-1, as
amended (File Number 33-98366), which became effective on
December 13, 1995)
**10.4 Collaborative Research Agreement dated as of February 5, 1996,
between the Company and The DuPont Merck Pharmaceutical
Company (incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1995, Commission File Number 0-27324)
+10.5 1988 Amended and Restated Incentive Plan of the Company
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S- 1, as amended (File Number
33-98366), which became effective on December 13, 1995)
+10.6 Form of Restricted Stock Purchase Agreement under the 1988
Amended and Restated Incentive Plan of the Company
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
+10.7 Form of Incentive Stock Option Agreement under the 1988
Amended and Restated Incentive Plan of the Company
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
+10.8 Form of Non-Qualified Stock Option Agreement under the 1988
Amended and Restated Incentive Plan of the Company
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
61
<PAGE>
10.9 Third Amended and Restated Registration Rights Agreement dated
as of January 19, 1993, as amended by Amendment No. 1 dated as
of August 4, 1994 (incorporated by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1, as
amended (File Number 33-98366), which became effective on
December 13, 1995)
10.10 Form of Common Stock Purchase Warrant dated as of January 1993
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
10.11 License Agreement dated June 3, 1991, between the Company and
the Trustees of Columbia University in the City of New York
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
10.12 License Agreement dated as of May 1, 1991, between the Company
and the Board of Trustees of the Leland Stanford Junior
University (incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1, as amended (File
Number 33-98366), which became effective on December 13, 1995)
10.13 Sublease Agreement dated October 31, 1991, between the Company
and Playtex, Inc., as amended by the First Sublease Amendment
effective as of August 15, 1994 (incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on Form
S-1, as amended (File Number 33-98366), which became effective
on December 13, 1995)
10.14 Equipment Lease dated as of October 31, 1991, between the
Company and UJB Leasing Corporation, as amended (incorporated
by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
+10.15 Executive Employment Agreement effective as of October 1,
1993, between the Company and Dr. Kathleen P. Mullinix
(incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
+10.16 Employment Agreement dated as of February 14, 1994, between
the Company and Robert I. Taber (incorporated by reference to
Exhibit 10.21 to the Company's Registration Statement on Form
S-1, as amended (File Number 33-98366), which became effective
on December 13, 1995)
+10.17 Employment Agreement dated as of January 1, 1994, between the
Company and Robert L. Spence (incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on Form
S-1, as amended (File Number 33-98366), which became effective
on December 13, 1995)
62
<PAGE>
+10.18 Employment Agreement dated as of February 7, 1994, between the
Company and Lisa L. Reiter (incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on Form
S-1, as amended (File Number 33-98366), which became effective
on December 13, 1995)
+10.19 Employment Agreement dated as of April 6, 1995, between the
Company and Richard L. Weinshank (incorporated by reference to
Exhibit 10.24 to the Company's Registration Statement on Form
S-1, as amended (File Number 33-98366), which became effective
on December 13, 1995)
10.20 Form of Indemnification Agreement between the Company and each
of its executive officers and directors (incorporated by
reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
+10.21 1996 Incentive Plan of the Company (incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K
filed for the fiscal year ended December 31, 1995, Commission
File No. 0-27324)
+10.22 Incentive Stock Option Agreement dated October 1, 1993,
between the Company and Kathleen P. Mullinix (incorporated by
reference to Exhibit 10.28 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
+10.23 Incentive Stock Option Agreement dated February 14, 1994,
between the Company and Robert I. Taber (incorporated by
reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
+10.24 Incentive Stock Option Agreement dated February 7, 1994,
between the Company and Lisa L. Reiter (incorporated by
reference to Exhibit 10.30 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
+10.25 Incentive Stock Option Agreement dated as of March 21, 1996,
between the Company and Kathleen P. Mullinix (incorporated by
reference to Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 1996,
Commission File Number 0-27324)
+10.26 Incentive Stock Option Agreement dated as of March 21, 1996,
between the Company and Robert L. Spence (incorporated by
reference to Exhibit 10.26 to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 1996,
Commission File Number 0-27324)
+10.27 Incentive Stock Option Agreement dated as of March 21, 1996,
between the Company and Lisa L. Reiter (incorporated by
reference to Exhibit 10.27 to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 1996,
Commission File Number 0-27324)
63
<PAGE>
+10.28 Nonqualified Stock Option Agreement dated as of March 21,
1996, between the Company and Richard L. Weinshank
(incorporated by reference to Exhibit 10.28 to the Company's
Quarterly Report on Form 10-Q filed for the quarter ended
March 31, 1996, Commission File Number 0-27324)
10.29 Form of Incentive Stock Option Agreement under the 1996
Incentive Plan (incorporated by reference to Exhibit 10.29 to
the Company's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 1996, Commission File Number 0-27324)
10.30 Form of Nonqualified Stock Option Agreement under the 1996
Incentive Plan (incorporated by reference to Exhibit 10.30 to
the Company's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 1996, Commission File Number 0-27324)
***10.31 Research and License Agreement dated as of May 31, 1996,
between the Company and Ciba-Geigy Limited
(predecessor-in-interest of Novartis A.G., parent of Novartis
Pharma A.G.) (incorporated by reference to Exhibit 10.31 to
the Company's Quarterly Report on Form 10-Q/A filed for the
quarter ended June 30, 1996, Commission File Number 0-27324)
***10.32 Supplement No. 1 to Research and License Agreement dated as of
August 4, 1994, between the Company and Ciba-Geigy Limited
(incorporated by reference to Exhibit 10.32 to the Company's
Quarterly Report on Form 10-Q/A filed for the quarter ended
June 30, 1996, Commission File Number 0-27324)
10.33 1996 Nonemployee Director Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.33 to the Company's
Quarterly Report on Form 10-Q filed for the quarter ended June
30, 1996, Commission File Number 0- 27324)
10.34 Form of Stock Option Agreement under the 1996 Nonemployee
Director Stock Option Plan of the Company (incorporated by
reference to Exhibit A attached to Exhibit 10.33 to the
Company's Quarterly Report on Form 10-Q filed for the quarter
ended June 30, 1996, Commission File Number 0-27324)
**10.35 Addendum No. 2 to Research, Option and License Agreement dated
as of October 31, 1996, between the Company and Eli Lilly and
Company (filed herewith)
**10.36 Amendment No. 2 to Research Collaboration and License
Agreement dated as of October 9, 1996, between the Company and
Merck & Co., Inc. (filed herewith)
+10.37 Incentive Stock Option Agreement dated as of December 13,
1996, between the Company and Kathleen P. Mullinix (filed
herewith)
+10.38 Form of Incentive Stock Option Agreement dated as of December
13, 1996, entered into between the Company and each of Robert
L. Spence, Robert I. Taber, Lisa L. Reiter and Richard L.
Weinshank (filed herewith)
64
<PAGE>
11 Statement Regarding Computation of Per Share Earnings (Loss)
23.1 Consent of Independent Auditors, Ernst & Young LLP
24 Powers of Attorney
27 Financial Data Schedule
* Portions of this Exhibit were omitted and confidential treatment thereof
has been granted by the Secretary of the Securities and Exchange
Commission in response to the Registrant's Application Requesting
Confidential Treatment under Rule 406 under the Securities Act of 1933, as
amended.
** Portions of this Exhibit have been omitted and filed separately with the
Secretary of the Securities and Exchange Commission pursuant to the
Registrant's Application Requesting Confidential Treatment under Rule
24b-2 under the Securities Exchange Act of 1934, as amended.
*** Portions of this Exhibit were omitted and confidential treatment thereof
has been granted by the Secretary of the Securities and Exchange
Commission in response to the Registrant's Application Requesting
Confidential Treatment under Rule 246-2 under the Securities Act of 1933,
as amended.
+ Management contracts and compensatory plans or arrangements
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1996.
Supplemental Information
Copies of the Registrant's Proxy Statement and copies of the form of proxy
to be used at the Annual Meeting of Stockholders to be held on May 15, 1997,
will be furnished to the Securities and Exchange Commission at the time they are
distributed to the Registrant's stockholders.
65
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNAPTIC PHARMACEUTICAL CORPORATION
Date: March 21, 1997 By:/s/ Kathleen P. Mullinix
-----------------------------------
Name: Kathleen P. Mullinix
Title: Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature Title Date
/s/ Kathleen P. Mullinix, Ph.D. Chairman, President and
Chief Executive Officer March 21, 1997
- -------------------------------
Kathleen P. Mullinix
/s/ Robert L. Spence Senior Vice President and
- ------------------------------- Chief Financial Officer March 21, 1997
Robert L. Spence
* Director March 21, 1997
- -------------------------------
Jonathan J. Fleming
* Director March 21, 1997
- -------------------------------
Zola P. Horovitz, Ph.D.
* Director March 21, 1997
- -------------------------------
Eric R. Kandel, M.D.
* Director March 21, 1997
- -------------------------------
John E. Lyons
* Director March 21, 1997
- -------------------------------
Sandra Panem
* Director March 21, 1997
- -------------------------------
Alison Taunton-Rigby, Ph.D.
* Director March 21, 1997
- -------------------------------
Robert Walkingshaw
* By:/s/ Kathleen P. Mullinix
-----------------------------------
Name: Kathleen P. Mullinix, Ph.D.
Title: Attorney-in-Fact
66
<PAGE>
EXHIBIT 10.35
ADDENDUM NO. 2 TO
RESEARCH, OPTION AND LICENSE AGREEMENT
This Addendum No. 2, effective as of October 31, 1996 (the "Addendum
Effective Date"), between ELI LILLY AND COMPANY, a corporation organized under
the laws of the State of Indiana, having its principal place of business at
Lilly Corporate Center, Indianapolis, Indiana 46285, and its Affiliates
(hereinafter collectively called "LILLY"),
AND
SYNAPTIC PHARMACEUTICAL CORPORATION (formerly known as Neurogenetic
Corporation), a corporation organized under the laws of the State of Delaware,
having its principal place of business at 215 College Road, Paramus, New Jersey
07652, and its Affiliates (hereinafter collectively called "SYNAPTIC").
Recitals
1. LILLY and SYNAPTIC are parties to a Research, Option and License
Agreement dated as of January 25, 1991(the "Original Agreement"), as amended by
the Addendum to Research, Option and License Agreement, effective as of January
1, 1995 ("Addendum No. 1"; and, together with the Original Agreement, the
"Current Agreement"), pursuant to which they have collaborated in a research
effort directed at certain serotonin (5-hydroxytryptamine or 5-HT) receptors and
5-HT- related disorders. Capitalized terms used and not defined in this Addendum
No. 2 have the meanings ascribed to them in the Current Agreement.
[*** CONFIDENTIAL TREATMENT REQUESTED]
1
<PAGE>
2. The Current Agreement requires SYNAPTIC to devote to the Project,
and LILLY to provide financial support to SYNAPTIC for, a minimum of [***]
Scientific Man Years. The parties desire to, among other things, increase the
minimum level of effort required of SYNAPTIC, as well as the minimum level of
financial support required of LILLY, subject to the terms and conditions set
forth below, including the modification of certain terms and conditions
contained in the Current Agreement.
3. In addition, the parties desire to modify their economic arrangement
with respect to certain compounds, on the terms and conditions set forth below,
including the modification of certain terms and conditions contained in the
Current Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter recited, the parties agree as follows:
Section 1. Definitions.
(a) Modification of Definition. The definition of "Project" contained
in Section 1.05 of the Current Agreement is hereby amended to read in its
entirety as follows:
'"Project" means (i) with respect to the period beginning on
January 25, 1991, and ending on December 31, 1994, the research and
development program conducted by SYNAPTIC in the Field in collaboration
with LILLY during such period and (ii) with respect to the period
beginning on January 1, 1995, the continuation of such program;
provided, however, that from and after January 1, 1995, such program
shall be limited to the continued provision by SYNAPTIC to LILLY of
support in [***]all in accordance with Sections 2.00, 2.01 and 5.00 and
to the extent that LILLY's license shall not have terminated pursuant
to Section 6.02; provided further, however, that such program may be
expanded to include SYNAPTIC chemistry resources as contemplated by
Section 7.00.'
[*** CONFIDENTIAL TREATMENT REQUESTED]
2
<PAGE>
(b) Addition of New Defined Terms. There is hereby added immediately
following Section 1.19 of the Current Agreement the following new subsections:
"Section 1.20. "5-HT4 Receptor" means any 5-HT4 receptor that is disclosed in
U.S. Letters Patent No. 5,472,866 entitled "DNA Encoding 5-HT4a Receptors" and
PCT International Application entitled "DNA Encoding 5-HT4 Serotonin Receptors
and Uses Thereof," published as WO 94/14957.
Section 1.21. "Library Compound" means any Existing Lilly
Compound or New Compound included within a Lilly Library.
Section 1.22. "Lilly Library" means any compound library which
(i) Lilly, or an Affiliate thereof, owns or otherwise has access to and
(ii) is subject to high volume screening in assays using Existing
Synaptic Technology, Project Technology and/or 5-HT4 Receptors at
Lilly's Affiliate, Sphinx Pharmaceuticals, or at other mutually agreed
sites."
Section 2. Staffing, Planning and Execution of Project.
(a) SYNAPTIC Effort on Project. LILLY hereby acknowledges its
satisfaction to date with the performance by SYNAPTIC of its
obligations with respect to the Project under Section 2.00 of the
Current Agreement.
Section 2.00 of the Current Agreement is hereby amended by deleting the
first two sentences thereof in their entirety and by inserting in lieu thereof
the following:
"From January 1, 1995, through December 31, 1996, SYNAPTIC
shall devote a minimum of [***] Scientific Man Years per year to the
Project. From and after January 1, 1997, during the term of the
Project, SYNAPTIC shall devote a minimum of [***] Scientific Man Years
per year to the Project, at least [***] of which shall be provided by
scientists with Ph.D. degrees."
Section 3. Funding of the Project.
(a) Duration and Amount of Funding. Section 3.00 of the Current
Agreement is herebyamended to read in its entirety as follows:
[*** CONFIDENTIAL TREATMENT REQUESTED]
3
<PAGE>
"Section 3.00. Duration and Amount of Funding. LILLY has
provided SYNAPTIC with financial support over the period from January
1, 1991, to October 31, 1996. LILLY shall provide SYNAPTIC with further
financial support for the Project for the period from October 31, 1996,
through December 31, 1998. SYNAPTIC shall use the funds supplied by
LILLY solely for purposes of the Project. During the period from
January 1, 1995, through December 31, 1996, the financial support
provided to SYNAPTIC by LILLY shall be [***] per Scientific Man Year
for [***] Scientific Man Years per year, and during the period from
January 1, 1997, through December 31, 1998, the financial support
provided to SYNAPTIC by LILLY shall be [***] per Scientific Man Year
for [***] Scientific Man Years per year; provided, however, that as of
January 1 of each year following 1995 the amount of funding per
Scientific Man Year shall be increased by the percentage increase in
the Bureau of Labor Statistics Consumer Price Index for Urban Consumers
- New York, N.E. New Jersey Metropolitan Region Price Index during the
one-year period ending on the immediately preceding October 1. The
amount per Scientific Man Year shall be the total amount paid to
SYNAPTIC by LILLY for SYNAPTIC's effort on the Project, with SYNAPTIC
being responsible for all wages, supplies, facilities, utilities and
all other expenses in connection with the performance by it of its
services for the Project."
Section 4. Commercial Rights.
(a) Exclusive Licenses to LILLY. Section 5.00(2) of the Current
Agreement is hereby amended by deleting the period at the end thereof and by
inserting in lieu thereof the following:
"; and"
(b) Nonexclusive Licenses to LILLY. There is hereby added immediately
following Section 5.00(2) of the Current Agreement, as amended by Section 4(a)
above, the following new Section 5.00(3):
"(3) grants to LILLY a nonexclusive, worldwide, noncancellable right
and license to use and have used, for the sole purpose of testing
compounds, (i) Existing Synaptic Technology, Project Technology and the
5-HT4 Receptors, the cDNA encoding such receptors, the cell lines
expressing such receptors and, to the extent related to such receptors,
binding assays and functional assays and (ii) all SYNAPTIC patent
rights which would be infringed by LILLY's exercise of the right and
license referred to in the foregoing clause (i); provided,
[*** CONFIDENTIAL TREATMENT REQUESTED]
4
<PAGE>
however, that such right and license does not extend to the use of
either of the aforementioned Technologies or the 5-HT4 Receptors and
the aforementioned related
[*** CONFIDENTIAL TREATMENT REQUESTED]
5
<PAGE>
materials and technology for the purpose of the screening,
identification, selection and/or development of any compound the
mechanism of action of which involves a 5-HT4 Receptor and does not
involve a Project Receptor."
Section 5. Commercial Terms.
Under Section 6.00 of the Current Agreement, Lilly is required to pay
Synaptic a running royalty of [***] of the Net Sales of each Product comprising
any Existing Lilly Compound or New Compound, respectively, and to make certain
milestone payments to Synaptic for each such Compound, subject to the other
terms and conditions contained in the Agreement. Lilly and Synaptic desire to
make certain modifications to their economic arrangement with respect to certain
Existing Lilly Compounds and New Compounds. Accordingly, there is hereby added
to the Current Agreement the following new Section 6.00A:
"Section 6.00A. Payments by LILLY with respect to Certain Compounds.
With respect to any Product comprising an Existing Lilly Compound or a
New Compound that is, or is derived from information concerning, a
Library Compound, the provisions of Section 6.00 shall apply, except in
the case of any of the following:
(a) [***] If such Existing Lilly Compound or New Compound [***], then LILLY
shall not be required to pay SYNAPTIC any royalties or milestones with respect
thereto; provided, however, that if such Compound is [***], then LILLY shall be
required to -------- ------- pay SYNAPTIC (A) a running royalty of [***] of the
Net Sales of each product comprising such [***] Compound and (B) the same
milestone payments with respect to such [***] Compound that LILLY would be
required to pay SYNAPTIC with respect to any Lilly Compound under Section 6.00
of this Agreement. In the event that royalties are payable by LILLY to SYNAPTIC
pursuant to this Section 6.00A(a), the provisions regarding the computation and
term of royalties, the payment thereof and records and taxes with respect
thereto contained in this Agreement shall apply to such royalties to the same
extent that such provisions apply to royalties payable under Section 6.00 of
this Agreement. LILLY shall not later than December 1, 1996, develop and
implement a procedure by which it may from time to time be readily determined
whether any Existing Lilly Compound or New Compound is a [***] Compound. Such
procedure shall be
[*** CONFIDENTIAL TREATMENT REQUESTED]
6
<PAGE>
described in writing to SYNAPTIC prior to such date and shall be
reasonably satisfactory to it. For purposes of this Section 6.00A(a),
the term [***].
(b) [***] If such Existing Lilly Compound or New Compound [***],
then LILLY shall not be required to pay SYNAPTIC any royalties
or milestones with respect thereto.
For purposes of this Section 6.00A, an Existing Lilly Compound
or a New Compound [***].
The provisions of this Section 6.00A shall not affect in any
way any obligation of LILLY that arose before March 1, 1996, to pay to
SYNAPTIC royalties or milestone payments with respect to Products,
Existing Lilly Compounds or New Compounds."
Section 6. Term and Termination. The parties agree that Lilly's right
under Section 9.02 of the Current Agreement to terminate the Project at any time
after December 31, 1995, upon six (6) months advance written notice to SYNAPTIC
is hereby extinguished. Accordingly, the text of Section 9.02 is hereby deleted
in its entirety and the following is hereby inserted in lieu thereof:
"[Intentionally Omitted]"
Section 7. Counterparts. This Addendum may be executed in two counterparts,
each of which shall be an original instrument, but both of which together shall
constitute one agreement. Section 8. Effect of Addendum. From and after the
Addendum Effective Date, all references in the Current Agreement, as amended or
supplemented by this Addendum, to "this
[*** CONFIDENTIAL TREATMENT REQUESTED]
7
<PAGE>
Agreement," "hereunder," "hereof," "herein," or words of similar import, shall
be a reference to the Current Agreement, as so amended or supplemented. Except
as expressly amended or supplemented by this Addendum, the Current Agreement
shall remain in full force and effect and unchanged.
[*** CONFIDENTIAL TREATMENT REQUESTED]
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Addendum to be
executed and delivered as of the Addendum Effective Date by their proper and
duly authorized representatives.
SYNAPTIC PHARMACEUTICAL CORPORATION
By: /s/ Kathleen P. Mullinix
-----------------------------------
Name: Kathleen P. Mullinix
Title: Chairman, President
and Chief Executive Officer
ELI LILLY AND COMPANY
By: /s/
------------------------------------
Name:
Title:
[*** CONFIDENTIAL TREATMENT REQUESTED]
9
<PAGE>
EXHIBIT 10.36
AMENDMENT NO. 2 AND SUPPLEMENT TO
RESEARCH COLLABORATION AND LICENSE AGREEMENT
Amendment No. 2
and Supplement dated and
effective as of October 9,
1996, between SYNAPTIC
PHARMACEUTICAL CORPORATION,
a Delaware corporation
("SYNAPTIC"), and MERCK &
CO., INC., a New Jersey
corporation ("MERCK").
Recitals
1. SYNAPTIC and MERCK are parties to a Research Collaboration and
License Agreement dated as of November 30, 1993, as amended by Amendment
No. 1 dated and effective as of February 15, 1995 (the "Agreement").
Capitalized terms used and not defined in this Amendment No. 2 and
Supplement shall have the meanings ascribed to them in the Agreement.
2. Pursuant to Section 2.1 of the Agreement, the parties have since
November 30, 1993, engaged in a RESEARCH PROGRAM in order to identify and
develop COMPOUNDS useful for the treatment of BPH.
3. The original term of the RESEARCH PROGRAM expires on November 30,
1996 (the "Current Expiration Date"), but is subject to continuation on a yearly
basis upon the agreement of the parties.
4. [***] the parties have determined that it is in their mutual best
interests to continue to work together [***] and have thus agreed to extend the
term of the RESEARCH PROGRAM beyond the Current Expiration Date.
Accordingly, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties agree as follows:
[*** CONFIDENTIAL TREATMENT REQUESTED]
1
<PAGE>
Section 1. Extension of Term of Research Collaboration.
(a) Section 2.1 of the Agreement is hereby amended by deleting from the
last sentence thereof "on a yearly basis if" and by inserting in lieu thereof
"for such period and on such other terms as may be".
(b) The term of the RESEARCH PROGRAM is hereby extended beyond the
Current Expiration Date for the period (the "Extension Period") commencing on
December 1, 1996, and ending on November 30, 1997 (the "New Expiration Date").
Such term may be further extended upon the agreement of the parties; provided,
however, that any such further extension shall be on terms acceptable to both
parties and each party shall notify the other party at least 90 days prior to
the New Expiration Date that it is interested in a further extension of the
Research Program.
Section 2. SYNAPTIC Effort.
(a) Beginning on December 1, 1996, SYNAPTIC shall dedicate [***] man
years to the RESEARCH PROGRAM at a cost per man year of [***]. [***].
(b) Upon written notification by MERCK to SYNAPTIC that [***] and upon
the written request of MERCK, SYNAPTIC's [***] effort in the RESEARCH PROGRAM,
as described in paragraph (a) of this Section 2, shall be reduced during the
three-month period following such request by up to [***] man years (as specified
in such request and determined on an annualized basis) and shall be further
reduced following such three-month period to the extent determined by the Joint
Research Team.
(c) SYNAPTIC's [***] effort in the RESEARCH PROGRAM, as described in
paragraph (a) of this Section 2, shall continue throughout the Extension Period
and terminate on the New Expiration Date.
(d) Notwithstanding anything contained herein to the contrary, MERCK
may terminate the RESEARCH PROGRAM at any time prior to the New Expiration Date
if it determines to terminate MERCK's efforts to identify and develop COMPOUNDS
useful for the treatment of BPH in their entirety and notifies SYNAPTIC in
writing of such determination.
Section 3. Research Payments. In consideration of the research
performed in regard to COMPOUND(S) and PRODUCT, MERCK shall pay SYNAPTIC, within
30 days following the end of each three-month period of the Extension Period
(or, if the RESEARCH PROGRAM is terminated pursuant to Section 2(d) above,
within 30 days following the end of the period beginning on the first day
following the last full three-month period and ending on the effective date of
such termination), an amount equal to (a) the number of man years devoted to the
RESEARCH PROGRAM during each three-month period (or such shorter period) by
members of SYNAPTIC's
[*** CONFIDENTIAL TREATMENT REQUESTED]
2
<PAGE>
[***] departments (such man years to be determined for the period on an
annualized basis), multiplied by (b) the product of (i) [***] and (ii) a
fraction the numerator of which is the number of days in such period and the
denominator of which is 365.
Upon any termination of the RESEARCH PROGRAM pursuant to Section 2(d)
above, no sums shall be payable by MERCK under this Section 3 except for amounts
due or earned but not yet paid as of the effective date of such termination. The
foregoing amounts are in addition to the amounts that Merck has paid or is
required to pay pursuant to Article 8 of the Agreement.
Section 4. Effect of Amendment and Supplement.
(a) From and after the date first written above, all references in the
Agreement to "this AGREEMENT," "hereunder," "hereof," "hereof," "herein," or
words of similar import, shall be a reference to the Agreement, as amended by
this Amendment No. 2 and Supplement.
(b) From and after the date first written above, all references in the
Agreement to "the RESEARCH PROGRAM" shall be a reference to the RESEARCH PROGRAM
conducted during the period beginning on November 30, 1993, and ending on the
New Expiration Date in accordance with the Agreement, as amended and
supplemented by this Amendment No. 2 and Supplement, or such earlier date as may
be specified in a notification from MERCK to SYNAPTIC in accordance with Section
2(d) above.
(c) Except as expressly amended and supplemented by this Amendment
No. 2 and Supplement, the Agreement shall remain in full force and effect
and unchanged.
[*** CONFIDENTIAL TREATMENT REQUESTED]
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 and
Supplement to be executed and delivered as of the date first written above.
SYNAPTIC PHARMACEUTICAL CORPORATION
By: /s/ Kathleen P. Mullinix
---------------------------
Name: Kathleen P. Mullinix
Title: Chairman, President and
Chief Executive Officer
MERCK & CO., INC.
By: /s/
Name:
Title:
[*** CONFIDENTIAL TREATMENT REQUESTED]
4
<PAGE>
EXHIBIT 10.37
NONTRANSFERABLE
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of the 13th day of December, 1996, is
by and between SYNAPTIC PHARMACEUTICAL CORPORATION, a Delaware corporation (the
"Company"), and Kathleen P. Mullinix (the "Optionee," which term as used herein
shall be deemed to include any successor to the Optionee by will or by the laws
of descent and distribution, unless the context shall otherwise require).
W I T N E S S E T H:
WHEREAS, the Company and the Optionee are parties to an
Employment Agreement (the "Employment Agreement") dated as of October 1, 1993;
and
WHEREAS, pursuant to the Synaptic Pharmaceutical Corporation
1996 Incentive Plan (the "Plan"), the Company, acting through the Compensation
Committee (the "Committee") of its Board of Directors (the "Board"), on December
13, 1996 (the "Start Date"), granted to the Optionee an option to purchase up to
an aggregate of 25,000 shares of Common Stock, $0.01 par value, of the Company
(the "Common Stock"), at the price of $12.00 per share, such option to be for
the term and upon the terms and conditions hereinafter stated.
NOW, THEREFORE, in consideration of the mutual premises and
undertakings hereinafter set forth, the parties hereto agree as follows:
1. Option; Option Price. Pursuant to said action of the
Committee, the Company has granted to the Optionee the option (the "Option") to
purchase, upon and subject to the terms and conditions of this Agreement and the
terms and conditions of the Plan (which are hereby incorporated by reference
herein), 25,000 shares (the "Option Shares") of Common Stock of the Company at
the price of $12.00 per share (the "Option Price"), which Option is intended to
qualify for Federal income tax purposes as an "incentive stock option" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Term. The term (the "Option Term") of the Option shall commence on the
Start Date and expire on the tenth anniversary of the Start Date, unless the
Option shall theretofore have been terminated in accordance with the terms
hereof or of the Plan.
3. Exercisability; Time of Exercise.
(a) General. Unless accelerated in the discretion of the
Committee or as otherwise provided herein, the Option shall become exercisable
as to 25% of the Option Shares on January 1 of each of 1998, 1999, 2000, and
2001; provided, however, that in the event of the termination of
-1-
<PAGE>
the Optionee's employment (i) as a result of her death or legal or other
incapacity pursuant to Section 3.1.1 or 3.1.2 of the Employment Agreement, (ii)
by the Company pursuant to Section 3.1.4 of the Employment Agreement or (iii)
after a change in control as contemplated by Section 4.3 of the Employment
Agreement, at any time prior to January 1, 2001, then the Option shall as of the
date of such termination become exercisable as to all of the Option Shares;
provided further, however, that in the event the Optionee retires with the
consent of the Company any time prior to January 1, 2001, then the Option shall
be exercisable as to that number of Option Shares which is equal to the product
of (i) the total number of Option Shares and (ii) 2-1/12% times the number of
full calendar months which shall have elapsed during the period commencing on
January 1, 1997, and ending on the date of the Optionee's retirement. The Option
shall remain exercisable as to all of such shares until the expiration of the
Option Term, unless it is terminated earlier as provided in any of the other
paragraphs of this Section 3 or Section 6 or as provided in the Plan.
(b) Termination for Cause. If the Optionee shall cease to be
an employee of the Company as a result of a termination by the Company for cause
(as hereinafter defined), the Option shall automatically terminate on, and the
Optionee shall have no further right to exercise the Option on or after, the
date as of which notice of such termination is given to the Optionee by the
Company. For purposes of this Agreement, the term "cause" shall have the meaning
ascribed thereto in Section 3.1.3 of the Employment Agreement.
(c) Termination without Cause. If the Optionee's employment
with the Company terminates for any reason other than cause or the Optionee's
death or Disability or Retirement (as defined in the Plan), the Option shall
thereafter be exercisable only to the extent of the purchase rights, if any,
which shall have accrued pursuant to paragraph (a) of this Section 3 as of the
date of such termination, and the Option and such accrued rights to purchase
shall in any event terminate upon, and the Optionee shall have no further right
to exercise the Option after, (i) in the case of any such termination pursuant
to Section 3.1.1, 3.1.2, 3.1.4 or 4.3 of the Employment Agreement, the earlier
of (A) the expiration of the Option Term and (B) 120 days after the date of such
termination; provided, however, that, in the case of any such termination other
than a termination resulting from the Optionee being "disabled" within the
meaning of Section 22(e)(3) of the Code, the Option shall no longer be treated
as an "incentive stock option" within the meaning of Section 422 of the Code
unless exercised within three (3) months following the date of such termination,
and (ii) in the case of any such termination not described in the foregoing
clause (i), the earlier of (A) the expiration of the Option Term and (B) 90 days
after the date of such termination.
(d) Termination as a Result of Disability or Retirement. If
the Optionee's employment with the Company terminates as a result of the
Optionee's Disability or Retirement, the Option shall thereafter be exercisable
only to the extent of the purchase rights, if any, which shall have accrued
pursuant to paragraph (a) of this Section 3 as of the date of such termination,
and the Option and such accrued rights to purchase shall in any event terminate
upon, and the Optionee shall have no further right to exercise the Option after,
the earlier of (i) the expiration of the Option Term and (ii) 180 days after the
date of such termination; provided, however, that, in the case of any such
termination other than a termination resulting from the Optionee being
"disabled" within the
-2-
<PAGE>
meaning of Section 22(e)(3) of the Code, the Option shall no longer be treated
as an "incentive stock option" within the meaning of Section 422 of the Code
unless exercised within three (3) months following the date of such termination
(e) Termination as a Result of Death. If the Optionee's
employment with the Company terminates as a result of the Optionee's death, the
Option shall thereafter be exercisable by the Optionee's Designated Beneficiary
(as defined in the Plan) or personal representatives, heirs or legatees (as
provided in the Plan), but only to the extent of the purchase rights, if any,
which shall have accrued pursuant to paragraph (a) of this Section 3 as of the
date of such termination, and the Option and such accrued rights to purchase
shall in any event terminate upon, and the Optionee shall have no further right
to exercise the Option after, the earlier of (i) the expiration of the Option
Term and (ii) one (1) year after the date of death. Notwithstanding anything
contained in the Plan to the contrary, the Option shall continue to be treated
as an "incentive stock option" within the meaning of Section 422 of the Code
even if it is not exercised until after the third month following the date of
the Optionee's death.
(f) Death Following Disability or Retirement. In the event of
the Optionee's death within 180 days following the Optionee's termination of
employment as a result of the Optionee's Disability or Retirement, the Option
shall thereafter be exercisable by the Optionee's Designated Beneficiary or
personal representatives, heirs or legatees, to the extent of the purchase
rights, if any, which shall have accrued pursuant to paragraph (a) of this
Section 3 as of the date of such termination, for a period of one (1) year
following the date of death but in no event later than the expiration of the
Option Term; provided, however, that, in the case in which the Optionee's
termination of employment resulted from the Optionee being "disabled" within the
meaning of Section 22(e)(3) of the Code, the Option shall no longer be treated
as an "incentive stock option" within the meaning of Section 422 of the Code
unless exercised within one (1) year following the date of such termination; and
provided further, however, that, in all other cases, the Option shall no longer
be treated as an "incentive stock option" within the meaning of Section 422 of
the Code unless exercised within three (3) months following the date of such
termination.
4. Procedure for Exercise. (a) The Option may be exercised, from time to
time, in whole or in part (but for the purchase of whole shares only), by
delivery of a written notice (the "Notice") from the Optionee to the Secretary
of the Company, which Notice shall:
(i) state that the Optionee elects to exercise the Option;
(ii) state the number of shares with respect to which the Optionee is
exercising the Option (the "Acquired Shares");
(iii) include any representations of the Optionee required under Section
7(b) hereof;
-3-
<PAGE>
(iv) state the method of payment for the Acquired Shares pursuant to
Section 4(b);
(v) in the event that the Option shall be exercised
by any person other than the Optionee pursuant to Sections 3
and 8, include appropriate proof of the right of such person
to exercise the Option; and
(vi) state the date upon which the Optionee desires
to consummate the purchase of the Acquired Shares (which date
must be prior to the termination of such Option).
(b) Payment of the Option Price for the Acquired Shares shall,
unless otherwise provided by the Committee, be made in cash or by personal or
certified check.
5. No Rights as a Stockholder. The Optionee shall not have any
privileges of a stockholder with respect to any Option Shares until the date of
a stock certificate representing such Option Shares is issued to the Optionee.
6. Adjustments.
(a) Stock Dividends, Splits, Subdivisions or Combinations.
Subject to the other provisions of this Section 6, if, at any time while the
Option is outstanding, the Common Stock is changed by reason of dividends
payable in Common Stock or splits, subdivisions or combinations of shares of
Common Stock, then the number of shares of Common Stock deliverable upon the
exercise thereafter of the Option shall be increased or decreased
proportionately, as the case may be, without change in the aggregate Option
Price.
(b) Cash Mergers. Upon the occurrence of a merger on
consolidation of the Company with another corporation in a transaction in which
the stockholders of the Company receive cash consideration in exchange for their
shares of capital stock of the Company (a "cash merger"), the Option shall
automatically terminate; provided, however, that the Optionee shall be given (i)
written notice of such cash merger at least 20 days prior to its proposed
effective date (as specified in such notice) and (ii) an opportunity, during the
period commencing with delivery of such notice and ending ten (10) days prior to
such proposed effective date, to exercise the Option in full as to all of the
Option Shares, whether or not then vested.
(c) Assumption or Substitution of Options. Notwithstanding
anything contained herein or in the Plan to the contrary, Section 6(b) shall not
be applicable if provision shall be made in connection with such cash merger for
the assumption of the Option by, or the substitution for the Option of a new
option covering the stock of, the surviving, successor or purchasing
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number, kind and option price of shares subject to such option; provided,
however, that the Board shall, to the extent not inconsistent with the best
interests of the Company or its subsidiaries (such best interests to be
-4-
<PAGE>
determined in good faith by the Board, in its sole discretion), use its best
efforts to ensure that any such assumption or substitution will not constitute a
modification, extension or renewal of the Option within the meaning of Section
424(h) of the Code and the regulations thereunder.
(d) Corporate Transactions. Notwithstanding anything contained
herein or in the Plan to the contrary, upon the occurrence of (i) a merger or
consolidation of the Company with another corporation in a transaction (other
than a cash merger) in which the Company shall not survive or in which the
Company is the survivor but its capital stock is exchanged for stock,
securities, or property of another entity or (ii) a sale of all or substantially
all of the assets of the Company (any transaction described in clause (i) or
(ii) being referred to herein as a "corporate transaction"), provision shall be
made in connection with such corporate transaction for the assumption of the
Option by, or the substitution for the Option of a new option covering the stock
of, the surviving, successor or purchasing corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number, kind and
option price of shares subject to such option; provided, however, that the Board
shall, to the extent not inconsistent with the best interests of the Company or
its subsidiaries (such best interests to be determined in good faith by the
Board, in its sole discretion), use its best efforts to ensure that any such
assumption or substitution will not constitute a modification, extension or
renewal of the Option within the meaning of Section 424(h) of the Code and the
regulations thereunder.
(e) Termination within One Year of Cash Merger or Corporate
Transaction. Notwithstanding anything contained herein or in the Plan to the
contrary, in the event the Optionee's employment with the Company or the person
which is the surviving, successor or purchasing corporation in a cash merger to
which Section 6(c) applies or a corporate transaction to which Section 6(d)
applies, or a parent or subsidiary thereof, is terminated without cause (as
defined in Section 3(b)) and other than as a result of the Optionee's death or
disability, at any time prior to the first anniversary of such transaction or
merger, the Option shall become exercisable in full as to all Option Shares,
whether or not vested, as of the date on which notice of termination is given to
the Optionee, and the Optionee shall have the right to exercise the Option as to
any or all of such shares until the earlier of (i) the expiration of the Option
Term and (ii) the 90th day following the date of such termination, at which time
the Option shall terminate.
7. Additional Provisions Related to Exercise. (a) The
Option shall be exercisable only on such date or dates and during such period
and for such number of shares of Common Stock as are set forth in this
Agreement.
(b) To exercise the Option, the Optionee shall follow the
procedures set forth in Section 4 hereof. Upon the exercise of the Option at a
time when there is not in effect a registration statement under the Securities
Act of 1933, as amended, relating to the shares of Common Stock issuable upon
exercise of the Option, the Optionee shall provide the Company with such
representations and warranties as may be required by the Committee to the effect
that the Acquired Shares are being acquired for investment and not with a view
to the distribution thereof. Anything contained herein to the contrary
notwithstanding, in the event the Board shall determine, in its sole
-5-
<PAGE>
and subjective discretion, that the registration, qualification or listing of
the Option Shares upon a securities exchange or under any state or Federal law,
or the consent or approval or any government or regulatory body, is necessary or
desirable as a condition of or in connection with the exercise of the Option,
the Option may not be exercised, in whole or in part, unless and until such
registration, qualification, listing, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Board.
(c) The Option shall not be affected by any change of duties
or position of the Optionee (including transfer to or from a subsidiary), so
long as the Optionee continues to be an employee of the Company or one of its
subsidiaries. Nothing in the Option granted hereunder shall confer upon the
Optionee any right to continue in the employ of the Company or any of its
subsidiaries or interfere in any way with the right of the Company or its
subsidiaries or the stockholders of the Company, as the case may be, to
terminate the Optionee's employment or to increase or decrease the Optionee's
compensation at any time.
8. Restriction on Transfer. The Option may not be transferred,
pledged, assigned, hypothecated (whether by operation of law or otherwise), sold
or otherwise disposed of in any way by the Optionee, except by will or by the
laws of descent and distribution, and may be exercised during the lifetime of
the Optionee only by the Optionee. If the Optionee dies, the Option shall
thereafter be exercisable, during the applicable period specified in Section 3,
by the Optionee's Designated Beneficiary or personal representatives, heirs or
legatees (as provided in the Plan) to the full extent to which the Option was
exercisable by the Optionee at the time of the Optionee's death as provided
herein. The Option shall not be subject to execution, attachment or similar
process. Any attempted transfer, pledge, assignment, hypothecation, sale or
other disposition of the Option contrary to the provisions hereof, and the levy
of any execution, attachment or similar process upon the Option, shall be null
and void and without effect.
9. Restrictive Legends. In order to reflect certain
restrictions on disposition of the shares acquired upon exercise of the Option
(the "Restricted Shares"), all stock certificates representing the Restricted
Shares issued shall have affixed thereto any legends determined by the Company
to be appropriate.
10. Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if (i)
personally delivered or sent by telecopier, (ii) sent by nationally-recognized
overnight courier or (iii) sent by registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:
if to the Optionee, to:
Kathleen P. Mullinix
975 Park Avenue, Apt. 2D
New York, New York 10028
-6-
<PAGE>
if to the Corporation, to:
Synaptic Pharmaceutical Corporation
215 College Road
Paramus, New Jersey 07652
Attention: General Counsel
Telecopier: 201-261-0623
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered, if
personally delivered, sent by telecopier or sent by nationally-recognized
overnight courier and (ii) on the third Business Day (as hereinafter defined)
following the date on which the piece of mail containing such communication is
posted, if sent by mail. As used herein, "Business Day" means a day that is not
a Saturday, Sunday or a day on which banking institutions in the city to which
the notice or communication is to be sent are not required to be open.
11. No Waiver. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature.
12. Optionee Undertaking. The Optionee hereby agrees to take
whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgement deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Optionee pursuant to the express provisions of this Agreement.
13. Modification of Rights. The rights of the Optionee are subject to
modification and termination in certain events as provided in this Agreement and
the Plan.
14. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New Jersey without giving effect to
principles of conflicts of laws.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
16. Entire Agreement. This Agreement, the Employment Agreement
(the provisions relating to stock options of which are hereby incorporated
herein by reference) and the Plan constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof, and supersede all
previously written or oral negotiations, commitments, representations and
agreements with respect thereto. In the event of any inconsistency among the
terms of this Agreement, the terms of the Employment Agreement and the terms of
the Plan, the terms of the Employment Agreement shall control.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
SYNAPTIC PHARMACEUTICAL CORPORATION
By:/s/ Lisa L. Reiter
---------------------
Lisa L. Reiter
Vice President, General Counsel and Secretary
/s/ Kathleen P. Mullinix
------------------------
Kathleen P. Mullinix
-8-
<PAGE>
EXHIBIT 10.38
FORM OF
NONTRANSFERABLE
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of the 13th day of December, 1996, is
by and between SYNAPTIC PHARMACEUTICAL CORPORATION, a Delaware corporation (the
"Company"), and ______________ (the "Optionee," which term as used herein shall
be deemed to include any successor to the Optionee by will or by the laws of
descent and distribution, unless the context shall otherwise require).
W I T N E S S E T H:
WHEREAS, the Company and the Optionee are parties to an Employment
Agreement (the "Employment Agreement") dated as of ________________; and
WHEREAS, pursuant to the Synaptic Pharmaceutical Corporation
1996 Incentive Plan (the "Plan"), the Company, acting through the Compensation
Committee (the "Committee") of its Board of Directors (the "Board"), on December
13, 1996 (the "Start Date"), granted to the Optionee an option to purchase up to
an aggregate of ______ shares of Common Stock, $0.01 par value, of the Company
(the "Common Stock"), at the price of $12.00 per share, such option to be for
the term and upon the terms and conditions hereinafter stated.
NOW, THEREFORE, in consideration of the mutual premises and
undertakings hereinafter set forth, the parties hereto agree as follows:
1. Option; Option Price. Pursuant to said action of the
Committee, the Company has granted to the Optionee the option (the "Option") to
purchase, upon and subject to the terms and conditions of this Agreement and the
terms and conditions of the Plan (which are hereby incorporated by reference
herein), ______ shares (the "Option Shares") of Common Stock of the Company at
the price of $12.00 per share (the "Option Price"), which Option is intended to
qualify for Federal income tax purposes as an "incentive stock option" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Term. The term (the "Option Term") of the Option shall commence on the
Start Date and expire on the tenth anniversary of the Start Date, unless the
Option shall theretofore have been terminated in accordance with the terms
hereof or of the Plan.
3. Exercisability; Time of Exercise.
(a) General. Unless accelerated in the discretion of the
Committee or as otherwise provided herein, the Option shall become exercisable
as to 25% of the Option Shares on January 1 of each of 1998, 1999, 2000, and
2001; provided, however, that if the Optionee dies or retires with the consent
of the Company any time prior to January 1, 2001, then the Option shall be
exercisable
-1-
<PAGE>
as to that number of Option Shares which is equal to the product of (i) the
total number of Option Shares and (ii) 2-1/12% times the number of full calendar
months which shall have elapsed during the period commencing on January 1, 1997,
and ending on the date of the Optionee's death or retirement; provided further,
however, that if, at any time prior to January 1, 2001, the Optionee's
employment with the Company is terminated in contemplation of, or at any time
within one (1) year following, a Change in Control (capitalized terms used and
not defined herein having the meanings ascribed to them in the Employment
Agreement ) and such termination constitutes a Termination Without Cause or a
Resignation for Good Reason, then the Option shall, as of the date of such
termination, become exercisable in full as to all of the Option Shares. The
Option shall remain exercisable as to all of such shares until the expiration of
the Option Term, unless it is terminated earlier as provided in any of the other
paragraphs of this Section 3 or Section 6 or as provided in the Plan.
(b) Termination for Cause. If the Optionee shall cease to be
an employee of the Company as a result of a termination by the Company for
Cause, the Option shall automatically terminate on, and the Optionee shall have
no further right to exercise the Option on or after, the date as of which notice
of such termination is given to the Optionee by the Company.
(c) Termination without Cause. If the Optionee's employment
with the Company terminates for any reason other than Cause or the Optionee's
death or Disability or Retirement (as defined in the Plan), the Option shall
thereafter be exercisable only to the extent of the purchase rights, if any,
which shall have accrued pursuant to paragraph (a) of this Section 3 as of the
date of such termination, and the Option and such accrued rights to purchase
shall in any event terminate upon, and the Optionee shall have no further right
to exercise the Option after, the earlier of (i) the expiration of the Option
Term and (ii) (A) in the case of any such termination governed by Section 11 of
the Employment Agreement, 120 days after the date of such termination and (B) in
the case of any such termination not governed by said Section 11, 90 days after
the date of such termination; provided, however, that, in the case of any such
termination other than a termination resulting from the Optionee being
"disabled" within the meaning of Section 22(e)(3) of the Code, the Option shall
no longer be treated as an "incentive stock option" within the meaning of
Section 422 of the Code unless exercised within three (3) months following the
date of such termination.
(d) Termination as a Result of Disability or Retirement. If
the Optionee's employment with the Company terminates as a result of the
Optionee's Disability or Retirement, the Option shall thereafter be exercisable
only to the extent of the purchase rights, if any, which shall have accrued
pursuant to paragraph (a) of this Section 3 as of the date of such termination,
and the Option and such accrued rights to purchase shall in any event terminate
upon, and the Optionee shall have no further right to exercise the Option after,
the earlier of (i) the expiration of the Option Term and (ii) 180 days after the
date of such termination; provided, however, that, in the case of any such
termination other than a termination resulting from the Optionee being
"disabled" within the meaning of Section 22(e)(3) of the Code, the Option shall
no longer be treated as an "incentive stock option" within the meaning of
Section 422 of the Code unless exercised within three (3) months following the
date of such termination.
-2-
<PAGE>
(e) Termination as a Result of Death. If the Optionee's
employment with the Company terminates as a result of the Optionee's death, the
Option shall thereafter be exercisable by the Optionee's Designated Beneficiary
(as defined in the Plan) or personal representatives, heirs or legatees (as
provided in the Plan), but only to the extent of the purchase rights, if any,
which shall have accrued pursuant to paragraph (a) of this Section 3 as of the
date of such termination, and the Option and such accrued rights to purchase
shall in any event terminate upon, and the Optionee shall have no further right
to exercise the Option after, the earlier of (i) the expiration of the Option
Term and (ii) one (1) year after the date of death. Notwithstanding anything
contained in the Plan to the contrary, the Option shall continue to be treated
as an "incentive stock option" within the meaning of Section 422 of the Code
even if it is not exercised until after the third month following the date of
the Optionee's death.
(f) Death Following Disability or Retirement. In the event of
the Optionee's death within 180 days following the Optionee's termination of
employment as a result of the Optionee's Disability or Retirement, the Option
shall thereafter be exercisable by the Optionee's Designated Beneficiary or
personal representatives, heirs or legatees, to the extent of the purchase
rights, if any, which shall have accrued pursuant to paragraph (a) of this
Section 3 as of the date of such termination, for a period of one (1) year
following the date of death but in no event later than the expiration of the
Option Term; provided, however, that, in the case in which the Optionee's
termination of employment resulted from the Optionee being "disabled" within the
meaning of Section 22(e)(3) of the Code, the Option shall no longer be treated
as an "incentive stock option" within the meaning of Section 422 of the Code
unless exercised within one (1) year following the date of such termination; and
provided further, however, that, in all other cases, the Option shall no longer
be treated as an "incentive stock option" within the meaning of Section 422 of
the Code unless exercised within three (3) months following the date of such
termination.
4. Procedure for Exercise. (a) The Option may be exercised, from time to
time, in whole or in part (but for the purchase of whole shares only), by
delivery of a written notice (the "Notice") from the Optionee to the Secretary
of the Company, which Notice shall:
(i) state that the Optionee elects to exercise the Option;
(ii) state the number of shares with respect to which the Optionee is
exercising the Option (the "Acquired Shares");
(iii) include any representations of the Optionee required under Section
7(b) hereof;
(iv) state the method of payment for the Acquired Shares pursuant to
Section 4(b);
-3-
<PAGE>
(v) in the event that the Option shall be exercised
by any person other than the Optionee pursuant to Sections 3
and 8, include appropriate proof of the right of such person
to exercise the Option; and
(vi) state the date upon which the Optionee desires
to consummate the purchase of the Acquired Shares (which date
must be prior to the termination of such Option).
(b) Payment of the Option Price for the Acquired Shares shall,
unless otherwise provided by the Committee, be made in cash or by personal or
certified check.
5. No Rights as a Stockholder. The Optionee shall not have any
privileges of a stockholder with respect to any Option Shares until the date of
a stock certificate representing such Option Shares is issued to the Optionee.
6. Adjustments.
(a) Stock Dividends, Splits, Subdivisions or Combinations.
Subject to the other provisions of this Section 6, if, at any time while the
Option is outstanding, the Common Stock is changed by reason of dividends
payable in Common Stock or splits, subdivisions or combinations of shares of
Common Stock, then the number of shares of Common Stock deliverable upon the
exercise thereafter of the Option shall be increased or decreased
proportionately, as the case may be, without change in the aggregate Option
Price.
(b) Cash Mergers. Upon the occurrence of a merger on
consolidation of the Company with another corporation in a transaction in which
the stockholders of the Company receive cash consideration in exchange for their
shares of capital stock of the Company (a "cash merger"), the Option shall
automatically terminate; provided, however, that the Optionee shall be given (i)
written notice of such cash merger at least 20 days prior to its proposed
effective date (as specified in such notice) and (ii) an opportunity, during the
period commencing with delivery of such notice and ending ten (10) days prior to
such proposed effective date, to exercise the Option in full as to all of the
Option Shares, whether or not then vested.
(c) Assumption or Substitution of Options. Notwithstanding
anything contained herein or in the Plan to the contrary, Section 6(b) shall not
be applicable if provision shall be made in connection with such cash merger for
the assumption of the Option by, or the substitution for the Option of a new
option covering the stock of, the surviving, successor or purchasing
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number, kind and option price of shares subject to such option; provided,
however, that the Board shall, to the extent not inconsistent with the best
interests of the Company or its subsidiaries (such best interests to be
determined in good faith by the Board, in its sole discretion), use its best
efforts to ensure that any such assumption or substitution will not constitute a
modification, extension or renewal of the Option within the meaning of Section
424(h) of the Code and the regulations thereunder.
-4-
<PAGE>
(d) Corporate Transactions. Notwithstanding anything contained
herein or in the Plan to the contrary, upon the occurrence of (i) a merger or
consolidation of the Company with another corporation in a transaction (other
than a cash merger) in which the Company shall not survive or in which the
Company is the survivor but its capital stock is exchanged for stock,
securities, or property of another entity or (ii) a sale of all or substantially
all of the assets of the Company (any transaction described in clause (i) or
(ii) being referred to herein as a "corporate transaction"), provision shall be
made in connection with such corporate transaction for the assumption of the
Option by, or the substitution for the Option of a new option covering the stock
of, the surviving, successor or purchasing corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number, kind and
option price of shares subject to such option; provided, however, that the Board
shall, to the extent not inconsistent with the best interests of the Company or
its subsidiaries (such best interests to be determined in good faith by the
Board, in its sole discretion), use its best efforts to ensure that any such
assumption or substitution will not constitute a modification, extension or
renewal of the Option within the meaning of Section 424(h) of the Code and the
regulations thereunder.
(e) Termination within One Year of Cash Merger or Corporate
Transaction. Notwithstanding anything contained herein or in the Plan to the
contrary, in the event the Optionee's employment with the Company or the person
which is the surviving, successor or purchasing corporation in a cash merger to
which Section 6(c) applies or a corporate transaction to which Section 6(d)
applies, or a parent or subsidiary thereof, is terminated without Cause and
other than as a result of the Optionee's death or disability, at any time prior
to the first anniversary of such transaction or merger, the Option shall become
exercisable in full as to all Option Shares, whether or not vested, as of the
date on which notice of termination is given to the Optionee, and the Optionee
shall have the right to exercise the Option as to any or all of such shares
until the earlier of (i) the expiration of the Option Term and (ii) the 90th day
following the date of such termination, at which time the Option shall
terminate.
7. Additional Provisions Related to Exercise. (a) The Option shall be
exercisable only on such date or dates and during such period and for such
number of shares of Common Stock as are set forth in this Agreement.
(b) To exercise the Option, the Optionee shall follow the
procedures set forth in Section 4 hereof. Upon the exercise of the Option at a
time when there is not in effect a registration statement under the Securities
Act of 1933, as amended, relating to the shares of Common Stock issuable upon
exercise of the Option, the Optionee shall provide the Company with such
representations and warranties as may be required by the Committee to the effect
that the Acquired Shares are being acquired for investment and not with a view
to the distribution thereof. Anything contained herein to the contrary
notwithstanding, in the event the Board shall determine, in its sole and
subjective discretion, that the registration, qualification or listing of the
Option Shares upon a securities exchange or under any state or Federal law, or
the consent or approval or any government or regulatory body, is necessary or
desirable as a condition of or in connection with the exercise of the Option,
the Option may not be exercised, in whole or in part, unless and until such
registration,
-5-
<PAGE>
qualification, listing, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Board.
(c) The Option shall not be affected by any change of duties
or position of the Optionee (including transfer to or from a subsidiary), so
long as the Optionee continues to be an employee of the Company or one of its
subsidiaries. Nothing in the Option granted hereunder shall confer upon the
Optionee any right to continue in the employ of the Company or any of its
subsidiaries or interfere in any way with the right of the Company or its
subsidiaries or the stockholders of the Company, as the case may be, to
terminate the Optionee's employment or to increase or decrease the Optionee's
compensation at any time.
8. Restriction on Transfer. The Option may not be transferred,
pledged, assigned, hypothecated (whether by operation of law or otherwise), sold
or otherwise disposed of in any way by the Optionee, except by will or by the
laws of descent and distribution, and may be exercised during the lifetime of
the Optionee only by the Optionee. If the Optionee dies, the Option shall
thereafter be exercisable, during the applicable period specified in Section 3,
by the Optionee's Designated Beneficiary or personal representatives, heirs or
legatees (as provided in the Plan) to the full extent to which the Option was
exercisable by the Optionee at the time of the Optionee's death as provided
herein. The Option shall not be subject to execution, attachment or similar
process. Any attempted transfer, pledge, assignment, hypothecation, sale or
other disposition of the Option contrary to the provisions hereof, and the levy
of any execution, attachment or similar process upon the Option, shall be null
and void and without effect.
9. Restrictive Legends. In order to reflect certain
restrictions on disposition of the shares acquired upon exercise of the Option
(the "Restricted Shares"), all stock certificates representing the Restricted
Shares issued shall have affixed thereto any legends determined by the Company
to be appropriate.
10. Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if (i)
personally delivered or sent by telecopier, (ii) sent by nationally-recognized
overnight courier or (iii) sent by registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:
if to the Optionee, to:
-------------------
-------------------
-------------------
-6-
<PAGE>
if to the Corporation, to:
Synaptic Pharmaceutical Corporation
215 College Road
Paramus, New Jersey 07652
Attention: President
Telecopier: 201-261-0623
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered, if
personally delivered, sent by telecopier or sent by nationally-recognized
overnight courier and (ii) on the third Business Day (as hereinafter defined)
following the date on which the piece of mail containing such communication is
posted, if sent by mail. As used herein, "Business Day" means a day that is not
a Saturday, Sunday or a day on which banking institutions in the city to which
the notice or communication is to be sent are not required to be open.
11. No Waiver. No waiver of any breach or condition of this Agreement shall
be deemed to be a waiver of any other or subsequent breach or condition, whether
of like or different nature.
12. Optionee Undertaking. The Optionee hereby agrees to take
whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgement deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Optionee pursuant to the express provisions of this Agreement.
13. Modification of Rights. The rights of the Optionee are subject to
modification and termination in certain events as provided in this Agreement and
the Plan.
14. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New Jersey without giving effect to
principles of conflicts of laws.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
16. Entire Agreement. This Agreement, the Employment
Agreement(the provisions relating to stock options of which are hereby
incorporated herein by reference) and the Plan constitute the entire agreement
between the parties with respect to the subject matter hereof and thereof, and
supersede all previously written or oral negotiations, commitments,
representations and agreements with respect thereto. In the event of any
inconsistency among the terms of this Agreement, the terms of the Employment
Agreement and the terms of the Plan, the terms of the Employment Agreement shall
control.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
SYNAPTIC PHARMACEUTICAL CORPORATION
By:----------------------------------------------
Kathleen P. Mullinix
Chairman, President and Chief Executive Officer
-------------------------------------------------
-8-
<PAGE>
EXHIBIT 11
SYNAPTIC PHARMACEUTICAL CORPORATION
Computation of Net Loss Per Share
Year Ended December 31,
Primary 1996 1995 1994
- ----------------------------------- ----------- ----------- -----------
Weighted average common shares
outstanding 7,577,610 680,824 336,976
Shares sold within 12 months of
initial registration statement
filing, considered outstanding for
periods prior to the initial public
offering, based on the treasury
stock method and the initial
public offering price -- 2,619 7,454
Shares underlying options granted
within 12 months of initial
registration statement filing,
considered outstanding for all
periods prior to the initial
public offering, based on the
treasury stock method and the
initial public offering price -- 23,651 31,535
----------- ----------- -----------
Shares used in computation
of net loss per share 7,577,610 707,094 375,965
=========== =========== ===========
Net loss ($2,633,055) ($3,367,351) ($5,526,721)
=========== =========== ===========
Net loss per share ($0.35) ($4.76) ($14.70)
=========== =========== ===========
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
Computation of Net Loss Per Share
Year Ended December 31,
Fully Diluted 1996 1995 1994
- ----------------------------------- ----------- ----------- -----------
Weighted average common shares
outstanding 7,577,610 680,824 336,976
Weighted average common stock
options outstanding considered
exercised, based on the treasury
stock method 297,361 268,715 258,044
Weighted average 1993 Warrants
outstanding considered exercised,
based on the treasury stock method 50,775 1,046 24,738
Weighted average 1990 Warrants
outstanding considered exercised,
based on the treasury stock method -- 55,089 51,816
Shares sold within 12 months of
initial registration statement
filing, considered outstanding for
periods prior to the initial public
offering, based on the treasury
stock method and the initial public
offering price -- 2,619 7,454
Options granted within 12 months of
initial registration statement
filing, considered outstanding for
all periods prior to the initial
public offering, based on the
treasury stock method and the
initial public offering price -- 23,651 31,535
Weighted average convertible
preferred stock outstanding,
as if converted:
Series 1 -- 1,207,735 1,260,214
Series 2 -- 1,157,521 1,207,848
Series 3 -- 1,844,383 1,924,574
Series 4 -- 513,394 223,215
----------- ----------- -----------
Shares used in computation of
net loss per share 7,925,746 5,754,977 5,326,414
=========== =========== ===========
Net loss ($2,633,055) ($3,367,351) ($5,526,721)
=========== =========== ===========
Net loss per share ($0.33) ($0.59) ($1.04)
=========== =========== ===========
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333- 05793) pertaining to the 1988 Amended and Restated Incentive Plan,
1996 Incentive Plan and the 1996 Nonemployee Director Stock Option Plan of
Synaptic Pharmaceutical Corporation of our report dated February 18, 1997, with
respect to the financial statements of Synaptic Pharmaceutical Corporation
included the Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Hackensack, NJ
March 21, 1997
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Kathleen P. Mullinix and Lisa L. Reiter,
or either of them, such person's true and lawful attorney-in-fact and agent with
full power of substitution and re- substitution for such person and in his or
her name, place and stead, in any and all capacities, to sign this Annual Report
on Form 10-K and any or all amendments thereto and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and the National Association of Securities
Dealers, granting unto said attorney-in-fact and agent full power and authority,
to do and perform each and every act and thing requisite or necessary to be done
in and about the premises, to all intents and purposes and as fully as he or she
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or her substitutes may lawfully do or cause to be
done by virtue hereof.
Signature Title Date
- ------------------------------ ---------------------- --------------
/s/ Kathleen P. Mullinix Chairman of the Board, March 13, 1997
- ------------------------------ President, and Chief
Kathleen P. Mullinix Executive Officer
/s/ Robert L. Spence Senior Vice President, March 13, 1997
- ------------------------------ Chief Financial Officer,
Robert L. Spence and Treasurer
/s/ Jonathan J. Fleming Director March 13, 1997
- ------------------------------
Jonathan J. Fleming
/s/ Zola P. Horovitz, Ph.D Director March 18, 1997
- ------------------------------
Zola P. Horovitz, Ph.D
/s/ Eric R. Kandel, M.D Director March 13, 1997
- ------------------------------
Eric R. Kandel, M.D
/s/ John E. Lyons Director March 17, 1997
- ------------------------------
John E. Lyons
/s/ Sandra Panem, Ph.D Director March 13, 1997
- ------------------------------
Sandra Panem, Ph.D
/s/ Alison Taunton-Rigby, Ph.D Director March 13, 1997
- ------------------------------
Alison Taunton-Rigby, Ph.D
/s/Robert Walkingshaw Director March 13, 1997
- ------------------------------
Robert Walkingshaw
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,588,731
<SECURITIES> 21,418,869
<RECEIVABLES> 191,666
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,369,181
<PP&E> 5,559,321
<DEPRECIATION> 2,895,192
<TOTAL-ASSETS> 40,354,594
<CURRENT-LIABILITIES> 1,314,233
<BONDS> 0
0
0
<COMMON> 76,335
<OTHER-SE> 38,964,026
<TOTAL-LIABILITY-AND-EQUITY> 40,354,594
<SALES> 0
<TOTAL-REVENUES> 9,480,688
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,545
<INCOME-PRETAX> (2,633,055)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,633,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,633,055)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> 0
</TABLE>
