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, 1999
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, as amended (the "Exchange Act"), during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of the voting and non voting
common equity held by non-affiliates of the registrant was approximately
$76,278,000 as of February 15, 2000, 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 February 15, 2000, there were 10,767,311 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, 1999, in connection with the
registrant's 2000 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, 1999
Part I
Page
----
Item 1. Business..................................................... 1
Item 2. Properties................................................... 25
Item 3. Legal Proceedings............................................ 25
Item 4. Submission of Matters to a Vote of Securityholders........... 25
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 26
Item 6. Selected Financial Data...................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 36
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........... 58
Item 11. Executive Compensation....................................... 58
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 58
Item 13. Certain Relationships and Related Transactions............... 58
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 59
(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 in its genomics program to discover and
clone the genes that code for human receptors. The Company and its licensees are
also utilizing this technology in functional genomics programs to discover the
function of these receptors in the body and thus specific physiological
disorders with which they may be associated. The Company and its licensees are
in turn utilizing the cloned receptor genes to design compounds that can
potentially be developed as drugs for treating these disorders.
Synaptic's human receptor-targeted drug design technology is the result
of an integrated approach to four life science fields: molecular biology; cell
biology; pharmacology; and chemistry, including medicinal, combinatorial and
computer-assisted chemistry. This technology allows chemists to focus their drug
discovery efforts on a specific human receptor target. The Company believes that
its technology provides four distinct advantages over the traditional approach
to drug discovery in which compounds are screened against animal tissues
containing many different types of receptors. First, by having an isolated
receptor as a target, chemists are better able to design compounds that interact
with only the target of interest and not with other receptors that may be
responsible for side effects. Second, the Company believes that using human
receptors as drug design targets will substantially reduce the number of
problems that often arise during the drug development process as a result of
differences in a compound's activity in humans compared to its activity in
animal models. Third, Synaptic believes that its technology may be more
cost-effective than traditional drug discovery because the Company and its
licensees can eliminate or redesign compounds that react poorly with human
receptor targets prior to initiating the costly activities related to
preclinical testing and clinical trials. Fourth, once a compound designed with
this technology is tested in clinical trials, the specific receptor targeted by
such compound may be validated as a useful intervention point of therapy.
Synaptic focuses its receptor and drug discovery efforts on members of
a receptor superfamily known as "G protein-coupled receptors" or "GPCRs." The
Company selected this receptor superfamily for two principal reasons. First,
many GPCRs 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 GPCRs. Second, the GPCR
superfamily is extremely large and diverse and, based on several estimates,
exceeds 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 receptors within the GPCR
superfamily as targets for novel drugs.
The Company began its genomics program in 1988 shortly following its
inception and has since that time discovered the genes that code for many G
protein-coupled receptors. Gene discovery is, however, just the first step in
the long process of drug discovery. In order for receptors to have value as drug
targets in the drug discovery process, it is imperative that their functions in
the body be determined. The multi-step process of determining the function of a
receptor can be described as "target validation," which occurs only when
compounds directed toward the receptor of interest have been shown to have
therapeutic efficacy in a population of individuals who suffer from the disorder
in question. The data required to prove therapeutic
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efficacy of such compounds are available only after the completion of Phase II
clinical trials. "Functional genomics" is the term which comprises the
technologies that are involved in target validation.
An essential step in the process of validating a receptor as a drug
target is determining the "family" within the GPCR superfamily of which the
receptor is a member. This determination is made by discovering the specific
endogenous ligand with which the receptor preferentially interacts. Genes that
code for receptors whose endogenous ligand has not yet been discovered are
called "orphan receptors." Without knowing the family, or endogenous ligand, for
a receptor, it is difficult to generate pharmacological information which might
suggest a function for that receptor in the body and, as a consequence, to
speculate on the role of an orphan receptor in specific physiological disorders.
The Company anticipated several years ago that, as worldwide interest in
sequencing the entire human genome increased, more and more discoveries from its
and others' genomics programs would be orphan receptors. Accordingly, the
Company began to develop technologies that would facilitate the discovery of the
endogenous ligands for orphan receptors. These efforts have culminated in the
successful development of an assay, which the Company calls its "Universal
Functional Assay" (UFA). By means of the Universal Functional Assay, the Company
has discovered the endogenous ligands for several orphan receptors.
Synaptic has varying levels of expertise in the many steps of the
validation process, with its highest expertise in the earlier steps of the
validation process. In order to gain access to expertise required to effect
steps where it has no expertise, or its expertise is limited, the Company seeks
to leverage its resources by entering into collaborative and licensing
arrangements with pharmaceutical companies. In these arrangements, the Company's
human receptor-targeted drug design technology is used through the preclinical
stage of the drug discovery process and the Company's licensees assume
responsibility for conducting clinical trials with compounds that successfully
complete the preclinical stage.
Through December 31, 1999, the Company's gene discoveries resulting
from its genomics and functional programs had led to collaborations between the
Company and a number of pharmaceutical companies. In four of these
collaborations, the Company and its collaborative partners Eli Lilly and Company
("Lilly"), Merck & Co., Inc. ("Merck"), Novartis Pharma AG ("Novartis"), and
Grunenthal GmbH ("Grunenthal"), confirmed the role of at least five receptor
targets in specific physiological disorders in studies, known as "proof of
concept" studies, in animal model systems. Further, the Company's collaboration
with Lilly yielded a compound that showed substantial efficacy in patients in
three Phase II clinical trials and thus validated the specific receptor targeted
by the compound as a target of drugs for the treatment of migraine headache. The
Company's collaboration with Merck yielded a compound that showed substantial
efficacy in a Phase II clinical trial and thus validated the specific receptor
targeted by that compound as a target of drugs for the treatment of benign
prostatic hyperplasia ("BPH"). These compounds were subsequently withdrawn from
clinical trials in 1999 due to drug development concerns unrelated to Synaptic's
technology.
In January 2000, the Company entered into a collaborative arrangement
with Kissei Pharmaceutical Co., Ltd. ("Kissei"). Unlike earlier arrangements in
which the Company's collaborative partners licensed from the Company previously
cloned receptor genes whose endogenous ligands had at the time already been
discovered by Synaptic, Kissei is providing funding to the Company for research
in which the Company will utilize its genomics technologies on behalf of Kissei
to discover and clone novel receptor genes and to discover their endogenous
ligands.
Certain discussions in this Report refer to various phases of
preclinical testing and clinical trials. For a description of such phases, see
"Government Regulation" below.
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Business Objectives
Synaptic's business objectives are to develop, together with
collaborative partners, a broad array of drugs based upon the Company's human
receptor-targeted drug design technology, and to license certain of its
technology to third parties which will use the technology in their drug
development efforts. In order to achieve its objectives the Company employs five
principal strategies.
To Discover and Clone G Protein-Coupled Receptor Genes
The first strategy of the Company is to aggressively discover and clone
G protein-coupled receptor genes and to aggressively seek patent protection for
such discoveries.
The Company's original approach to gene discovery was a targeted
genomics approach, which involves the use of the Company's molecular biology
expertise to discover and clone receptor genes within families of GPCRs
identified by the Company as being of particular interest based upon their
potential role in certain physiological disorders. During the past several
years, the Company has successfully developed an array of proprietary
technologies related to a nontargeted approach to the discovery of GPCRs. These
technologies involve molecular biology, cell biology and bioinformatics
algorithms. The receptor discoveries resulting from the nontargeted approach are
generally orphan receptors.
As of February 18, 2000, Synaptic had successfully cloned many receptor
genes and had received 50 patents relating to 16 of these receptor genes and
related drug discovery systems. In addition, at that date additional patent
applications relating to the Company's receptor gene discoveries had been filed
in the United States and in other countries.
To Develop a Broad Array of Functional Genomics Technologies
The Company's second strategy is to attempt to validate individual
GPCRs as drug targets. The Company has discovered, and will continue to attempt
to discover, technologies that will facilitate an understanding of the various
functions of specific GPCRs in the body. One such technology is an assay, which
the Company calls its "Universal Functional Assay," that facilitates the
discovery of the endogenous ligands for GPCRs, a critical step in the process of
target validation. The Universal Functional Assay allows for the screening of
the Company's proprietary endogenous ligand library against orphan receptors of
interest. The successful application of the UFA is, however, dependent on the
presence of the endogenous ligand for the receptor of interest in the Company's
ligand collection. In an attempt to maximize the chances that the endogenous
ligand for a particular receptor will be discovered, the Company has developed
proprietary algorithms which it employs in deciding how best to enhance and
expand its ligand collection.
To Discover and Design Potential Drugs with Human Receptor-Targeted
Drug Design Technology
The Company's third strategy is to discover and design, or to have
collaborative partners and other licensees discover and design, potential drugs
through the use of the Company's human receptor-targeted drug design technology.
The Company and its licensees are using this technology to design, synthesize
and optimize compounds for further development. The Company's two approaches to
designing and synthesizing compounds include medicinal chemistry and
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 ligands
and targeted receptors to design and synthesize initial chemical structures that
are then optimized.
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To Leverage Resources and Generate Royalty-Based Revenues
The Company's fourth strategy is to leverage resources and generate
royalty-based revenues through collaborations and licensing arrangements with
pharmaceutical companies. As part of this strategy, the Company focuses most of
its scientific resources on the discovery of receptor genes and their endogenous
ligands, the use of such genes as potential drug targets and the early design
phases of the drug discovery process, while relying predominately on
collaborative partners and other licensees for preclinical testing, clinical
trials and commercialization. With respect to its nontargeted genomics
expertise, the Company seeks to establish collaborations in which it utilizes
this expertise on behalf of its collaborative partners to discover and clone
novel receptor genes present in specific tissues selected by its partners and,
together with those partners, attempts to link its receptor discoveries to
specific physiological functions. In these arrangements, the Company's
collaborative partners would be responsible for all late preclinical and
clinical development activities, as well as commercialization of any drug
resulting from any such arrangement. The Company may also, as part of this
strategy, seek to license certain of its receptor discoveries to pharmaceutical
companies, which would then be solely responsible for any research necessary to
evaluate the licensed discoveries as potential drug targets and for any drug
discovery and development efforts focused on these discoveries.
The Company's collaborative and licensing arrangements generally
provide for the payment to the Company of milestone payments upon the occurrence
of certain events and royalties tied to net sales of any drugs resulting from
the use of the Company's technology. The collaborative arrangements may also
provide for financial support for the Company's research. By pursuing the
objective of leveraging resources and generating royalty-based revenues,
Synaptic benefits from the expertise and resources of its partners and other
licensees, while simultaneously maintaining relatively low capital requirements.
See "Joint Research Programs" and "Other Licensees' Programs" below."
To Retain Ownership of Certain Products
The Company's fifth strategy is to retain ownership rights to certain
products developed through the use of its technology. The Company is seeking to
implement this strategy in a variety of manners, including the exploration of
and entry into collaborations with pharmaceutical companies in which the Company
increases its participation in and funding of drug development activities
conducted as part of such collaborations. Through such arrangements, the Company
believes that it may be able to gain access to additional chemistry, in vivo
pharmacology and preclinical and clinical expertise, as well as to retain a
greater portion of the downstream financial benefits associated with the
commercialization of any products resulting from such arrangements. In January
1998, the Company entered into a collaboration with Grunenthal in which the
Company participates in and may fund a portion of the drug development
activities conducted as part of the collaboration. See "Grunenthal
Collaboration" under "Joint Research Programs" below.
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Background
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.
Many different kinds of receptors involved in cellular communication
exist in the human body. Receptors are first classified into categories, called
"superfamilies," based upon similarities in their biochemical and structural
properties. There are four principal superfamilies of receptors: the G
protein-coupled receptor superfamily, the receptor protein-tyrosine kinase
superfamily, the ligand-gated ion channel superfamily and the intracellular
receptor superfamily. 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 GPCR
superfamily are the serotonin, adrenergic, neuropeptide Y ("NPY") and galanin
families of receptors. Each member of each family is called a "receptor
subtype." If the ligand with which a receptor interacts is not known, the
receptor is called an "orphan receptor."
Historically, it was believed that each family of receptors had only
one or two members. Scientists have discovered, however, 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.
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 marketed. 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.
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The reason that many of these currently available drugs do not
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
Advantages Over Traditional Approach
Since its inception, Synaptic's goal has been to develop a technology
that will facilitate the design and development of drugs that are safer and more
efficacious than existing drugs. Toward that end, the Company has developed, and
continues to refine and expand, its human receptor-targeted drug design
technology. The Company believes that this technology can overcome the
limitations of the traditional approach to drug discovery. This technology makes
it possible not only to clone receptors previously believed or known to exist,
but also to discover and clone receptors which had previously been undetectable
in animal tissues because they were present in concentrations too low to detect
using traditional pharmacological techniques. In addition, the Company believes
that the expansion of its technology platform to facilitate the discovery of the
endogenous ligands for orphan receptors and to determine their functions will
enable it to extend its reach into the drug discovery process. The Company
believes that a number of its newly discovered receptors will provide
opportunities for the design of novel drugs. In addition, the Company believes
that its ability to access and to use individual cloned human receptors in its
and its licensees' drug design efforts will yield safer and more effective drugs
than those currently available. Synaptic further believes that its technology
may make the drug development process more predictive and cost-effective than
the traditional approach because the Company and its licensees can eliminate or
redesign nonsubtype-selective compounds and compounds that react poorly with
human targets at an early stage of the 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
receptors 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 receptors
included within different receptor families. For example, in the case of
obesity, there are pharmacological data indicating that NPY, galanin and
serotonin receptors are involved in controlling food intake. 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
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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.
Industry-Shift from Traditional Approach Towards Use of Cloned Receptors
Over the past decade, most of the major pharmaceutical companies have
developed a keen interest in using cloned receptors in at least some of their
drug discovery efforts. This interest coincides with, and may in part be
responsible for, the worldwide race to sequence the entire human genome. While
worldwide genomics efforts have resulted in the development of new technologies
which greatly accelerate the pace at which new receptors are discovered, most of
these discoveries are orphan receptors. Without information regarding the
endogenous ligands of these receptors, it is difficult to hypothesize about
their role in specific physiological functions. As a result, these newly
discovered receptors are, and will continue to be, of limited value as targets
for the design and development of drugs until their biological roles are
determined.
As the new millennium commences, a principal focus of the biotechnology
and pharmaceutical industries is upon utilizing the vast body of data being
generated with respect to cloned receptors to better understand these receptors,
their physiological functions and their potential as targets for the design and
development of drugs that are safer and more efficacious than existing drugs.
Synaptic believes that its human receptor-targeted drug design technology will
play an important role in both the discovery of new receptors and the
elucidation of the functions of newly discovered receptors and their potential
as drug targets.
Overview -- The Three Principal Steps
The Company's human receptor-targeted drug design technology has three
principal steps:
(i) Genomics. Genomics is the discovery and cloning of the genes that
code for receptors. In this step, the Company's molecular biologists employ
genetic engineering techniques, molecular biology technologies, automated gene
sequencing and bioinformatics to discover and clone receptor genes. Many of the
component technologies in this step are proprietary to the Company.
(ii) Functional Genomics. Functional genomics is the term which
comprises the technologies involved in the process of target validation. For
example, certain functional genomics technologies facilitate the discovery of
the endogenous ligands for receptors and, thus, the biological roles of such
receptors in the body, while others involve assays that facilitate both the
search for compounds that are selective for the receptors of interest and the
use of selective compounds in various animal models of behavior and physiology
in an attempt to provoke a response in an animal model system that might
indicate the role of such receptors in the body. Observation of a response in an
animal model constitutes a confirmation, or "proof of concept,"of a role of the
receptors targeted by the selective compounds and provides an opportunity to
develop hypotheses concerning the possible therapeutic utility of drugs that act
at the receptors of interest. There is no guarantee, however, that effects seen
in animals will also occur in humans. The downstream steps in the process of
target validation include preclinical testing and Phase I and Phase II clinical
trials. These steps are currently performed by Synaptic's collaborative partners
or licensees.
(iii) Chemistry: Compound Design and Optimization. Chemistry, as it
relates to Synaptic's human receptor-targeted drug design technology, involves
two principal activities: the design and synthesis of compounds which are
selective for the receptor of interest and which can thus be used in proof of
concept studies; and, following proof of concept, the optimization of selective
compounds to arrive at a compound
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which has the desired pharmacological profile and which can thus proceed through
preclinical testing and clinical trials.
Drug Discovery Paradigm
Set forth below is a diagram of the Drug Discovery Paradigm, which
illustrates various steps in the drug discovery process and the role that
Synaptic's human receptor-targeted drug design technology plays in this process.
DRUG DISCOVERY PARADIGM -- 2000
===============================
/--------------Synaptic Expertise------------/------"Big Pharma"-------------/
/---Genomics---/--------------------Functional Genomics----------------------/
Gene Discovery Functional Screening Preclinical
and Cloning Assays Assays Pharmacology
+-----+------+------+------+------+--------+-------+------+------+----------+
+ + + + + + + Proof + + + Validated+
+ + + + + + + of + + + Targets +
+ + + + + + +Concept+ + + +
+-----+------+------+------+------+--------+-------+------+------+----------+
Endogenous Compound Phase I
Ligand Design and Phase II
Identif- Optimization Efficacy Trials
ication
Research and Drug Discovery Programs: Focus on 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 GPCR 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: Zantac(R), a histamine
receptor antagonist for the treatment of ulcers; Claritin(R), a histamine
receptor antagonist for the treatment of allergy; Propulsid(R), a serotonin
receptor agonist for the treatment of gastric motility disorder; 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 urinary retention resulting from benign prostatic hyperplasia ("BPH").
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 and licensees
can draw in beginning their drug discovery programs. Third, the GPCR superfamily
is extremely large and, based on several estimates, exceeds 1,000 receptor
subtypes belonging to more than 45 known families and an unknown number of
additional families the endogenous ligands of which either have not yet been
identified or have been identified but have not been publicly disclosed.
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The Company's human receptor-targeted drug design technology is being
utilized or has been utilized in a number of different research and drug
discovery programs. Some of these programs are currently being conducted by the
Company independently. Others may have been conducted by the Company
independently or in collaboration with pharmaceutical companies but are
currently inactive and available for licensing by the Company. Finally, some of
the programs are being conducted by the Company in joint research programs with
its collaborative partners or by the Company's licensees.
Total operating expenses incurred by the Company for each of the fiscal
years 1999, 1998 and 1997 were $19,652,000, $19,576,000 and $17,853,000,
respectively, of which approximately $1,759,000, $7,182,000 and $9,785,000,
respectively, was funded by the Company's collaborative partners during such
years. In 1998, the Company increased its internal research and development
spending in part as a result of the expiration of its collaboration with
Novartis and the termination of the associated research funding provided by
Novartis. The Company again increased internal research and development spending
during 1999, in part as a result of the July 31, 1999 expiration of its
collaboration with Lilly and the termination of the associated research funding
provided by Lilly and the February 28, 1999 expiration of its collaboration with
Merck and the termination of the associated research funding provided by Merck.
Certain of the programs in which the Company's human receptor-targeted
drug design technology is being or has been utilized are summarized in the
following table:
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Summary of Certain
Research and Drug Discovery Programs
Types [and
Number] of
Issued U.S. and
Programs(1) Subject Matter Primary Indications Foreign Patents
- --------------------------------------------------------------------------------
Company Programs
- ----------------
Genomics Research Gene Discovery All Potent'l GPCR-based --
and Cloning
Functional Genomics
Research Target Validation All Potent'l GPCR-based --
Undisclosed -- Urology --
Undisclosed -- Obesity --
Galanin Galanin Obesity, Diabetes, Receptor [1]
Alzheimer's Disease,
Depression and Pain
Neuropeptide Y NPY Depression and Pain Receptor [10]
Alpha 1a Antagonist Alpha 1a BPH Funct'l Use [9]
Receptor [3]
Chemistry [3]
Joint Research Programs
- -----------------------
Grunenthal Undisclosed Pain --
Kissei Gene Discovery Undisclosed --
and
Cloning/Target
Validation
Programs of Licensees
- ---------------------
Lilly Serotonin Acute Migraine, Funct'l Use [1]
Depression Receptor [31]
and Obesity
Novartis NPY Obesity Receptor [10]
Glaxo Alpha 1a,1b or 1d (2) Receptor [4]
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(1) The Company's technology is being utilized by certain of the Company and
its licensees in drug discovery programs in addition to those programs
referenced in the above table. The subjects of such programs are
confidential to the Company.
(2) Glaxo has a nonexclusive license to use Synaptic's alpha 1 receptors for
certain purposes, but is not required to provide Synaptic with any
information regarding such use unless it files an NDA for a
royalty-bearing compound under its agreement with Synaptic. Glaxo has not
notified Synaptic of any such NDA filing.
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Company Programs
Genomics and Functional Genomics Research
The Company began its genomics program in 1988 shortly following its
inception and has since that time discovered the genes that code for many G
protein-coupled receptors. The Company continues to place considerable emphasis
on receptor gene discovery and, accordingly, continues to devote substantial
resources to its genomics program. Gene discovery is, however, just the first
step in the long process of drug discovery. In order for receptors to have value
as drug targets in the drug discovery process, it is imperative that their
functions in the body be determined. As a result, the Company is committing
significant resources to the development and utilization of technologies
designed both to facilitate the discovery of the endogenous ligands for its
orphan receptor discoveries and to further the overall process of validating
receptors for which the endogenous ligands have been discovered as targets of
drugs for specific physiological disorders.
Galanin Program
One focus of the Company in its functional genomics program has been
the galanin family of receptors. The neurotransmitter galanin is widely
distributed in the gastrointestinal tract and the brain. There are a number of
possible therapeutic applications for drugs that modulate galanin receptors,
including the treatment of obesity, diabetes, Alzheimer's Disease, depression
and pain. 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. The immediate objective of this
program is to achieve proof of concept of the biological function of one or more
galanin receptors in animal model systems.
To date, the discovery and cloning of the genes for three of these
subtypes have been reported. The Company believes that it is responsible for the
discovery of two of the three reported genes that code for galanin receptor
subtypes. As of February 18, 2000, the Company had been issued one patent
relating to the GALR2 receptor subtype. As of that date, additional patent
applications relating to the Company's galanin discoveries had been filed in the
United States and in other countries.
In July 1997, the Company entered into a collaboration with
Warner-Lambert to identify and develop galanin receptor subtype-selective
compounds for a variety of therapeutic applications. As part of this program,
the Company and Warner-Lambert identified galanin receptor subtype-selective
compounds. Under the terms of its agreement with Warner-Lambert, Synaptic
granted Warner-Lambert an exclusive worldwide license under certain of its
patent rights to develop and commercialize galanin agonists and antagonists. In
May 1999, this license automatically terminated upon the termination of the
agreement. Synaptic is now seeking to license this program to a third party.
There can be no assurance that Synaptic will be successful in licensing this
program to a third party or that any licensee would be successful in developing
galanin receptor subtype-selective compounds.
NPY Program
Neuropeptide Y is a neurotransmitter that is widely distributed in the
nervous system and gastrointestinal tract. Evidence from both pharmacological
studies and molecular cloning demonstrates the existence of multiple NPY
subtypes. NPY exerts a multitude of actions in the body which indicate potential
roles for the control of appetite, pain, affective disorders, circadian
function, vasoconstriction, and
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gastrointestinal motility. In addition, the administration of NPY has been shown
to greatly enhance food ingestion in several species, and selective antagonists
of the Y5 receptor subtype suppress appetite and lead to loss of body weight in
rodents. In addition to its role in feeding, the Y5 receptor appears to mediate
circadian function, play a role in the control of body temperature, and may
suppress seizure disorders. NPY has also been shown to reduce plasma
extravazation in a neurogenic model of migraine headache, as well as to
constrict blood vessels in a "cranial window" model for that same condition,
both through the Y2 receptor subtype.
To date, the discovery and cloning of the genes for four NPY receptor
subtypes have been reported. The Company believes that it is responsible for the
discovery of three of these subtypes, the Y2, Y4 and Y5 receptor subtypes. As of
February 18, 2000, the Company had been issued ten patents relating to these
receptors. As of that date, additional patent applications had been filed in the
United States and in other countries.
The Company's NPY technology and related intellectual property, insofar
as they relate to obesity and cardiovascular disease, are subject to licenses
granted by the Company to Novartis. See "Novartis Programs" under "Other
Licensees' Programs" below.
Alpha 1a Antagonist Program
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.
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 at least six subtypes (alpha- 1a, 1b and 1d
and alpha-2a, 2b and 2c). The Company believes it is responsible for the
discovery of the genes that code for the human alpha-1a, -1b, -1d and -2b
receptors. As of February 18, 2000, the Company had received six patents
relating to these genes and related drug discovery systems. As of that date,
additional patent applications relating to certain of these genes had been filed
both in the United States and in other countries.
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's first drug discovery program involving the alpha 1
adrenergic receptors focused on the condition known as benign prostatic
hyperplasia ("BPH"). 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.
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Through the use of its alpha adrenergic drug discovery systems and by
means of in vivo studies in animals, Synaptic discovered that different alpha 1
adrenergic receptor subtypes are involved in the control of prostate musculature
and blood pressure: the alpha-1a receptor subtype is responsible for contraction
of prostate musculature and other alpha-1 receptor subtypes are involved in the
regulation of blood pressure. This discovery confirmed the Company's hypothesis
that many of the side effects caused by nonselective alpha-1 adrenergic
antagonists that were available for the treatment of BPH stemmed from their lack
of selectivity for the receptor subtype involved in relaxation of prostate
musculature.
The Company, in collaboration with Merck, used the Company's drug
discovery systems to design compounds that block the activity of the alpha-1a
receptor subtype, but that have minimal affinity for alpha-1b and alpha-1d
receptor subtypes. In studies involving the administration of alpha-1a selective
antagonists to animals, "proof of concept"--that the alpha-1a receptor subtype
is an appropriate target of drugs for the treatment of symptoms associated with
BPH--was demonstrated. Further, one of the compounds resulting from the
collaboration was found in a Phase IIa clinical trial to be efficacious in the
treatment of BPH without cardiovascular side effects seen with currently
available nonselective alpha-1 adrenergic antagonists, thereby validating the
alpha-1a receptor subtype as a target of drugs for the treatment of BPH. Due to
drug development concerns unrelated to Synaptic's technology, Merck withdrew
this compound from clinical trials in 1999 and subsequently terminated its
efforts to develop an alpha-1a antagonist for BPH.
As of February 18, 2000, the Company had been issued 15 patents
relating to its BPH program, nine of which are functional use patents that cover
the use of alpha-1a antagonists having defined degrees of selectivity for the
alpha-1a receptor subtype relative to one or both of the other alpha-1 receptor
subtypes for the treatment of BPH (the "BPH use patents"), three of which relate
to the human alpha-1a adrenergic receptor subtype and three of which cover
selective alpha-1a antagonists. As of that date, additional patent applications
had been filed in the United States and in other countries.
Under the terms of its agreement with Merck, Synaptic had granted Merck
a nonexclusive worldwide license under certain of its patent rights, including
the Company's alpha adrenergic receptor patents and patent applications, to
develop and commercialize alpha-1a antagonists. In addition, Synaptic had
granted Merck an exclusive worldwide license to use Synaptic's alpha-1a
selective compounds and know-how, as well as an exclusive worldwide license
under certain of the Company's patent rights, including the BPH use patents and
related patent applications, for the same purpose. In March 2000, these licenses
automatically terminated upon the termination of the Merck agreement. Merck
continues to have a non-exclusive license to use certain Synaptic know-how.
However, Synaptic is now free to license its technology and patent rights
relating to the BPH program to third parties and is currently seeking licensees
for such patent rights. There can be no assurance that Synaptic will be
successful in licensing this technology and related patent rights to third
parties or that any licensee would be successful in developing an alpha-1a
antagonist for the treatment of BPH.
Joint Research Programs
A key element of the Company's business strategy has been to leverage
resources and to attempt to generate royalty-based revenues through
collaborative and licensing arrangements with pharmaceutical companies. The
Company is currently collaborating with two pharmaceutical companies pursuant
to: (i) the Cooperation Agreement dated as of January 12, 1998, as amended (the
"Grunenthal Agreement"), with Grunenthal GmbH ("Grunenthal") and (ii) the
Collaborative Research and License Agreement dated as of January 24, 2000 (the
"Kissei Agreement"), with Kissei. Concurrently with the establishment of these
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collaborative arrangements, the Company granted certain rights with respect to
its technology and patent rights to Grunenthal and Kissei. Set forth below is a
brief summary of these collaborative arrangements.
Grunenthal Collaboration
In January 1998, the Company and Grunenthal entered into the Grunenthal
Agreement pursuant to which they agreed to collaborate in the identification and
development of drugs for the alleviation of pain. The basis of the collaboration
has been the complementary technologies of the two companies. Synaptic has
cloned the genes for many receptors whose biological functions are not known.
Grunenthal has a broad expertise in various animal models of pain. The work of
the collaboration involves the coupling of the Company's human receptor-targeted
drug design technology with Grunenthal's expertise in pain-related technology in
an attempt first to identify receptors that could be targets of drugs that
alleviate pain and then to design and develop drugs targeted to such receptors.
Under the terms of the Grunenthal Agreement, Synaptic agreed to make
available to Grunenthal for evaluation all receptors (to the extent not already
licensed exclusively to a third party) cloned by Synaptic for which there is
evidence of a role in the mediation of pain or whose function has not yet been
elucidated but which were first cloned by Synaptic from tissues known to be so
implicated. Synaptic further agreed not to pursue such receptors, independently
or with any third party, as targets of potential drugs for the alleviation of
pain during the evaluation period applicable to the receptors or during the
period over which activities involving any such receptor are being jointly
conducted with Grunenthal.
The terms of the Grunenthal Agreement provide that the companies are
responsible for their own expenses incurred during the research stage of any
project undertaken as part of the collaboration but will each be responsible for
50% of all development costs incurred as part of the project with respect to any
resulting drug candidates up to the commencement of Phase III clinical trials.
Synaptic will retain manufacturing and marketing rights in the United States,
Canada and Mexico with respect to any drug candidates resulting from the
collaboration, while Grunenthal will retain manufacturing and marketing rights
in Europe, Central America (other than Mexico) and South America with respect to
any such candidates. The two companies will share these rights in all other
countries. With respect to each country in its own territories and in the shared
territories in which it desires to market a drug candidate, each of Synaptic and
Grunenthal will be responsible for conducting Phase III clinical trials, if
required, for obtaining any necessary regulatory approval, and for all
associated costs.
Kissei Collaboration
In January 2000, the Company and Kissei entered into the Kissei
Agreement pursuant to which they agreed to collaborate in an effort in which
Synaptic will conduct both a genomics and functional genomics program on behalf
of Kissei in an attempt to clone genes that code for G protein-coupled receptors
from tissues selected by Kissei and to identify the ligands for such receptors,
and Kissei will attempt to discover and develop compounds that act at such
receptors. The term of the collaboration is three years.
Under the terms of the Kissei Agreement, Kissei will provide the
Company with funding to support Synaptic's research. Kissei will have the
opportunity to select up to a certain number of receptors that are discovered by
Synaptic during the course of the collaboration and to receive an exclusive
worldwide license to use the selected receptors to develop, manufacture and
market drugs that act through such receptors. Kissei's license will convert to a
nonexclusive license in all countries except Japan following its achievement of
certain
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milestones. In consideration for this license, Kissei will be required to pay
the Company license fees, milestone payments and royalty payments on each drug
that reaches the marketplace.
Kissei has the right to terminate the Kissei Agreement effective in
January 2001, 2002 or 2003 upon at least three months' prior written notice. In
the event of any such termination, Kissei will not be required to provide the
Company with any research funding that has not come due prior to such
termination.
Other Licensees' Programs
In addition to the licenses granted in connection with the Company's
ongoing collaborative arrangements, licenses to certain of the Company's
technology and patent rights have been granted to three other pharmaceutical
companies pursuant to: (A) the Research, Option and License Agreement dated as
of January 25, 1991, as amended (the "Lilly Agreement"), with Lilly; (B) 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"), with Novartis; and (C) the
Option and License Agreement dated as of March 2, 1998 (the "Glaxo Agreement"),
with Glaxo Group Limited ("Glaxo"). The Lilly and Novartis licenses were granted
concurrently with the establishment by Synaptic of collaborative arrangements
with such companies. While the Novartis collaboration and the Lilly
collaboration ended in August 1998 and July 1999, respectively, the associated
licenses continue for the respective periods provided in the Novartis Agreements
and the Lilly Agreement.
Lilly Programs
Serotonin is one of the major neurotransmitters 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, many of the serotonergic drugs
currently available were designed without the use of cloned serotonin receptor
subtype genes and some of these drugs have unacceptable 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 nonsubtype-selective
drugs. As a consequence, a nonsubtype-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 that have been discovered
and cloned, the Company believes that it is responsible for the discovery of
seven. The Company has been issued 32 patents relating to these receptors and
related drug discovery systems. Additional patent applications relating to these
genes have been filed in the United States and in other countries.
In 1991, the Company and Lilly began a collaboration to exploit
Synaptic's serotonin receptor technology. The basis of the collaboration was
Synaptic's discovery of several serotonin receptors and its creation of
serotonin receptor drug discovery systems, and Lilly's expertise in serotonin
pharmacology, chemistry and drug development.
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During the course of the collaboration, one of the serotonin receptors,
the serotonin 1F receptor, was validated as a target for the treatment of
migraine headaches. The use of the serotonin 1F receptor as a target allows for
the design of compounds that are efficacious in the treatment of migraine and
that, in addition, do not carry the cardiovascular side effects associated with
currently available serotonin-based drugs for the treatment of migraine
headache.
In addition to migraine headache, there is a wide variety of additional
applications for serotonin-based drugs, including potential therapies for the
treatment of obesity and novel receptor-based therapies for the treatment of
depression. Although many years of research have been committed to the serotonin
receptor system by dozens of research teams around the world, the understanding
of the biological role of most of the serotonin receptors is still in a very
early stage. Considerable work must be done in order to validate many of the
serotonin receptors as drug targets.
Lilly recently informed the Company that it is conducting drug
discovery programs focused on a number of serotonin receptor subtypes and
therapeutic applications, including migraine headache, obesity and depression,
and that receptor subtype-selective compounds have been identified for a number
of Lilly's serotonin programs.
Under the terms of the Lilly Agreement, 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 drugs that affect
serotonergic transmission. The Company retained 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 for cross-reactivity screening of
compounds in nonserotonin drug discovery programs. Lilly was also granted
certain exclusive rights under several of the Company's patents and patent
applications.
The terms of the Lilly Agreement provide that Lilly is responsible for
all development, manufacturing, marketing and sales of drugs resulting from the
use of Synaptic's technology. The Company will be 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's
milestone and royalty payment obligations under the Lilly Agreement continue,
notwithstanding the expiration of the term of the collaboration.
Novartis Programs
From August 1994 to August 1998, the Company and Novartis engaged in a
collaboration directed primarily to the identification and development of NPY
drugs for the treatment of obesity and eating disorders. As part of its
collaboration with the Company, Novartis received an exclusive worldwide license
to use the Company's NPY receptor subtype drug discovery systems for the limited
purpose of developing and commercializing Y5 antagonists, as well as any other
NPY drugs, for the treatment of obesity and eating disorders, as well as
cardiovascular disorders. Novartis also received rights under several of the
Company's patents and patent applications. The license and rights remain
exclusive until August 2001, following which time they become nonexclusive.
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, a key brain area that
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controls appetite, 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. In laboratory tests, the activity of NPY and related peptides
on the Y5 receptor correlates with the ability of these peptides to stimulate
feeding in animals. As part of its collaboration with the Company, Novartis then
showed in proof of concept studies that several peptides that activated the Y5
receptor preferentially over other known NPY receptors increased food intake in
rats. Additional proof of concept studies by Synaptic and Novartis showed that
small molecules that selectively block the Y5 receptor significantly reduce food
intake in rats and reduce body weight after chronic administration. 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's collaboration with
Novartis focused on discovering and developing a potent and selective Y5
antagonist for the treatment of obesity. Novartis recently informed the Company
that it was continuing its efforts to identify a Y5 antagonist as a development
candidate for this obesity program.
In consideration for the licenses granted to it pursuant to the
Novartis Agreements, from August 1994 to August 1998, Novartis provided the
Company with funding to support a specified number of the Company's scientists
dedicated to work on the collaboration. Novartis will be required to make
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.
Glaxo Agreement
In March 1998, the Company and Glaxo entered into the Glaxo Agreement
pursuant to which the Company granted Glaxo a nonexclusive license under the
Company's alpha 1 adrenergic receptor patents to develop and sell alpha-1a
selective compounds for therapeutic applications other than the treatment of
BPH. Synaptic will be entitled to receive royalties on sales of all alpha-1a
selective drugs sold by Glaxo so long as Synaptic has an issued patent relating
to an alpha 1 adrenergic receptor subtype in at least one major market country
at that time.
Terminated Agreements
The Company had also granted licenses to certain of its technology and
patent rights to two other pharmaceutical companies pursuant to (i) the
Collaborative Research and License Agreement dated as of July 28, 1997 (the
"Warner-Lambert Agreement"), with Warner-Lambert; and (ii) the Research
Collaboration and License Agreement dated as of November 30, 1993, as amended
(the "Merck Agreement"), with Merck. The Warner-Lambert license terminated in
May 1999 upon the termination of the collaboration and the Merck licenses
terminated in March 2000 upon the termination of the Merck Agreement.
Other Agreements
The Company's practice is to meet with pharmaceutical and biotechnology
companies on an on-going basis to discuss the possibility of collaborating with
them on projects of mutual interest and/or out-licensing its technology to them
on a noncollaborative basis. At present, the Company is in the early stages of
discussing
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with other companies the possibility of a number of such arrangements. There can
be no assurance that the Company will be successful in consummating any such
arrangement.
Patents, Proprietary Technology and Trade Secrets
The Company's success depends, in part, on its ability to establish,
protect and enforce its proprietary rights relating to its technology. The
Company's policy is to seek, when appropriate, protection for its gene
discoveries, compound discoveries and other proprietary technology by filing
patent applications in the United States and other countries. The Company has
filed numerous patent applications both in the United States and in other
countries covering its inventions.
As of February 18, 2000, the Company had been issued a total of 50
patents relating to the genes that code for various G protein-coupled receptors.
These patents expire at various times from 2009 to 2016. In addition, as of that
date additional patent applications relating to the Company's receptor gene
discoveries had been filed in the United States and in other countries.
In April 1995, the Company was issued its first functional use patent
in the United States. This patent covers the use of selective alpha-1a
antagonists for the treatment of BPH. As of February 18, 2000, the Company had
been issued a total of nine patents relating to the same subject matter in the
United States and in other countries. These patents expire at various times from
2012 to 2016. Additional related or corresponding patent applications of the
Company are on file in the United States and in other countries.
In August 1999, the Company received a functional use patent in the
United States covering the use of selective serotonin 1D agonists for the
treatment of migraine headache. Additional patent applications relating to the
same subject matter have been filed 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. As of February 18, 2000, the Company had been issued eight patents
relating to six of these transporter discoveries in the United States and in
another country. Additional related or corresponding applications have been
filed by the Company in the United States and in another country. The Company is
no longer actively working on its transporter program. However, the Company is
seeking to license its transporter technology to one or more other companies.
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 expects to file additional patent applications
in the future.
The Company has granted certain rights under several of its patents and
patent applications to Lilly, Novartis, Grunenthal, Glaxo and Kissei.
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. Accordingly, 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
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future. The failure by the Company to receive patents pursuant to the
applications referred to herein and any future applications could have a
material adverse effect on the Company.
There is no clear policy involving the breadth of claims allowed in
patents or the degree of protection afforded thereunder. Accordingly, 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, and 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.
Also, there can be no assurance that the Company's patents or 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 and opposition
proceedings can be expensive to prosecute and defend. In 1998, one of the
Company's patent applications on file outside the United States was the subject
of an opposition filed by a pharmaceutical company. During the year, a
determination favorable to the Company was made in which most of the claims in
the Company's patent application were found to be patentable. In November 1998,
the Company sought to file an amendment to the patent application pursuant to
which certain of the claims that were found not to be patentable would be
modified. This amendment was approved by the patent office in such country in
February 1999 and the patent, with the modified claims, issued in August 1999.
In addition, as of February 18, 2000, one of the Company's patent applications
on file in the United States was the subject of an interference proceeding
involving an issued patent of a third party, and the Company was seeking to
provoke an interference by the United States Patent and Trademark Office between
another of its patent applications and an issued patent of a third party. There
can be no assurance that the outcome of the interference proceeding or the
anticipated interference proceeding will be favorable to the Company. In the
event that the outcome of the interference proceedings were unfavorable to the
Company, the Company might not be able to practice the subject matter of the
relevant patent applications in the United States. Accordingly, an unfavorable
outcome in any such proceeding would have an adverse effect on the Company. Even
if the ultimate outcome of the interference proceedings is favorable to the
Company, the Company's participation in them could result in substantial cost to
the Company.
Further, no assurance can be given that patents issued to the Company
will not be infringed, invalidated or circumvented by others, or that the rights
granted thereunder will be commercially valuable or will provide competitive
advantages to the Company and its present or future collaborative partners or
licensees. 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.
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. Many of these groups are employing recent technological advances in gene
sequencing technology to rapidly identify partial sequences of expressed genes
("expressed sequence tags" or "ESTs") and complete sequences of genes whose
functions have not been characterized. Some of these groups, including
Washington University (with funding provided by Merck), are currently
identifying ESTs
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through partial sequencing and depositing these sequences into public databases,
while others are filing patent applications covering their discoveries. The
public availability of EST and other sequence information prior to the time the
Company applies for patent protection on corresponding gene discoveries could
adversely affect the Company's ability to obtain patent protection with respect
to such discoveries. While the Company routinely conducts searches of publicly
available databases to determine whether other parties have previously cloned
ESTs or full-length genes discovered by the Company, it is not always possible
to determine whether the third party or the Company was the first inventor.
Patent applications covering ESTs and full-length genes filed by third parties
may be competitive with the Company's applications or conflict in certain
respects with claims made under the Company's applications. There can be no
assurance that, in the event of any conflict, the Company will be in a priority
position with respect to inventorship on any of these applications. To the
extent any patents issue to other parties on such partial or full-length genes,
the risk increases that the Company will not be able to obtain patents covering
certain of its discoveries, that the Company's existing or future patents and
patent applications may become the subject of interference or opposition
proceedings, that the Company may not be able to use such discoveries and/or
that the potential products and processes of the Company or its licensees may
give rise to claims of patent infringement.
The commercial success of the Company depends in part 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, ESTs of novel GPCRs and/or compounds that interact
with GPCRs. Patents issued to others may preclude the Company from using or
licensing certain of its receptor discoveries or may preclude the Company or its
collaborative partners and other licensees from commercializing drugs developed
with the use of the Company's technology. The Company has acquired a license to
use certain technologies covered by a patent owned by Columbia University. The
Columbia University license is a worldwide nonexclusive license 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 license. The term
of the license extends until the expiration of the last to expire of the patent
rights covered by the license. The Company 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' or licensees' activities, including the development,
manufacture or sale of drugs requiring such licenses, or preclude such
development, manufacture or sale.
In some cases, litigation or other proceedings may be necessary to
assert infringement claims against others, to defend against 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 could result in substantial costs to and diversion of resources
by the Company and could have a material adverse effect on the Company. There
can be no assurance that any of the Company's 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 a material 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
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<PAGE>
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.
Competition
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, including government-financed entities, and others is intense and
is expected to increase. Although the Company believes that the elements of its
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 many other pharmaceutical and
biotechnology companies in their drug discovery efforts. Moreover, 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 receptor subtypes, including receptor subtypes with which the
Company is working. In addition, there are a number of companies and academic
and other research institutions engaged in gene sequencing, gene discovery, gene
expression analysis and other genomic service businesses. There is a finite
number of genes in the human genome, and many competitors are seeking to
identify, sequence and determine the biological function of a large number of
genes in the shortest time possible in order to obtain a proprietary position
with respect to the largest number of novel genes discovered. In addition, the
Company is aware that other companies and research institutions have developed
genomic databases and are marketing, or have announced their intention to
market, their data to competitors of the Company. The Company expects that
additional competitors will attempt to establish gene sequence, gene expression
or other genomic databases in the future.
In addition, competitors may discover and establish patent positions
with respect to the same gene sequences discovered by the Company. Further,
certain entities engaged in gene sequencing have made and are continuing to make
the results of their sequencing efforts publicly available. These patent
positions or the public availability of gene sequences comprising substantial
portions of the human genome could decrease the potential value of the Company's
discoveries and adversely affect the Company's ability to realize royalties or
other revenue from commercialization of this genetic information and products
based upon this genetic information.
Many of the Company's competitors are large biotechnology companies and
multinational pharmaceutical companies who 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 present and future collaborative partners or other licensees. The
genomics industry is characterized by extensive research efforts and rapid
technological progress. To remain competitive in its genomics efforts, the
Company will be required to continue to expand its databases and to enhance the
functionality of its bioinformatics and database software. New developments are
expected to continue and discoveries by others may render the Company's services
and potential products noncompetitive.
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<PAGE>
The Company also expects to encounter significant competition with
respect to the drugs that it and its collaborative partners and other licensees
plan to develop. Companies that complete clinical trials, obtain required
regulatory 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 certain of
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 and
other licensees or that would render technology or drugs of the Company and its
collaborators and other licensees less competitive or obsolete. In addition,
there can be no assurance that competitors of the Company will not obtain
regulatory approvals of their drugs more rapidly than the Company and its
collaborative partners and other licensees, thereby rendering the Company's and
its collaborative partners' and other licensees' drugs noncompetitive or
obsolete. 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' and other licensees'
ability to use the Company's technology or commercialize its or their drugs.
Government Regulation
The development, manufacturing and marketing of drugs developed through
the use of the Company's technology 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 agencies in other countries
(each of such Federal, state, local and other authorities and agencies, a
"Regulatory Agency"). Regulatory Agencies 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 many 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.
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. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. 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
22
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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 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. Compounds must be formulated according to the
FDA's Good Manufacturing Practices ("GMP").
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 may seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range
and/or 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 package
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 other licensees 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. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations which could also delay, limit or prevent Regulatory Agency
approval. 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. Finally, 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. Moreover, because most of the Company's collaborative
partners and other licensees are generally 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. There can be no assurance
23
<PAGE>
that the regulatory framework described above will not change or that additional
regulations will not arise that may affect approval of a potential drug.
Each manufacturing establishment for new drugs is required to receive
some form of approval by the FDA. Among the conditions for such approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other Federal, state
or local agencies.
Prior to the commencement of marketing a product in other countries,
approval by the Regulatory Agencies in such countries is required, regardless of
whether 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.
Delays in obtaining Regulatory Agency approvals could adversely affect
the marketing of any drugs developed by the Company or its collaborative
partners or other licensees, impose costly procedures upon the Company's or its
collaborative partners' or other licensees' activities, diminish any competitive
advantages that the Company or its collaborative partners or other licensees may
attain and adversely affect the Company's ability to receive revenues or
royalties. There can be no assurance that, even after such time and
expenditures, Regulatory Agency approvals will be obtained for any compounds
developed by, in collaboration with or pursuant to licenses from 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 or other
licensees.
As with many biotechnology and pharmaceutical companies, the Company's
activities involve the use of radioactive compounds and hazardous materials. The
Company is subject to local, state and Federal laws and regulations 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 February 18, 2000, the Company had 94 full-time employees, 29 of
whom hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 76 were
engaged directly in scientific research and 18 were engaged in general and
administrative functions. The Company's scientific staff members have
diversified
24
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experience and expertise in molecular and cell biology, biochemistry, molecular
pharmacology, medicinal, structural, combinatorial and computer-assisted
chemistry and information systems.
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 83,843. The lease will expire on December 31, 2015. The
Company is currently converting a portion of its space into additional research
laboratories and may renovate other portions of its space in 2000 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.
Item 4. Submission of Matters to a Vote of Securityholders
None.
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Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company trades on The Nasdaq Stock Market under
the symbol SNAP. As of February 18, 2000, there were approximately 2,150 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 periods
indicated below.
1999 Fiscal Year
High Low
---- ----
1st Quarter 1999 19 1/4 6 1/16
2nd Quarter 1999 7 1/2 4 1/2
3rd Quarter 1999 9 4 1/2
4th Quarter 1999 7 1/4 4
1998 Fiscal Year
High Low
---- ----
1st Quarter 1998 14 10 7/16
2nd Quarter 1998 15 1/8 11 1/8
3rd Quarter 1998 15 1/8 9 3/4
4th Quarter 1998 16 1/8 12 5/8
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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.
(In thousands, except per share information)
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Total revenues $ 1,855 $ 9,352 $ 10,307 $ 9,481 $ 7,977
Total expenses $ 19,652 $ 19,576 $ 17,853 $ 14,319 $ 12,078
Other income, net $ 2,676 $ 3,731 $ 2,200 $ 2,205 $ 734
Net loss $(15,121) $ (6,493) $ (5,346) $ (2,633) $ (3,367)
Basic and diluted net
loss per share $ (1.41) $ (0.61) $ (0.66) $ (0.35) $ (4.76)
Total assets $ 48,750 $ 64,696 $ 69,402 $ 40,355 $ 40,913
Long term debt -- -- -- -- $ 107
Accumulated deficit $(50,930) $(35,809) $(29,316) $ (23,970) $(21,337)
Stockholders' equity $ 47,106 $ 62,676 $ 67,704 $ 39,040 $ 38,668
- -------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 in its genomics program to discover and
clone the genes that code for human receptors. The Company and its licensees are
also utilizing this technology in functional genomics programs to discover the
function of these receptors in the body and thus specific physiological
disorders with which they may be associated. The Company and its licensees are
in turn utilizing the cloned receptor genes to design compounds that can
potentially be developed as drugs for treating these disorders.
The Company is currently collaborating with Grunenthal GmbH
("Grunenthal"). Concurrently with the establishment of this collaborative
arrangement, the Company granted a license to certain of its technology and
patent rights to Grunenthal.
In addition to its ongoing collaborative arrangement, three other
pharmaceutical companies, Eli Lilly and Company ("Lilly"), Novartis Pharma AG
("Novartis"), and Glaxo Group Limited ("Glaxo"), have licenses to certain of the
Company's technology and patent rights. The Lilly and Novartis licenses were
granted concurrently with the establishment of collaborative arrangements with
such companies. While the Lilly collaboration and the Novartis collaboration
ended in July 1999 and August 1998, respectively, the associated licenses
continue for the respective periods provided in these agreements. For
convenience of reference, the
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agreements pursuant to which the licenses referred to in this paragraph and the
preceding paragraph were granted are collectively referred to in this Item 7 as
the "License Agreements."
Since inception, the Company has financed its operations primarily
through the sale of its stock, through contract and license revenue under
certain of its License Agreements, and through interest income and capital gains
resulting from its investments. The Company also has received revenues from
government grants under the Small Business Innovative Research ("SBIR") program
of the National Institutes of Health.
Under the License Agreements, the Company may receive one or more of
the following types of revenue: contract revenue, license revenue, royalty
revenue or revenue from the sales of drugs. 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 collaboration to
which it relates and is based upon predetermined funding requirements. Research
and development milestone payment revenue is recognized when the related
research or development milestone is achieved. License revenue represents
non-refundable payments for a license to one or more of the Company's patents
and/or a license to the Company's technology. Non-refundable payments for
licenses were recognized as they were received or when they became guaranteed.
Under each of the License Agreements (other than the Grunenthal Agreement), the
Company is entitled to receive royalty payments based upon the sales of drugs
that may be developed using the Company's technology or that may be covered by
the Company's patents. Under the Grunenthal Agreement, the Company has
development and marketing rights in certain territories with respect to drugs,
if any, that are jointly identified as part of the collaboration with
Grunenthal. Accordingly, the Company may receive revenue from sales in its
territories (as defined) of such drugs if it markets them independently or the
Company may receive royalty payments if it licenses its marketing rights to a
third party. To date, the Company has not received either royalty revenue or
revenue from the sales of drugs and the Company does not expect to receive such
revenues for a number of years, if at all.
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 $50,930,000 at December 31, 1999. The Company
expects to continue to incur operating losses for a number of years and may not
become profitable, unless and until it receives royalty revenue or revenue from
sales of drugs that may be developed with the use of its technology or its
patent rights.
Results of Operations
Comparison of Fiscal Years Ended December 31, 1999, 1998 and 1997
Revenues. The Company recognized revenue of $1,855,000, $9,352,000 and
$10,307,000 for the fiscal years of 1999, 1998 and 1997, respectively. The
decrease of $7,497,000 from 1999 to 1998 was attributable primarily to the
following: a net decrease in contract revenue of $5,347,000 resulting from the
contractual termination of three of the Company's collaborative arrangements and
the receipt in 1998 of $2,000,000 of non-recurring license revenue under the
Glaxo Agreement.
The decrease of $955,000 from 1998 to 1997 was attributable primarily
to the following: a net decrease in contract revenue of $2,583,000 resulting
primarily from the contractual termination of the Novartis Agreements on August
3, 1998 as well as the reduction in full-time equivalent scientists being funded
under
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<PAGE>
another of the License Agreements and a decrease in grant revenue of $372,000,
which were offset by the receipt in 1998 of $2,000,000 of non-recurring license
revenue under the Glaxo Agreement.
Research and Development Expenses. The Company incurred research and
development expenses of $14,592,000, $15,274,000 and $13,781,000 for the fiscal
years of 1999, 1998 and 1997, respectively. The decrease of $682,000, or 4%,
from 1998 to 1999 was attributable primarily to: a reduction in compensation and
fringe benefit expenses due to a net decrease in headcount as well as
corresponding reductions in travel and supply costs, all of which were partially
offset by increased rent expense for facilities resulting from previously
contracted increases in square footage.
The increase of $1,493,000, or 11%, from 1997 to 1998 was attributable
primarily to increases in compensation and fringe benefit expenses, facility
related costs, and research supply costs.
General and Administrative Expenses. The Company incurred general and
administrative expenses of $5,060,000, $4,302,000 and $4,072,000 for the fiscal
years of 1999, 1998 and 1997, respectively. The increase of $758,000, or 18%,
from 1998 to 1999 was attributable primarily to increases in: rent expense
resulting from previously contracted increases in square footage; and
compensation and fringe benefit expenses.
The increase of $230,000, or 6%, from 1997 to 1998 was attributable
primarily to an increase in compensation and fringe benefit expenses.
Other Income, Net. The Company recorded other income of $2,676,000,
$3,731,000 and $2,200,000 for the fiscal years of 1999, 1998 and 1997,
respectively. The decrease of $1,055,000 from 1998 to 1999 in other income was
primarily due to lower interest income as a result of lower average cash, cash
equivalent and marketable securities balances during 1999.
The increase of $1,531,000 from 1997 to 1998 in other income was
primarily due to higher interest income as a result of higher average cash, cash
equivalent and marketable securities balances during 1998 which resulted from
the receipt of net proceeds from a public offering of its common stock completed
in November 1997.
Net Loss and Basic and Diluted Net Loss Per Share. The net loss
incurred by the Company was $15,121,000 ($1.41 per share), $6,493,000 ($0.61 per
share) and $5,346,000 ($0.66 per share) for the fiscal years of 1999, 1998 and
1997, respectively. The increase in net loss per share of $0.80 from 1998 to
1999 resulted primarily from the recognition of lower total revenue and of
higher total expenses.
The decrease in net loss per share of $0.05 from 1997 to 1998 resulted
primarily from higher average outstanding shares during 1998 partially offset by
the recognition of higher total expenses. The increase in average outstanding
shares primarily relates to the sale of 2,875,000 shares of common stock in a
public offering in the fourth quarter of 1997 as well as the sale of 137,648
shares of common stock pursuant to the exercise of stock warrants in January
1998.
Operating Trends. Revenues may vary from period to period depending on
numerous factors including the timing of revenue earned under the License
Agreements and revenue that may be earned under future collaborative and/or
license agreements. On January 24, 2000, the Company entered into a research and
licensing agreement with Kissei Pharmaceutical Co., Ltd. The Company will
recognize revenue under this agreement during 2000 and expects to recognize
revenue under this agreement during 2001 and 2002. Under
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<PAGE>
the terms of certain of the License Agreements, revenues may be recognized if
certain milestones are achieved. Management continues to assess the opportunity
for obtaining additional funding under new collaborative and/or license
agreements as well as obtaining financing through equity transactions. The
Company continues to monitor its spending level in order to insure that it has
enough cash to last through the year 2001.
Other income, net is expected to decline in 2000 and 2001 as existing
funds are utilized to fund the Company's operations.
Property and equipment spending may vary from period to period
depending on numerous factors including: the number of collaborations in which
the Company is involved at any given time; replacement due to obsolescence and
replacement due to normal wear. Consequently, equipment spending in 2000 is
expected to increase from that of 1999.
At December 31, 1999, the Company held marketable securities with an
estimated fair value of $35,907,000. The Company's primary interest rate
exposure results from changes in short-term interest rates. The Company does not
purchase financial instruments for trading or speculative purposes. All of the
marketable securities held by the Company are classified as available-for-sale
securities. The following table provides information about marketable securities
held by the Company at December 31, 1999:
Estimated
Principal Amount and Weighted Average Stated Rate Fair
by Expected Maturity Value
- ---------------------------------------------------- ---------
(000's) 2000 2001 2002 2003 Total (000's)
- ---------------------------------------------------- ---------
Principal $6,487 $20,440 $2,500 $6,500 $35,927 $35,907
Weighted
Average
Stated
Rates 6.39% 7.91% 6.50% 5.77% 7.15% --
- ---------------------------------------------------- ---------
The stated rates of interest expressed in the above table may not
approximate the actual yield of the securities which the Company currently holds
since the Company has purchased some of its marketable securities at other than
face value. Additionally, some of the securities represented in the above table
may be called or redeemed, at the option of the issuer, prior to their expected
due dates. If such early redemptions occur, the Company may reinvest the
proceeds realized on such calls or redemptions in marketable securities with
stated rates of interest or yields that are lower than those of current
holdings, affecting both future cash interest streams and future earnings.
In addition to investments in marketable securities, the Company places
some of its cash in money market funds in order to keep cash available to fund
operations and to hold cash pending investments in marketable securities.
Fluctuations in short term interest rates will affect the yield on monies
invested in such money market funds. Such fluctuations can have an impact on
future cash interest streams and future earnings of the Company, but the impact
of such fluctuations are not expected to be material.
The Company does not believe that inflation has had a material impact
on its results of operations.
Management believes that it has remedied all of its information
technology and non-information technology systems that may have been affected by
the year 2000 issue. The Company did not experience any problems or issues
arising from the date change from 1999 to 2000. Through 1999, the Company spent
less
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<PAGE>
than $50,000 to remedy systems that may have been affected by the year 2000
issue and does not expect any future expenses.
Liquidity and Capital Resources
At December 31, 1999 and December 31, 1998, cash, cash equivalents and
marketable securities aggregated $42,143,000 and $56,378,000, respectively. This
decrease was a result of the utilization of these resources to fund the
Company's operations.
To date, the Company has met its cash requirements through the sale of
its stock, through contract and license revenue, through SBIR grants and through
interest income and gains resulting from its investments. If the current
biotechnology financing environment remains unfavorable, raising additional
capital may be difficult.
At December 31, 1999, the Company had invested an aggregate of
$11,301,000 in property and equipment.
The Company leases laboratory and office facilities under an agreement
expiring on December 31, 2015. The minimum annual payment under the lease is
currently $1,575,000. The lease provides for fixed escalations in rent payments
in the years 2005 and 2010.
At December 31, 1999, the Company had $42,143,000 in cash, cash
equivalents and marketable securities. The Company currently intends to utilize
these funds primarily to conduct certain of its research programs, for patent
related expenditures, for general corporate purposes, to make leasehold
improvements to its facilities and to purchase property and equipment. The
Company expects to continue to incur operating losses for a number of years. The
Company believes that its cash on hand and cash that it expects to receive
through interest payments on its investments, will be sufficient to fund its
operations, as well as the Company's share of certain development costs under
the Grunenthal Agreement, through the year 2001.
As of December 31, 1999, the Company had net operating loss
carryforwards of approximately $45,000,000 for Federal income tax purposes that
will expire principally in the years 2002 through 2019. In addition, the Company
had research and development credit carryforwards of $1,610,000 which will
expire principally in 2002 through 2018. For financial reporting purposes, a
valuation allowance has been recognized to offset the deferred tax assets
related to these carryforwards. Due to limitations imposed by the Tax Reform Act
of 1986, and as a result of a significant change in the Company's ownership in
1993 and 1997, the utilization of $25,000,000 of net operating loss
carryforwards is subject to annual limitation. The utilization of the research
and development credits is similarly limited.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS 133, as amended, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. As the Company does
31
<PAGE>
not currently intend to engage in derivatives or in hedging transactions, the
Company does not anticipate any effect on its results of operations, financial
position or cash flows upon the adoption of SFAS 133.
Disclosure Regarding Forward-Looking Statements
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. 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, including in Item 1 of this Report
under the captions "Patents, Proprietary Technology and Trade Secrets,"
"Competition" and "Government Regulation" ("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.
Early Stage of Product Development; Technological Uncertainty
Since its inception in January 1987, 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. To date, neither the Company nor any of its
collaborative partners or other licensees has completed the development of drugs
designed with the use of the Company's technology and the Company does not
expect that any drugs resulting from its or its collaborative partners' or other
licensees' research and development efforts will be commercially available for a
number of years, if at all. All compounds discovered by the Company and its
collaborative partners and other licensees 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 several years, and the time required to
commercialize new drugs cannot be predicted with accuracy. Moreover, potential
products that appear to be promising at early stages of development may never
reach the market for a number of reasons. Such reasons include, but are not
limited to, the possibilities that potential products are found during
preclinical testing or clinical trials to be ineffective or to cause harmful
side effects, that they fail to receive necessary regulatory approvals, that
they are difficult or uneconomical to manufacture on a large scale, that they
fail to achieve market acceptance or that they are precluded from
commercialization by proprietary rights of third parties. There can be no
assurance that the Company's approach to drug discovery, its research and
development efforts or the efforts of Grunenthal, Kissei, Lilly, Novartis or
Glaxo, or any future collaborative partner or other licensee of the Company,
will result in the development of any drugs, or that any drugs, if successfully
developed, will be proven to be safe and effective in clinical trials, receive
required regulatory approvals, 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, including clinical or regulatory delays, unexpected adverse
effects and inadequate therapeutic
32
<PAGE>
efficacy, would slow or prevent product development efforts of the Company and
its collaborative partners and other licensees and have a material adverse
effect on the Company's operations.
Dependence on Collaborative Partners and Licensees for Development, Regulatory
Approvals, Manufacturing, Marketing and Other Resources
A key element of the Company's business strategy is to leverage
resources by entering into collaborative and licensing arrangements with
pharmaceutical companies. Under the Company's agreements with Kissei, Lilly and
Novartis, the Company's collaborative partners and licensees are each
responsible for conducting preclinical testing and clinical trials of compounds
developed through the use of the Company's technology, obtaining regulatory
approvals and manufacturing and commercializing any resulting drugs. Under the
Grunenthal Agreement, Grunenthal is responsible for conducting certain
preclinical testing and clinical trials of compounds developed through the use
of the Company's technology. The Company has no involvement in the research and
development activities of Glaxo under the Glaxo Agreement. As a result, the
Company's receipt of revenues (whether in the form of drug development
milestones, royalties on sales or net sales proceeds) in respect of drugs
resulting from its collaborative and licensing arrangements is dependent upon
the activities of its collaborative partners and other licensees. The amount and
timing of resources dedicated by the Company's collaborative partners and other
licensees to the development of drugs that would be subject to royalties payable
to the Company are 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 or other licensees, that one or more of the
Company's collaborative partners or other licensees will not develop
independently or with third parties drugs that could compete with drugs of the
types covered by their arrangements with the Company, or that disagreements over
rights or technology or other proprietary interests will not occur.
If any of the Company's collaborative partners or other licensees
breaches its agreement with the Company, or fails to devote adequate resources
to or conduct in a timely manner its collaborative or licensed activities, the
related research programs or the development and commercialization of drug
candidates subject to such arrangement could be materially adversely affected.
There can be no assurance that the Company's collaborative or licensing
arrangements will be successful. Further, there can be no 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 will be successful.
History of Operating Losses and Accumulated Deficit
The Company has incurred significant operating losses since its
inception in January 1987. At December 31, 1999, the Company's accumulated
deficit was $50,930,000. 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 at least over
the next several years and expects losses to increase as research funding under
its collaborative arrangements diminish. As of December 31, 1999, the only
revenues generated by the Company had resulted from payments under collaborative
and license agreements, and government grants under the SBIR program of the
National Institutes of Health. The Company's revenues, expenses and losses may
fluctuate from quarter to quarter and year to year. Research payments under the
Novartis Agreements expired in 1998, research payments under the Merck Agreement
expired in February 1999, and research payments under the Lilly Agreement
expired in July 1999. The Company anticipates that there will
33
<PAGE>
initially be little, if any, biological knowledge regarding many of its future
gene discoveries and, as a result, it may have fewer opportunities to enter into
collaborative arrangements focused on such discoveries. The Company does not
expect to achieve revenues or royalties from sales of drugs for a 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 or other licensees
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.
Future Capital Needs; Uncertainty of Additional Funding
The operation of the Company's business requires substantial capital
resources and such requirements are likely to increase in the future. The
Company's future financial requirements will depend on many factors, including
the continued progress of its research and development programs, the timing and
results of preclinical testing and clinical trials, if any, of its or its
collaborative partners' or other licensees' drug candidates, the timing of
regulatory approvals, if any, technological advances, determinations as to the
commercial potential of its or its collaborative partners' or other licensees'
proposed products and the status of competitive products. The Company's capital
requirements will also depend on the Company's ability to establish and maintain
collaborative or licensing arrangements with others and on whether its future
collaborative partners provide research funding to the Company and are
responsible for all development activities, preclinical testing and regulatory
approvals and, if such approvals are obtained, the manufacturing and marketing
of products. In addition, such capital requirements will depend on the time and
expense associated with filing and, if necessary, prosecuting and enforcing
patent claims.
The Company entered into the Grunenthal Agreement in January 1998.
Under this agreement, the Company will retain certain ownership rights to
products that result from the collaboration. In addition, the Company will be
significantly involved in the development of any such potential products but may
also be required to contribute substantial financial resources towards such
development. Accordingly, the cost to the Company of this arrangement may be
significantly greater than the cost to it of participating in a royalty-based
collaboration.
No assurance can be given that the Company's existing cash on hand and
marketable securities and funds it will receive under its collaborative and
license agreements, together with interest income, will be sufficient. 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 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.
34
<PAGE>
Uncertainties Related to Clinical Trials
Before obtaining required regulatory approvals for the commercial sale
of each product under development, the Company or its collaborators and other
licensees must demonstrate through preclinical studies and clinical trials that
such product is safe and efficacious for use. The results of preclinical studies
and initial clinical trials are not necessarily predictive of results that will
be obtained from large-scale clinical trials, and there can be no assurance that
clinical trials of any product under development will demonstrate the safety and
efficacy of such product or will result in a marketable product. The safety and
efficacy of a therapeutic product under development by the Company or its
collaborative partners or other licensees must be supported by extensive data
from clinical trials. A number of companies have suffered significant setbacks
in advanced clinical trials, despite promising results in earlier trials. The
failure to demonstrate adequately the safety and efficacy of a therapeutic drug
under development would delay or prevent regulatory approval of the product and
could have a material adverse effect on the Company. In addition, the FDA or
other Regulatory Agency may require additional clinical trials, which could
result in increased costs and significant development delays.
The rate of completion of clinical trials of the Company's or its
collaborative partners' and other licensees' products is dependent upon, among
other factors, obtaining adequate clinical supplies and the rate of patient
accrual. Patient accrual is a function of many factors, including the size of
the patient population, the proximity of patients to clinical sites and the
eligibility criteria for the trial. Delays in planned patient enrollment in
clinical trials may result in increased costs, program delays or both, which
could have a material adverse effect on the Company. In addition, the Company's
collaborative partners and other licensees generally have the right to control
the planning and execution of product development and clinical programs, and
there can be no assurance that such partners and licensees will conduct such
programs in accordance with schedules that are satisfactory to the Company.
There can be no assurance that, if clinical trials are completed, the Company or
its collaborative partners and other licensees will submit NDAs with respect to
any potential products or that any such application will be reviewed and
approved by the FDA in a timely manner, if at all.
Lack of Manufacturing Experience; Reliance on Contract Manufacturers
The Company currently has no manufacturing facilities and relies on its
collaborative partners and other licensees or other manufacturers to produce its
compounds for research and development, preclinical and clinical purposes. The
products under development by the Company and its collaborative partners and
other licensees have never been manufactured on a commercial scale and there can
be no assurance that such products can be manufactured at a cost or in
quantities necessary to make them commercially viable. If the Company were
unable to contract for a sufficient supply of its compounds on acceptable terms,
or if it should encounter delays or difficulties in its relationships with
manufacturers, any preclinical or clinical testing schedule of the Company would
be delayed, resulting in delay in the submission of products for regulatory
approval or the market introduction and subsequent sales of such products, which
could have a material adverse effect on the Company. Moreover, manufacturers
that the Company may use must adhere to current GMP regulations enforced by the
FDA through its facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, the FDA pre-market approval of the products will
not be granted.
Lack of Sales and Marketing Capability
The creation of infrastructure to commercialize pharmaceutical products
is a difficult, expensive and time-consuming process. Synaptic currently has no
sales or marketing capability. To market directly any
35
<PAGE>
product it may develop, the Company would need to establish a marketing and
sales force with technical expertise and distribution capability or contract
with other pharmaceutical and/or health care companies with distribution systems
and direct sales forces. There can be no assurance that the Company would be
able to establish direct or indirect sales and distribution capabilities or be
successful in gaining market acceptance for licensing arrangements. To the
extent that the Company enters into co-promotion or licensing arrangements, any
revenues received by the Company will be dependent on the efforts of third
parties, and there can be no assurance that any such efforts will be successful.
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, scientific,
software and bioinformatics 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. Failure to attract and retain such
personnel could have a material adverse effect on the Company.
External Environment
Over the past several years, there has been a significant reduction in
the number of investors who are willing to commit capital to the biotechnology
industry. With over 300 public biotechnology companies and over 1,000 private
biotechnology companies, the lack of capital is severely impairing the ability
of many of these companies to carry out their research. Additionally, many
pharmaceutical companies are now routinely performing many of the types of
research and services that have historically been performed by biotechnology
companies. As a consequence, many pharmaceutical companies are less interested
than in the past both in engaging in collaborations with biotechnology companies
in a number of areas and in providing them with research funding and other
sources of revenue.
Over time, the Company could be materially adversely affected by a lack
of available capital and/or a lack of interest on the part of the pharmaceutical
industry in its services or products. This unfavorable external environment
could result in the Company's inability to complete certain of its research
projects and/or in the need for the Company to downsize until it begins to
receive royalty income pursuant to outstanding licensing arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk (i.e.,
interest rate risk) are included in Item 7 of this Report.
36
<PAGE>
Item 8. Financial Statements
SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors...............................................38
Balance Sheets at December 31, 1999 and 1998.................................39
Statements of Operations and Comprehensive Income (Loss) for the years ended
December 31, 1999, 1998 and 1997............................................40
Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997............................................41
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................................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, 1999 and 1998, and the related
statements of operations and comprehensive income (loss), stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Hackensack, New Jersey
February 4, 2000
38
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
BALANCE SHEETS
(in thousands, except share and per share information)
December 31, 1999 and 1998
Assets 1999 1998
- -------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 6,236 $ 16,590
Restricted cash -- 600
Marketable securities--current maturities 6,471 7,133
Other current assets 847 1,064
- -------------------------------------------------------------------------------
Total current assets 13,554 25,387
Property and equipment, net 5,186 5,733
Marketable securities 29,436 32,655
Patent and patent application costs,
net of accumulated amortization
(1999--$1,801; 1998--$1,454) 574 921
- -------------------------------------------------------------------------------
$ 48,750 $ 64,696
===============================================================================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 486 $ 966
Accrued liabilities 525 645
Accrued compensation 386 326
Deferred revenue -- 83
- -------------------------------------------------------------------------------
Total current liabilities 1,397 2,020
Deferred rent obligation 247 --
Stockholders' equity:
Preferred Stock, $.01 par value;
authorized--1,000,000 shares
Common Stock, $.01 par value;
authorized--25,000,000 shares;
issued and outstanding--10,764,661 shares
in 1999 and 10,711,374 shares in 1998 108 107
Additional paid-in capital 98,719 98,516
Accumulated other comprehensive income--net
unrealized losses on securities (791) (77)
Deferred compensation -- (61)
Accumulated deficit (50,930) (35,809)
- -------------------------------------------------------------------------------
Total stockholders' equity 47,106 62,676
- -------------------------------------------------------------------------------
$ 48,750 $ 64,696
===============================================================================
See notes to financial statements.
39
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share information)
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- -------------------------------------------------------------------------
Revenues:
Contract revenue $ 1,855 $ 7,202 $ 9,785
License revenue -- 2,000 --
Grant revenue -- 150 522
- -------------------------------------------------------------------------
Total revenues 1,855 9,352 10,307
Expenses:
Research and development 14,592 15,274 13,781
General and administrative 5,060 4,302 4,072
- -------------------------------------------------------------------------
Total expenses 19,652 19,576 17,853
- -------------------------------------------------------------------------
Loss from operations (17,797) (10,224) (7,546)
Other income, net:
Interest income 2,674 3,603 2,205
Interest expense -- -- (5)
Gain on sale of securities 2 128 --
- -------------------------------------------------------------------------
Other income, net 2,676 3,731 2,200
- -------------------------------------------------------------------------
Net loss $ (15,121) $ (6,493) $(5,346)
========================================================================
Comprehensive loss:
Net loss $ (15,121) $ (6,493) $(5,346)
Unrealized (losses) gains
arising during period (702) (82) 27
Less: reclassification
adjustment for gains
included in net income (12) (21) --
- ------------------------------------------------------------------------
Comprehensive loss $ (15,835) $ (6,596) $(5,319)
========================================================================
Basic and diluted net loss
per share $ (1.41) $ (0.61) $ (0.66)
========================================================================
Shares used in computation of
net loss per share 10,742,296 10,684,892 8,129,260
========================================================================
See notes to financial statements.
40
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share information)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Unrealized
Gains Total
Additional (Losses) Deferred Accumu- Stock-
Common Stock Paid-In on Compen- lated Treasury holders'
Shares Amount Capital Securities sation Deficit Stock Equity
------ ------ ------- ---------- ------ ------- ----- ------------
Balance at January 1, 1997 7,633,543 76 63,231 (1) (296) (23,970) -- 39,040
Purchase of 438 shares of
Treasury Stock at cost -- -- -- -- -- -- (1) (1)
Forfeiture of Deferred
Compensation related to
Stock Incentive Plan -- -- (12) -- 12 -- -- --
Amortization of Deferred
Compensation -- -- -- -- 124 -- -- 124
Issuance of 18,480, shares
of common stock pursuant 18,042 1 36 -- -- -- 1 38
to exercise of stock options
Issuance of 2,875,000 share
of common stock in public
offering 2,875,000 28 33,794 -- -- -- -- 33,822
Adjustment to reflect net
unrealized loss on
securities -- -- -- 27 -- -- -- 27
Net loss for the year ended
December 31, 1997 -- -- -- -- -- (5,346) -- (5,346)
---------- ------- -------- ---------- --------- ------------ ----- ------------
Balance at December 31, 1997 10,526,585 $ 105 $ 97,049 $ 26 $ (160) $ (29,316) $ -- $ 67,704
Purchase of 375 shares of
Treasury Stock at cost -- -- -- -- -- -- (1) (1)
Forfeiture of Deferred
Compensation related to
Stock Incentive Plan -- -- (20) -- 20 -- -- --
Amortization of Deferred
Compensation -- -- -- -- 79 -- -- 79
Issuance of 47,516, shares
of common stock pursuant 47,141 1 127 -- -- -- 1 129
to exercise of stock options
Issuance of 137,648 shares of
common stock pursuant to
exercise of stock warrants 137,648 1 1,307 -- -- -- -- 1,308
Adjustment to reflect net
unrealized gain on
securities -- -- -- (103) -- -- -- (103)
Adjustment to reflect
recognition of short-swing
profits realized on sale of
stock by stockholder -- -- 53 -- -- -- -- 53
Net loss for the year ended
December 31, 1998 -- -- -- -- -- (6,493) -- (6,493)
---------- ------- -------- ---------- --------- ------------ ----- ------------
Balance at December 31, 1998 10,711,374 $ 107 $ 98,516 $ (77) $ (61) $ (35,809) $ -- $ 62,676
========== ======= ======== ========== ========= ============= ===== ============
</TABLE>
See notes to financial statements.
41
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY -- (Continued)
(in thousands, except share information)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Unrealized
Gains Total
Additional (Losses) Deferred Accumu- Stock-
Common Stock Paid-In on Compen- lated Treasury holders'
Shares Amount Capital Securities sation Deficit Stock Equity
------ ------ ------- ---------- ------- --------- ----- -----------
Balance at December 31, 1998 10,711,374 $ 107 $ 98,516 $ (77) $ (61) $ (35,809) $ -- $ 62,676
Forfeiture of Deferred
Compensation related to
Stock Incentive Plan -- -- (11) -- 11 -- -- --
Amortization of Deferred
Compensation -- -- -- -- 50 -- -- 50
Issuance of 53,287, shares
of common stock pursuant
to exercise of stock options 53,287 1 214 -- -- -- -- 215
Adjustment to reflect net
unrealized gain on
securities -- -- -- (714) -- -- -- (714)
Net loss for the year ended
December 31, 1999 -- -- -- -- -- (15,121) -- (15,121)
---------- ----- --------- ---------- -------- --------- ----- -----------
Balance at December 31, 1999 10,764,661 $ 108 $ 98,719 $ (791) $ (--) $ (50,930) $ -- $ 47,106
========== ===== ========= ========== ======== ========= ===== ===========
</TABLE>
See notes to financial statements.
42
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- --------------------------------------------------------------------------------
Operating activities:
Net loss $(15,121) $ (6,493) $ (5,346)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and patent amortization 1,609 1,505 1,209
Amortization of premiums/(discounts) on
securities 479 226 (123)
Amortization of deferred compensation 50 79 124
Gain on sales of securities (2) (128) --
Loss on sale of equipment 32 -- --
Deferred rent obligation 247 -- --
Changes in operating assets and liabilities:
Decrease (increase) in other assets 817 (390) (816)
(Decrease) increase in accounts payable,
accrued liabilities and
accrued compensation (540) 239 490
Decrease in license agreement
revenue receivable -- 40 152
(Decrease) increase in deferred revenue (83) 83 --
- --------------------------------------------------------------------------------
Net cash (used in) operating activities (12,512) (4,839) (4,310)
Investing activities:
Proceeds from sale or maturity of
investments 19,039 70,797 27,666
Purchases of investments (16,349) (71,799) (35,696)
Purchases of property and equipment 80 (2,171) (2,888)
Increase in patent and patent application
costs (827) -- --
- --------------------------------------------------------------------------------
Net cash (used in) investing activities 1,943 (3,173) (10,918)
Financing activities:
Issuance of common stock, net of
repurchases 215 1,436 33,859
Short-swing profits realized on sale of
stock by stockholder -- 53 --
Payments on capital lease -- -- (107)
-------------------------------------------------------------------------------
Net cash provided by financing activities 215 1,489 33,752
- --------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (10,354) (6,523) 18,524
Cash and cash equivalents at beginning
of period 16,590 23,113 4,589
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 6,236 $ 16,590 $ 23,113
================================================================================
Supplemental cash flow disclosure:
Cash paid for interest $ -- $ -- $ 5
================================================================================
See notes to financial statements.
43
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 1 -- Summary of Significant Accounting Policies
Organization. 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 in its genomics
program to discover and clone the genes that code for human receptors. The
Company and its licensees are also utilizing this technology in functional
genomics programs to discover the function of these receptors in the body and
thus specific physiological disorders with which they may be associated. The
Company and its licensees are in turn utilizing the cloned receptor genes to
design compounds that can potentially be developed as drugs for treating these
disorders.
Basic and Diluted Net Loss Per Share. Net loss per share is computed
using the weighted average number of shares of common stock outstanding. As a
result of the Company's operating losses and the anti-dilutive effect from stock
options and warrants, such instruments are excluded from the computation of
diluted net loss per share.
Revenue Recognition. Research funding revenue is recognized ratably
over the period of the collaboration to which it relates. Payments received in
advance under the related contracts are 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/or patent
rights. Non-refundable payments for licenses were recognized at such time as
they were received or, if earlier, became 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. Included in cash
equivalents at December 31, 1999, is approximately $6,234,000 related to
investments in money market funds. At December 31, 1998, this amount totaled
$16,393,000.
Marketable Securities. All of the Company's marketable securities are
classified as available-for-sale securities and 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, 1999 consist primarily of U.S. Government
and Federal Agency obligations, U.S. corporate debt securities and
mortgage-backed securities. The maturities range from March 1, 2000, through
November 17, 2003.
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. Scientific equipment, office equipment and furniture
and fixtures are depreciated over a life of 7 years. Leasehold improvements are
depreciated principally over the life of the facility lease, which is currently
17 years (see Note 9). Software is depreciated
44
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
over a life of 3 years. Assets acquired under capital lease arrangements were
depreciated over the life of the related leases.
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 Company periodically reviews capitalized costs to
assess ongoing recoverability.
Accrued Liabilities. Included in accrued liabilities at December 31,
1999 and 1998 are accrued professional fees totaling $270,000 and $506,000,
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.
Comprehensive Income (Loss). In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This pronouncement, which was adopted
effective January 1, 1998, requires the presentation of a statement of
comprehensive income. Comprehensive income (loss) is defined as the change in
equity of a business enterprise during a period resulting from transactions and
other events and circumstances from nonowner sources. Comprehensive loss for the
Company, in addition to net loss, includes unrealized gains and losses on
marketable securities held for sale, currently recorded in stockholders' equity.
Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133,
as amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. As the Company does not currently intend to engage in derivatives
or in hedging transactions, the Company does not anticipate any effect on its
results of operations, financial position or cash flows upon the adoption of
SFAS 133.
45
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Note 2 -- Marketable Securities
The following is a summary of all of the Company's marketable
securities. All of these securities are classified as available-for-sale
securities. Determination of estimated fair value is based on quoted market
prices:
Gross Gross
Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
- --------------------------------------------------------------------------------
December 31, 1999:
U.S. Treasury obligations and
obligations of U.S.
government agencies $ 8,000,000 $ -- $(279,000) $ 7,721,000
U.S. corporate debt securities 28,698,000 -- (512,000) 28,186,000
- --------------------------------------------------------------------------------
$36,698,000 $ -- $(791,000) $35,907,000
================================================================================
December 31, 1998:
U.S. Treasury obligations and
obligations of U.S.
government agencies $12,998,000 -- $(43,000) $12,955,000
U.S. corporate debt securities 25,851,000 $41,000 (79,000) 25,813,000
Mortgage-backed securities 1,016,000 4,000 -- 1,020,000
- --------------------------------------------------------------------------------
$39,865,000 $45,000 $(122,000) $39,788,000
================================================================================
The gross realized gains on sale of available-for-sale securities for
the years ending December 31, 1999, 1998 and 1997 totaled $2,000, $128,000 and
$0, respectively, and the gross realized losses totaled $0, $0 and $0,
respectively. The net adjustment to unrealized (losses) gains on
available-for-sale securities included as a separate component of stockholders'
equity totaled $(714,000) in 1999, $(103,000) in 1998 and $27,000 in 1997.
46
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Note 3 -- Collaborative and Licensing Arrangements
At December 31, 1999, the Company was engaged in a collaboration with
Grunenthal GmbH ("Grunenthal"). In addition to this ongoing collaborative
arrangement, the Company has granted licenses to certain of its technology and
patent rights to four other pharmaceutical companies. Details of these
arrangements are set forth below:
Grunenthal GmbH. The Company and Grunenthal are parties to a
collaborative and licensing agreement pursuant to which they are collaborating
to discover and develop drugs for the treatment of pain. The Company is using
its receptor-targeted drug design technology to identify compounds of interest
and Grunenthal is using its expertise to evaluate the compounds in pain model
systems and conduct preclinical studies. Grunenthal will conduct clinical
studies with promising compounds. The companies will each be responsible for
their own research costs and equally share the development costs through Phase
IIa clinical trials. The Company will retain manufacturing and marketing rights
in the U.S., Canada and Mexico and share these rights in countries outside of
Europe, South and Central America where Grunenthal retains such rights. To date,
the Company has not recognized any revenue under this collaboration.
Eli Lilly and Company. The Company and Eli Lilly and Company ("Lilly")
are parties to a collaborative and licensing agreement under which the Company
granted Lilly an exclusive license to use all but two of the Company's serotonin
drug discovery systems to promote the discovery and development of receptor
subtype-selective drugs for the treatment of serotonin-related disorders.
Through July 1999, Lilly provided funding to the Company to support a specified
number of the Company's scientists who conducted research as part of the
collaboration. Under the terms of the agreement, the collaboration and
associated research funding ended on July 30, 1999.
Lilly is required to pay royalties on sales of any products developed
through the use of the Company's technology and is required to make payments
upon the achievement of certain milestones.
During 1999, 1998 and 1997, the Company recognized $1,676,000,
$4,659,000, and $4,748,000, respectively, in revenue under this agreement.
Revenues that have been recognized are not subject to repayment.
Merck & Co., Inc. The Company and Merck & Co., Inc. ("Merck") were
parties to a collaborative and licensing agreement to identify and develop
alpha-1a antagonists, principally for the treatment of BPH. The Company had
granted Merck certain licenses and know-how to develop and commercialize
alpha-1a antagonists. Through February 1999, Merck provided funding to the
Company to support a specified number of the Company's scientists who conducted
research as part of the collaboration. Under the terms of the agreement, the
collaboration and associated research funding ended on February 28, 1999. In
March 2000, certain licenses granted to Merck under this agreement will
automatically terminate concurrently with the termination of the agreement.
Merck will continue to have a non-exclusive license to use certain of the
Company's know-how.
During 1999, 1998 and 1997, the Company recognized $83,000, $482,000
and $1,631,000, respectively, in revenue under this agreement. Revenues that
have been recognized are not subject to repayment.
47
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
At December 31, 1998, the Company had received $83,000 in advance for
work performed in January and February 1999.
Novartis Pharma AG. The Company and Novartis Pharma AG ("Novartis") are
parties to two collaborative and licensing agreements under which the Company
granted Novartis an exclusive worldwide 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. Through August 4, 1998, Novartis provided funding to the Company to
support a specified number of the Company's scientists who conducted research as
part of the collaboration. Under the terms of the agreements, the collaboration
and associated research funding ended on August 4, 1998. After August 4, 2001,
all of these licenses and rights become nonexclusive.
Novartis is required to pay royalties on certain product sales and is
required to make payments upon the achievement of certain milestones.
During 1998 and 1997, the Company recognized $2,041,000 and $3,406,000,
respectively, in revenue under this agreement. Revenues that have been
recognized are not subject to repayment.
At December 31, 1999, Novartis held 695,715 shares of the Company's
common stock which represents 6.5% of the outstanding shares of the Company.
Glaxo Group Limited. The Company and Glaxo Group Limited of the United
Kingdom ("Glaxo") are parties to a licensing agreement under which Glaxo
currently holds a nonexclusive license under the Company's alpha 1 adrenergic
receptor patents to develop and sell alpha-1a selective compounds for
therapeutic applications other than the treatment of BPH. During 1998, the
Company recognized $2,000,000 in revenue under this licensing arrangement.
Revenue that has been recognized is not subject to repayment. Synaptic is
entitled to receive royalties on sales of all alpha-1a selective drugs sold by
Glaxo so long as Synaptic has an issued patent relating to an alpha 1 adrenergic
receptor subtype in at least one major market country.
48
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Note 4 -- Property and Equipment
Property and equipment consists of the following as of December 31,
1999 and 1998:
1999 1998
- ------------------------------------------------------------------------
Scientific equipment $ 6,745,000 $ 6,332,000
Furniture and fixtures 192,000 188,000
Office equipment 521,000 514,000
Leasehold improvements 2,218,000 2,003,000
Software 967,000 923,000
Equipment under capitalized leases 658,000 658,000
- ------------------------------------------------------------------------
11,301,000 10,618,000
Accumulated depreciation and amortization (6,115,000) (4,885,000)
- ------------------------------------------------------------------------
$ 5,186,000 $ 5,733,000
=========================================================================
Note 5 -- Capital Leases
The Company and a bank were parties to a master lease agreement under
which the Company leased laboratory and computer equipment with a cost basis of
$658,000. The effective interest rate on the leases approximated 10.5%. The
assets were depreciated over the related lease terms, the last of which ended in
1997.
Accumulated amortization on leased equipment as of December 31, 1999
and 1998 was $658,000.
49
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Note 6 -- Stockholders' Equity
Common Stock. In 1997, the Company completed a public offering of
2,875,000 shares of its common stock.
In January 1998, warrants to purchase 137,648 shares of the Company's
Common Stock were exercised at $9.50 per share. There are currently no common
stock warrants outstanding.
The total number of shares of Common Stock outstanding was 10,764,661
as of December 31, 1999. None of the outstanding common stock is subject to
repurchase.
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 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.
50
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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. In May 1998, the Company's
stockholders approved an amendment to the 1996 Plan which increased the maximum
number of shares available for awards under the 1996 Plan from 1,100,000 to
2,100,000. Effective as of January 1, 1996, the 1996 Plan replaced the 1988 Plan
with respect to all future stock and option awards by the Company to its
employees and consultants. 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).
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). At December 31, 1999, 693,603 shares remain available for
future awards under the 1996 Plan. As of December 31, 1999, 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 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
51
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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
Option
1996 1988 Director Price
Plan Plan Plan Per Share
- ------------------------------------------------------------------------------
Outstanding at January 1, 1997 415,762 291,511 17,500 $ 8.55
Granted 503,751 -- 15,000 $12.99
Exercised (625) (17,855) -- $ 2.01
Forfeited (67,825) (8,354) (2,500) $12.88
- ------------------------------------------------------------------------------
Outstanding at December 31, 1997 851,063 265,302 30,000 $10.47
Granted 339,543 -- 15,000 $13.36
Exercised (4,453) (43,063) -- $ 2.70
Forfeited (60,918) (4,375) -- $12.36
- ------------------------------------------------------------------------------
Outstanding at December 31, 1998 1,125,235 217,864 45,000 $11.39
Granted 432,100 -- 20,000 $ 4.92
Exercised (22,542) (30,745) -- $ 4.03
Forfeited (158,516) (625) -- $12.86
- ------------------------------------------------------------------------------
Outstanding at December 31, 1999 1,376,277 186,494 65,000 $ 9.69
==============================================================================
Exercisable at December 31, 1999 345,592 186,494 46,562 $ 9.90
==============================================================================
Exercisable at December 31, 1998 202,195 211,276 30,000 $ 8.10
==============================================================================
Exercisable at December 31, 1997 71,511 221,212 15,000 $ 5.27
==============================================================================
52
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The following table discloses at December 31, 1999, for each of the
following classes of options as determined by range of exercise price, the
information regarding weighted-average exercise price and weighted-average
remaining contractual life of each said class:
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 - $2.00 186,494 $ 1.78 2.4 years 186,494 $ 1.78
Prices ranging
from
$4.25 - $6.875 444,100 $ 4.72 9.9 years 5,312 $ 6.15
Prices ranging
from
$10.125 - $15.25 868,677 $12.90 8.0 years 283,592 $12.86
Prices ranging
from
$16.50 - $17.75 128,500 $16.66 6.5 years 103,250 $16.62
Other Disclosures. During 1999, 1998 and 1997, all options were granted
with an exercise price equal to the market price of the common stock on the date
of grant. 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 weighted-average fair value of options granted during 1999, 1998
and 1997 approximated $3.19, $7.66 and $7.59, respectively. 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 1999, 1998 and 1997,
respectively: weighted average risk-free interest rates of 6.13%, 4.70% and
5.92%; no dividends; and a weighted-average expected life of the options of 5
years. Weighted average volatility factors of the expected market price of the
Company's common stock of .741, .628 and .623, were used for 1999, 1998 and
1997, respectively.
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.
53
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
For purposes of pro forma net loss disclosures, the estimated fair
value of options granted subsequent to 1994 is amortized to expense over the
options' vesting period. The Company's pro forma net loss information is as
follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Pro forma net loss $(16,801,000) $(7,863,000) $(6,113,000)
Pro forma net loss per share $ (1.56) $ (0.74) $ (0.75)
- -------------------------------------------------------------------------------
For certain options granted prior to 1997, the Company recorded
pursuant to APB No. 25 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 was being amortized over the
vesting period of each option granted. Amortization of deferred compensation
under the Incentive Plans amounted to approximately $50,000, $79,000 and
$124,000 during 1999, 1998 and 1997, respectively. In addition, approximately
$11,000, $20,000 and $12,000 of deferred compensation as it relates to the
Incentive Plans was reversed during 1999, 1998 and 1997, respectively, due to
the forfeiture of the unvested options. At December 31, 1999, all such deferred
compensation has been amortized.
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, 1999 and 1998, the Company had net operating loss
("NOL") carryforwards of approximately $45,000,000 and $30,000,000,
respectively, for Federal income tax purposes that will expire principally in
the years 2002 through 2019. In addition, the Company had research and
development credit carryforwards of approximately $1,610,000 which will expire
principally in 2002 through 2018. 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 significant changes in the Company's ownership in 1993 and 1997,
the utilization of approximately $25,000,000 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, 1999
A reconciliation of the Company's income tax expense (benefit) at U.S.
federal statutory tax rates to recorded income tax provision is as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Tax at U.S. statutory rates $(5,141,000) $(2,208,000)$(1,818,000)
State income taxes (898,000) (386,000) (318,000)
Research and development credit -- (110,000) --
Expiration of state NOL's 248,000 2,000 356,000
Other (16,000) 50,000 108,000
Valuation allowance recorded 5,807,000 2,652,000 1,672,000
- --------------------------------------------------------------------------------
Recorded tax provision -- -- --
================================================================================
Significant components of the Company's deferred tax assets as of December
31, 1999 and 1998, are as follows:
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 17,233,000 $ 11,782,000
Research and development credit carryforwards 1,610,000 1,610,000
Book over tax amortization 1,638,000 1,282,000
- --------------------------------------------------------------------------------
Total deferred tax assets 20,481,000 14,674,000
Valuation allowance (20,481,000) (14,674,000)
- --------------------------------------------------------------------------------
Net deferred tax assets -- --
================================================================================
Note 9 -- Commitments
The Company leases facilities under an agreement expiring on December
31, 2015.
Rent expense for the years ended December 31, 1999, 1998 and 1997
approximated $1,749,000, $693,000, and $703,000, respectively, and included
executory costs of $579,000, $120,000 and $93,000, respectively. At December 31,
1998, a standby letter of credit for $580,000 had been outstanding as a security
deposit. A bank imposed restriction had been placed on $600,000 in cash 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, 1999
As of December 31, 1999, future minimum annual payments under the lease
are as follows:
2000 $ 1,575,000
2001 1,611,000
2002 1,611,000
2003 1,611,000
2004 1,611,000
Thereafter 22,498,000
------------
Total $ 30,517,000
============
The Company is party to a license agreement with a major research
university. Under the terms of this agreement, the Company received a worldwide
nonexclusive license under a patent issued in January 1991, which patent expires
in 2008. The Company is committed under this agreement to pay royalties on
future net sales of products employing the technology or falling under claims of
the patents covered by this agreement.
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, 1999, the Company had entered into agreements with each
of its Senior Vice President and Chief Financial Officer, Vice President for
Research, 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.
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 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. The Company matches 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
$133,000, $117,000 and $107,000 for the years ended December 31, 1999, 1998 and
1997, respectively, vests over a six-year period.
56
<PAGE>
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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 -- Subsequent Event
On January 24, 2000, the Company entered into a research and licensing
agreement with Kissei Pharmaceutical Co., Ltd. ("Kissei"), to identify and
develop drugs that act through novel receptors which will be identified
utilizing the Company's genomics discovery technologies. Under the term of the
three-year agreement, Kissei will provide funding to the Company to support
research that is aimed at discovering novel receptors through the use of the
Company's proprietary genomics technologies. In addition to the research
funding, the agreement provides for a license fee, milestone payments and
royalty payments to the Company on sales of any products. In return, the Company
granted Kissei worldwide exclusive rights to use selected receptors resulting
from the collaboration to develop, manufacture and market drugs that act through
such receptors.
57
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The 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.
58
<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
March 24, 1999 (incorporated by reference to Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 1999, 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)
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)
59
<PAGE>
*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 AG, the parent of
Novartis Pharma AG) (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 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)
+10.5 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)
+10.6 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)
+10.7 Form of Nonqualified 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)
10.8 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)
10.9 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)
60
<PAGE>
10.10 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)
+10.11 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)
+10.12 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)
10.13 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)
+10.14 1996 Incentive Plan of the Company, as amended on May 12, 1998
(incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1998, Commission File Number 0-27324)
+10.15 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)
+10.16 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)
+10.17 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)
+10.18 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)
+10.19 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)
61
<PAGE>
+10.20 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)
+10.21 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)
+10.22 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)
+10.23 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)
***10.24 Research and License Agreement dated as of May 31, 1996,
between the Company and Ciba-Geigy Limited
(predecessor-in-interest of Novartis AG, parent of Novartis
Pharma AG) (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)
***10.25 Supplement No. 1 to Research and License Agreement dated as of
August 4, 1994, between the Company and Ciba-Geigy Limited
(predecessor-in-interest of Novartis AG, parent of Novartis
Pharma AG) (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)
10.26 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)
10.27 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)
**10.28 Addendum No. 2 to Research, Option and License Agreement dated
as of October 31, 1996, between the Company and Eli Lilly and
Company (incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1996, Commission File No. 0-27324)
***10.29 Amendment No.2 to Research Collaboration and License Agreement
dated as of October 9, 1996, between the Company and Merck &
Co., Inc. (incorporated by reference to Exhibit 10.36 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1996, Commission File No. 0-27324)
62
<PAGE>
+10.30 Incentive Stock Option Agreement dated as of December 13,
1996, between the Company and Kathleen P. Mullinix
(incorporated by reference to Exhibit 10.37 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1996, Commission File No. 0-27324)
+10.31 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 (incorporated by reference to Exhibit 10.38 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1996, Commission File No. 0-27324)
***10.32 Collaborative Research and License Agreement dated as of July
28, 1997, between the Company and the Warner-Lambert Company
(incorporated by reference to Exhibit 10.39 to the Company's
Quarterly Report on Form 10-Q filed for the quarter ended
September 30, 1997, Commission File Number 0- 27324)
+10.33 Executive Employment Agreement effective as of October 1,1997,
between the Company and Dr. Kathleen P. Mullinix (incorporated
by reference to Exhibit 10.34 to the Company's Annual Report
on Form 10-K filed for the fiscal year ended December 31,
1997, Commission File No. 0-27324)
10.34 Lease Agreement dated November 19, 1997, between the Company
and Century Associates, which becomes effective January 1,
1998 (incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1997, Commission File No. 0- 27324)
10.35 Amendment No. 3 to Research Collaboration and License
Agreement dated as of December 1, 1997, between the Company
and Merck & Co., Inc. (incorporated by reference to Exhibit
10.36 to the Company's Annual Report on Form 10-K filed for
the fiscal year ended December 31, 1997, Commission File No.
0-27324)
+10.36 Amended and Restated Employment Agreement dated as of January
1, 1998, between the Company and Robert L. Spence
(incorporated by reference to Exhibit 10.37 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1997, Commission File No. 0-27324)
***10.37 Cooperation Agreement dated as of January 12, 1998, between
the Company and Grunenthal GmbH (incorporated by reference to
Exhibit 10.38 to the Company's Annual Report on Form 10-K
filed for the fiscal year ended December 31, 1997, Commission
File No. 0-27324)
+10.38 Amended and Restated Employment Agreement dated as of February
7, 1998, between the Company and Lisa L. Reiter (incorporated
by reference to Exhibit 10.39 to the Company's Annual Report
on Form 10-K filed for the fiscal year ended December 31,
1997, Commission File No. 0-27324)
10.39 Amendment No.4 to Research Collaboration and License Agreement
dated as of March 2,1998, between the Company and Merck & Co.,
Inc. (incorporated by reference to Exhibit 10.40 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1997, Commission File No. 0-27324)
63
<PAGE>
***10.40 Option and License Agreement dated as of March 2, 1998,
between the Company and Glaxo Group Limited (incorporated by
reference to Exhibit 10.41 to the Company's Annual Report on
Form 10-K filed for the fiscal year ended December 31, 1997,
Commission File No. 0-27324)
+10.41 Employment Agreement dated as of April 1, 1998, between the
Company and Theresa A. Branchek (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
filed for the quarter ended March 31, 1998, Commission File
Number 0-27324)
+10.42 Incentive Stock Option Agreement dated as of May 12, 1998,
between the Company and Theresa A. Branchek (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed for the quarter ended June 30, 1998,
Commission File Number 0-27324)
+10.43 Nonqualified Stock Option Agreement dated as of May 12, 1998,
between the Company and Theresa A. Branchek (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q filed for the quarter ended June 30, 1998,
Commission File Number 0-27324)
10.44 Amendment No. 1 to Cooperation Agreement between the Company
and Grunenthal GmbH (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q filed for the
quarter ended September 30, 1998, Commission File Number
0-27324)
10.45 First Amendment to Lease dated as of November 25, 1998,
between ARE-215 College Road, LLC, and the Company
(incorporated by reference to Exhibit 10.45 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1998, Commission File No. 0-27324)
10.46 Amendment No. 5 to Research Collaboration and License
Agreement dated as of December 1, 1998, between the Company
and Merck & Co., Inc. (incorporated by reference to Exhibit
10.46 to the Company's Annual Report on Form 10-K filed for
the fiscal year ended December 31, 1998, Commission File No.
0-27324)
10.47 Addendum No. 3 to Research, Option and License Agreement
effective as of January 1, 1999, between the Company and Eli
Lilly and Company (incorporated by reference to Exhibit 10.47
to the Company's Annual Report on Form 10-K filed for the
fiscal year ended December 31, 1998, Commission File No.
0-27324)
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.
64
<PAGE>
** 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, 1999.
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 11, 2000,
will be furnished to the Securities and Exchange Commission at the time they are
distributed to the Registrant's stockholders.
Imitrex(R) and Zantac(R) are registered trademarks of Glaxo Wellcome Inc.
Hytrin(R) is the registered trademark of Abbott Laboratories. Claritin(R) is the
registered trademark of Schering Corporation. Propulsid(R) is the registered
trademark of Johnson & Johnson. All other brand names or trademarks appearing in
this Report are the property of their respective owners.
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 24, 2000 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 Chairman, President and
- --------------------------- Chief Executive Officer March 24, 2000
Kathleen P. Mullinix, Ph.D.
/s/ Robert L. Spence Senior Vice President and
- --------------------------- Chief Financial Officer
Robert L. Spence (Principal Accounting Officer) March 24, 2000
* Director March 24, 2000
- ---------------------------
Jonathan J. Fleming
* Director March 24, 2000
- ---------------------------
Zola P. Horovitz, Ph.D.
* Director March 24, 2000
- ---------------------------
Eric R. Kandel, M.D.
* Director March 24, 2000
- ---------------------------
John E. Lyons
* Director March 24, 2000
- ---------------------------
Patrick J. McDonald
* Director March 24, 2000
- ---------------------------
Sandra Panem
* Director March 24, 2000
- ---------------------------
Alison Taunton-Rigby, Ph.D.
* By: /s/ Kathleen P. Mullinix
Name: Kathleen P. Mullinix, Ph.D.
Title: Attorney-in-Fact
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 4, 2000, with
respect to the financial statements of Synaptic Pharmaceutical Corporation
included in the Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
March 22, 2000
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. Koff,
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 20, 2000
- ------------------------------ President, and Chief
Kathleen P. Mullinix Executive Officer
/s/ Robert L. Spence Senior Vice President, March 20, 2000
- ------------------------------ Chief Financial Officer,
Robert L. Spence and Treasurer
/s/ Jonathan J. Fleming Director March 20, 2000
- ------------------------------
Jonathan J. Fleming
/s/ Zola P. Horovitz, Ph.D Director March 20, 2000
- ------------------------------
Zola P. Horovitz, Ph.D
/s/ Eric R. Kandel, M.D Director March 20, 2000
- ------------------------------
Eric R. Kandel, M.D
/s/ John E. Lyons Director March 20, 2000
- ------------------------------
John E. Lyons
/s/ Patrick J. McDonald Director March 20, 2000
- ------------------------------
Patrick J. McDonald
/s/ Sandra Panem, Ph.D Director March 20, 2000
- ------------------------------
Sandra Panem, Ph.D
/s/ Alison Taunton-Rigby, Ph.D Director March 20, 2000
- ------------------------------
Alison Taunton-Rigby, Ph.D
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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