UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
________________________
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Fiscal Year ended
July 31, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _______ to _______
Commission file number 0-20772
CYPROS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or otherjurisdiction of incorporation or organization)
2714 Loker Avenue West, Carlsbad, California 92008
(Address of principal executive offices)
33-0476164
(I.R.S. Employer Identification No.)
Registrant's telephone number, including area code:
619) 929-9500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Redeemable Class "B" Warrant
(Title of class)
Indicate by mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities
Exchange Act 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
[X] YES [ ] NO
As of October 21,1996, the Registrant had 11,613,748 shares of
Common Stock, no par value, outstanding, and the aggregate
market value of the shares held by non-affiliates on that date
was $34,706,916 based upon the last sales price of the
Registrant's Common Stock reported on the National Association of
Securities Dealers, Inc. Automated Quotation National Market
System.*
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 the 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. [X]
_______________
* Excludes 2,937,019 shares of Common Stock held by directors,
executive officers and shareholders whose beneficial ownership
exceeds ten percent of the shares outstanding on October 21,1996.
Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by
or under common control with the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be filed on or before November 28,
1996 are incorporated by reference into Part III.
PART 1.
Item 1. Business.
Except for the historical information contained herein, the
following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results
could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are
not limited to, those discussed in the description of the
Company's business below and the sections entitled "Licenses",
"Manufacturing", "Sales and Marketing", "Competition",
"Government Regulation", "Patents and Proprietary Rights" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations", those discussed in the S-3 Registration
Statement File No. 333-3507 filed with U.S. Securities and
Exchange Commission, as well as those discussed in any documents
incorporated by reference herein or therein.
General
The Company is developing and marketing acute care drugs for the
hospital market. On August 9, 1995, it acquired its first
marketable products, Glofil and Inulin, two injectable drugs that
assess kidney function by the measurement of glomerular
filtration rate ("GFR"). It is also currently conducting six (6)
Phase II clinical trials on CPC-111 and CPC-211, two drugs
potentially indicated for a number of major disorders caused by
impaired blood flow, known as "ischemia". These disorders
include heart attack and ischemic heart disease, surgically-
induced ischemia, sickle cell anemia crises, stroke and closed
head injury and the drugs are covered by U.S. patents. During the
year, the Company made two interim releases of statistically
significant data from 55 patients in its Phase II clinical trial
of CPC-111 in coronary artery bypass grafting surgery patients
which showed that CPC-111 is acting as a cardioprotective drug.
(See Clinical Programs on page 8).
Kidney Disease and the Company's Acquired Products. Kidney
disease afflicts more than 2,000,000 Americans and results in
over $12 billion annually in healthcare costs in the United
States. The Company believes that kidney disease can be reduced
if identified at an early stage by the monitoring of renal
function. Glofil and Inulin are products cleared by the U.S. Food
and Drug Administration ("FDA") for monitoring renal function by
determining GFR. Glofil is more accurate than its principal
competitor, creatinine clearance, in the measurement of GFR for
the estimated 500,000 patients with severe kidney disease and the
Company is targeting this segment of the market. Nephrologists
and nuclear medicine departments at major medical centers are the
primary end users of these products. During the fiscal year ended
July 31, 1996, the Company established a field sales force and
customer service function, obtained the appropriate licenses for
its own distribution facility in Carlsbad, California and Glofil
and Inulin reached sales of $1,275,000 after the Company acquired
them.
Ischemia-Induced Cell Damage and the Company's Phase II Clinical
Programs. Similarly, there are approximately 4,000,000 cases of
ischemia-induced disorders annually in the United States,
resulting in over 900,000 deaths and an estimated $200 billion in
annual costs for physical and mental rehabilitation and ongoing
care, and yet there are currently no FDA-approved drugs to avoid
or reverse the massive cell damage caused by ischemia (termed
"cytoprotective drugs"). Currently approved drugs for treating
cardiovascular ischemia, such as "clot busting" drugs, serve to
re-establish blood flow but do not have direct cytoprotective
benefits. The Company believes that the drugs it is developing,
if cleared by the FDA and successfully marketed, should reduce
significantly the number of fatalities and the rehabilitation and
ongoing care costs associated with ischemic disorders.
Impairment of blood flow reduces the supply of oxygen to body
cells, interrupting normal aerobic metabolism and causing
depletion of adenosine triphosphate ("ATP"), the cells' primary
energy source. Ischemia-induced depletion of ATP produces a
myriad of increasingly destructive cellular events known as the
"toxic ischemic cascade". The Company believes that all
cytoprotective drugs under development by others for treatment of
ischemia are focused on treating specific elements of the toxic
ischemic cascade, leaving other elements free to cause cell,
tissue and organ damage.
The Company's approach, based on preventing or reversing the
toxic ischemic cascade, is comprehensive in nature and, the
Company believes, potentially more effective. CPC-111 and CPC-211
are designed to act during and after ischemia by maintaining
cellular ATP levels or accelerating their restoration. CPC-111 (a
natural substance) and CPC-211 have very low orders of toxicity,
making them more amenable to being used early in the patient
management process, which is critical in acute care settings.
Further, CPC-111 and CPC-211 are small molecules, easily
deliverable and inexpensive to produce. Extensive pre-clinical
data shows desirable therapeutic effects in animal models of the
targeted diseases. Significant human data, available from the
Company's own studies and independent, physician-sponsored
Investigational New Drug applications ("INDs"), show that each of
these drugs is well tolerated when administered at clinically
relevant doses to healthy subjects. The minimal side effects
associated with CPC-111 and CPC-211 will greatly reduce their
development risk and may permit their broad, early use in acute
care settings, such as ambulances and emergency rooms, where
rapid access to treatment is of utmost importance.
During the fiscal year ended July 31, 1996, the Company began a
Phase II trial of CPC-211 in closed head injury patients and
continued a Phase II trial on CPC-211 in stroke patients.
During the year, the Company also began a dose-ranging Phase II
clinical trial on CPC-111 in sickle cell anemia crises patients
and one in angioplasty patients and continued Phase II trials on
CPC-111 in congestive heart failure patients and in cardiac
bypass grafting surgery patients. The Company's strategy is to
reduce the risk associated with drug development by selecting
for large-scale pivotal trials the clinical indication(s) showing
the best Phase II results from the multiple small-scale Phase II
trials on CPC-111 and CPC-211 that the Company has underway. The
Company intends to begin Phase III trials of CPC-111 and CPC-211
during the fiscal year ending July 31, 1997.
Pre-clinical Programs. Further implementing its overall strategy
of developing drugs that protect cells from ischemic damage, the
Company is conducting pre-clinical studies on a number of
additional drugs meant to reduce the neurodegeneration associated
with stroke and traumatic head injury. The Company believes that
these drugs will reduce "excitotoxicity", the excess release of
excitatory amino acid ("EAA") neurotransmitters in the brain that
stems from ischemically-caused ATP depletion in certain brain
cells. Drugs being developed in these studies include: (i) a
new class of neuronal calcium channel blockers which block
excessive EAA neurotransmitter release; and (ii) a patented
series of novel compounds which augment levels of adenosine (a
naturally occurring substance which inhibits EAA release) in
ischemic tissue by inhibiting its metabolism. During the year,
the Company also received a $100,000 Small Business Innovation
Research Phase I grant to develop a prodrug for CPC-111. This
program was recently initiated with the goal of producing CPC-111
prodrugs with improved pharmacokinetic properties.
Acquired Products for the Hospital Market
The Company's strategy includes building near-term sustainability
with the cash flow from acquired acute care products for the
hospital market with the goal of reducing its overall cash
consumption rate and building its sales, marketing and
distribution infrastructure in advance of FDA clearance of CPC-
111 and CPC-211.
Glofil and Inulin
Kidney disease afflicts more than 2,000,000 persons in the United
States and is increasing primarily due to the growth in diabetes
and lupus cases. Kidney disease results in over $12 billion
annually in healthcare costs in the United States. The Company
believes that more accurate diagnosis and monitoring of renal
disease will aid in the management of the primary causes of end
stage renal disease.
Glofil-125 and Inulin, two injectable products acquired by the
Company on August 9, 1995, are FDA-cleared products for the
measurement of renal function. Nephrologists and nuclear medicine
departments at major medical centers are the primary users of
these products. During the fiscal year ended July 31, 1996, the
Company recorded sales of $1,275,000 from the sale of Glofil-125
and Inulin. Two customers using Glofil-125 for long-term research
studies accounted for 39% and 15%, respectively, of net sales of
these products.
Glofil-125 is an injectable radioactive diagnostic drug, which
provides rapid information on GFRs with great accuracy. This is
an established product that is covered by an FDA-cleared New Drug
Application, and is currently sold by the Company in 4ml vials
and in prefilled syringes through the 117 nationwide
radiopharmacies of Syncor International pursuant to a
distribution agreement entered into with the Company in February
1996. Inulin is an injectable diagnostic drug, which provides a
measure of GFRs. Inulin is currently sold in 50 ml ampules with
actual patient dosing correlated to patient weight.
The Company believes there is substantial opportunity for
increased utilization of Glofil-125. Present diagnostic
procedures for measuring kidney function include serum creatinine
and creatinine clearance tests. These two tests are the most
commonly performed methods of measuring kidney function because
they are cheaper tests, however both methods significantly
overestimate kidney function in the estimated 500,000 patients
severe renal disease. The use of Glofil-125 is a more direct,
true measure of kidney function yielding accurate results. This
improved accuracy can be essential to reliably monitoring disease
progression and intervention, as well as assessing the immediate
state of renal impairment. The biggest impediment to the
continued growth in the sales of Glofil-125 would be a change in
the ability of the end users to obtain reimbursement for the test
or the unforeseen termination of the research studies being
conducted by the Company's two largest customers.
Inulin, which is sold by the Company, and 99m Tc-DTPA (which is
not sold by the Company) are alternative agents for GFR
measurement, however the preparation and use of these two drugs
is difficult and they do not provide the practical advantages of
Glofil-125. There are no new diagnostic drugs being introduced
or in development that the Company is aware of as a competitive
threat to Glofil-125.
Cytoprotection Market Opportunities
Cytoprotective drugs for acute care settings that treat ischemic
injury are not currently available and the market opportunities
for the Company's drugs are large, totalling approximately
4,000,000 cases annually in the United States. The Company
believes that its drugs, if approved, could substantially reduce
not only the 900,000 fatalities associated with ischemia-related
disorders but also reduce significantly the more than $200
billion annual cost of rehabilitation and ongoing care in the
United States.
The Company's drugs are designed to be administered intravenously
in order to speed their delivery to the ischemic tissue. In order
to ensure early interventions, they are intended to be standard
components of "crash boxes" in ambulances, hospital emergency
rooms, operating theater suites, endoscopy suites and radiology
suites. Their lack of substantial toxicity should suit them for
this purpose.
Circulatory System Ischemia
According to the American Heart Association and the National
Institutes of Health, heart attack and stroke represent the
number one (500,000 cases annually) and number three (150,000
cases annually) leading causes of death in the United States,
respectively. Heart attack and stroke are the result of ischemia
to the heart and brain, respectively.
Cardiovascular ischemia can result in a spectrum of clinically
significant events ranging from angina (pain) to heart attack and
sudden death. In addition to the numerous trauma or disease
related causes of ischemia, there are a variety of voluntary
surgical procedures which result in ischemia to vital organ
systems. Procedures such as coronary artery bypass grafting
surgery and coronary angioplasty, both of which are performed to
improve blood flow to the heart, in themselves induce temporary
ischemia which can result in tissue damage. Thus, CPC-111, if
approved, could also be a part of the treatment regimen for these
disorders. All of these conditions or procedures represent
potential opportunities for use of the Company's drugs to reduce
the tissue damage known to be associated with them.
Cerebrovascular ischemia (stroke) can result in temporary loss of
consciousness, permanent behavioral and neurologic impairment,
coma and death. Traumatic injury to the head is caused by
accidents, near drownings and similar incidents. The resultant
medical problems are, in large part, caused by ischemia to the
brain. The biochemical processes associated with stroke and head
trauma are thought to be very similar; thus, drugs developed for
one indication are expected to be useful for the other.
Sickle Cell Anemia
Sickle cell anemia is an autosomal recessive genetic disease
carried by about 8% of African-Americans. Approximately 60,000
African-Americans suffer from the most severe form (homozygous)
of the disease, termed sickle cell "crisis", where the red blood
cells form "sickle" shapes that can clog up capillaries and
result in severe and disseminated ischemia, and undergo multiple
crises each year. CPC-111 has been shown pre-clinically to
prevent this "sickling" process and the Company is evaluating it
in a Phase II trial of sickle cell anemia crisis patients.
The Pathology of Ischemia
Metabolic Aspects (General, All Tissues)
All living animal cells require glucose and oxygen to survive,
both of which are supplied to tissues by the blood. Glucose is
transformed into carbon dioxide and water with the resultant
formation of ATP. ATP is the universal fuel which is required
to keep the cell alive. During and after ischemia, the decrease
in cellular ATP levels damages the cell and, the Company
believes, results in the toxic ischemic cascade, a myriad of cell-
damaging processes discussed below which cause further cell
damage.
ATP generation occurs in two phases. The first phase, called
glycolysis or anaerobic metabolism does not require oxygen. The
second phase called aerobic metabolism requires oxygen and occurs
in mitochondria. Glycolysis is a means of producing cellular
energy in ischemic conditions, and therefore, represents the
body's natural defense against ischemic damage. For this reason,
the facilitation of glycolysis is of interest therapeutically in
the prevention of ischemic damage to tissues and organs. When
pyruvic acid builds up during ischemia due to the inability of
aerobic metabolism to utilize it, an enzyme converts it to lactic
acid which blocks glycolysis. The therapeutic principle
underlying CPC-111 and CPC-211 is to facilitate glycolysis during
and after ischemia so the cell continues to produce ATP and the
toxic ischemic cascade is pre-empted or reversed. Specifically,
CPC-111 bypasses the lactic acid block and does not need to be
energized by ATP to be metabolized. CPC-211 reduces ischemia
induced lactic acid accumulation and therefore allows energy
metabolism to continue.
Excitotoxicity (Nerve Tissue)
The destructive impact of ATP depletion in nerve tissue is
further complicated by the over-production in nerve cells of
various excitatory amino acids, chemicals that transmit nerve
impulses from one nerve cell to another. The over-production and
release of EAAs (predominately glutamate and aspartate) by nerve
cells exposed to ischemia over-stimulates adjacent postsynaptic
nerve cells, causing them in time to succumb to metabolic
exhaustion and cell death. This ischemia-induced process, called
delayed excitotoxicity, is associated with a number of acute
(stroke and traumatic head injury) and chronic (Alzheimer's,
Parkinson's Disease and Amyotrophic Lateral Sclerosis) neurologic
disorders. Controlling delayed excitotoxicity by blocking the
postsynaptic EAA receptors has recently attracted the attention
of both academic and pharmaceutical scientists. The drugs in
development that act by this mechansim to date have considerable
side effects and only block selected receptor subtypes,
therefore, only dealing with part of the problem since all
receptor subtypes appear to cause damage.
Recent evidence has shown that specific presynaptic channels,
neuronal calcium channels, regulate the release of
neurotransmitters in nerve cells. The Company has shown that
compounds which block excessive EAA neurotransmitter release from
nerve cells greatly reduce excitotoxicity and post-ischemic
tissue damage in animal models of stroke and head trauma. The
Company is seeking to develop drugs that specifically block
neuronal calcium channels and therefore, if successful, would
block the excitotoxic process and reduce the resultant cell
damage. These drugs are expected to have a more comprehensive
effect on excitotoxicity than the specific postsynaptic EAA
receptor blockers, since they will reduce the stimulation of all
and not just some EAA receptors. See " Neuronal Calcium Channel
Blocker Program."
The Company has also shown that adenosine, a natural compound,
has cytoprotective properties. The Company is seeking to develop
a series of drugs, called adenosine metabolism inhibitors, which,
if successful, would augment adenosine levels in ischemic tissue
and have cytoprotective effects in both brain and heart tissue.
See "Adenosine Metabolism Inhibitor Program."
The Toxic Ischemic Cascade
Ischemia-induced cell damage triggers a number of processes which
cause further damage to each affected cell and its surrounding
cells. This myriad of destructive processes is facilitated by
reperfusion injury, which occurs after blood flow is re-
established. The traumatized, ATP-depleted cell enters into the
toxic ischemic cascade, resulting in the release of a host of
toxic agents, including damaging reactive chemicals called free
radicals, as well as other molecules that are products of cell
membrane breakdown, all of which damage cells. Excessive
intracellular calcium buildup is also an element of the toxic
ischemic cascade and also triggers a host of other damaging
processes such as activation of proteolytic enzymes (enzymes that
break down proteins) which digest cells and activation of protein
kinases which regulate cell metabolism. The traumatized cell
also releases agents which stimulate the immune system,
activating various blood cells, such as neutrophils and
macrophages which actually eliminate the cell affected by
ischemia. Rather than target each of these myriad events, the
Company's drugs, CPC-111 and CPC-211, address the issue of ATP
replenishment so that the cell can correct the ischemic cascade
naturally.
There are currently no known FDA-approved cytoprotective drugs.
Those under development are, to the Company's knowledge,
primarily aimed at specific elements of the toxic ischemic
cascade. The Company believes that its approach to
cytoprotective drug development is unique in that it seeks to pre-
empt or reverse the entire cascade by decreasing the initial
metabolic trauma which triggers it (i.e., ATP depletion). The
Company believes that this approach is preferable to treating
specific elements of the cascade, since it more comprehensively
addresses the underlying pathology and should therefore result in
more efficacious therapy.
Ischemia Drugs in Development - The Metabolism Program
The Company is conducting four Phase II clinical trials on CPC-
111 and two Phase II trials on CPC-211. These drugs are designed
to minimize the tissue damage associated with cardiovascular
ischemia (e.g., congestive heart failure and angioplasty),
surgically-induced ischemia, sickle cell anemia crises, and
acute cerebral ischemia (specifically, stroke and traumatic head
injury). The Company expects to finish these trials during the
fiscal year ending July 31, 1997 and also to begin Phase III
trials with CPC-111 and CPC-211 in at least one indication each.
CPC-111. CPC-111 is a small non-peptide molecule that the
Company believes (based on extensive pre-clinical and mechanistic
data) stimulates and maintains glycolysis in cells undergoing
ischemia by circumventing the ischemia-induced blockage of this
process. The Company has licensed four issued U.S. patents which
cover the use of CPC-111 for acute ischemic heart disease (such
as acute myocardial infarction ("AMI"), congestive heart failure
and unstable angina), surgically-induced ischemia (e.g., CABG
surgery), and other ischemic disorders and has several patents
pending in the United States and Europe. Pre-clinical studies
conducted by various investigators involving this compound in
cardiovascular ischemia (including myocardial infarction), sickle
cell anemia, septic and hemorrhagic shock and generalized trauma
have shown therapeutic benefits as indicated by significant
tissue preservation, improved organ function and survival in
animal models.
There are published U.S. and foreign clinical studies with CPC-
111 indicating that is is well tolerated in humans with little or
no side effects. More than 500 patients have been tested with the
drug worldwide. These studies indicate that the drug improves
heart function in congestive heart failure patients as well as in
other situations where the heart is injured.
In December 1995 and in August 1996, the Company released data
from its Phase II trial with CPC-111 in coronary artery bypass
grafting surgery patients. Stage 1 data comprised 10 active- and
10 placebo-treated patients with the former receiving 250 mg/kg
of CPC-111 prior to the surgery. Stage 3 data comprised 15 active-
and 15 placebo-treated patients with the former receiving 250
mg/kg of CPC-111 prior to surgery and the cardioplegia solution
was supplemented with 2.5 mM of the drug.
The Company monitored the patients at multiple time points during
and after surgery to evaluate various hemodynamic and blood
chemistry measures and post-operative inotropic and vasodilator
therapy. Concerning the hemodynamic measures, the active-treated
group in both stages showed higher cardiac output and cardiac
index scores which were statistically significant at 12 hours and
at the 0-12 hour area under the curve. Concerning the blood
chemistry measure, creatinine kinase MB ("CKMB") isoenzyme tended
to be lower in the treated group and reached statistical
significance at 2-6 hours. CKMB is an isoenzyme that is released
through the cell wall into the blood stream with the breakdown of
the cellular wall by ischemia. Also, the active treated group
required approximately 50% less inotrope support on the intensive
care unit ("ICU") post-operatively and required less vasodilator
therapy allowing for earlier patient discharges from the ICU.
The Company is continuing this study, comprising another 10
active- and 10 placebo-treated patients with the former receiving
125 mg/kg of CPC-111 pre-bypass, which is necessary to determine
the dose-response curve. Also, the Company will determine whether
response is improved by adding two post-bypass doses to the pre-
bypass dose of the drug in an additional 15 active- and 15
placebo-treated patients.
Consistent with the Company's strategy to diversify drug
development risk, during the fiscal year ended July 31, 1996,
the Company began a dose-ranging Phase II clinical trial with
CPC-111 in sickle cell anemia crises patients and in angioplasty
patients and continued Phase II trials in ischemic congestive
heart failure patients and coronary artery bypass grafting
surgery patients.
CPC-211. CPC-211 is also a small non-peptide molecule which acts
on glycolysis at a different site from CPC-111. The Company has
exclusive rights to an issued U.S. patent covering the use of
CPC-211 in cerebral ischemia and in 1996 was issued a Notice of
Allowance on a novel dosing regimen of CPC-211 based on data from
the Company's Phase I trial. The Company believes that CPC-211
stimulates a specific enzyme which is present in the membrane of
mitochondria that removes a precursor of lactic acid (pyruvic
acid) from the cytoplasm of the cell by transporting it into the
mitochondria, resulting in a reduction of cell acidity. Increased
post-ischemia accumulation of lactic acid is a major causal
factor in the cessation of glycolysis, the resultant decrease in
cellular ATP levels and eventual cell death. Numerous studies
have shown that CPC-211 reduces post-ischemia lactic acid levels
in animal models, as well as in humans, subjected to various
traumatic events which would otherwise have resulted in increased
lactic acid (lactic acidosis). Pre-clinical animal studies
involving central nervous system trauma (ischemia to both the
brain and spinal cord) have documented the effectiveness of
CPC-211 in normalizing cell function and preventing or reducing
tissue damage.
CPC-211 has been employed by clinical investigators in patients
on an experimental basis for the intravenous treatment of lactic
acidosis. Published clinical studies have established that
CPC-211 reduces serum lactic acid and exhibits no serious side
effects. It has also been shown in human studies to permeate the
blood-brain barrier and to reduce brain lactic acid levels in
congenital lactic acidosis patients. The Company believes that
the availability of human data on CPC-211 should facilitate and
reduce the risk associated with its clinical development.
Further, the Company's Phase I study in CPC-211 demonstrated that
the drug promptly lowers serum lactate, and that this effec lsted
for several hours. Using these data, this year the Company began
a Phase II clinical trial on CPC-211 in closed head injury
patients exploring similar properties of the drug in the human
brain. In addition, a Phase II clinical trial on CPC-211 in
stroke patients is continuing.
Ischemia Drugs in Pre-clinical Research-The Metabolism and
Excitotoxicity Programs
The Company is also seeking to develop new drugs for the
treatment of ischemia-related disorders involving neurological
damage, such as stroke, traumatic head injury, epilepsy and
chronic neurodegenerative disorders such as Alzheimer's and
Parkinson's disease. These pre-clinical research programs are
focused on either the metabolic or the excitotoxicity aspects of
ischemia therapeutics, and involve the chemical modification of
identified lead molecules that regulate adenosine metabolism and
various calcium ion channels on neuronal cells.
Adenosine Metabolism Inhibitor Program. The Company is seeking to
develop CPC-405 and certain of its derivatives, which are novel
small molecules with demonstrated potency as inhibitors of
adenosine metabolism. Adenosine is a natural cytoprotective agent
which is generated in ischemic tissue and serves to protect cells
from a variety of traumatic situations. Naturally generated
adenosine is rapidly degraded by enzymes. The Company expects
that CPC-405 will increase the level of adenosine in tissue
traumatized by ischemia and thereby increase its cytoprotective
effect. A U.S. patent has been issued on the composition of the
CPC-400 series of drugs. The Company will seek to identify other
lead compounds to take forward into clinical development.
Neuronal Calcium Channel Blocker Program. The Company believes
that the therapeutic approach to excitotoxicity currently
attracting the most commercial attention involves the development
of specific EAA receptor blockers which inhibit the excessive
postsynaptic EAA action that is triggered by ischemia. Although
these EAA receptor blockers have neuroprotective properties in
cell culture and animal models of ischemia, their usefulness is
hampered by toxic side effects associated with the blockage of
EAA receptors and by the fact that there are multiple EAA
receptor subtypes, all of which appear to cause post-ischemic
damage when they are excessively stimulated.
The Company is seeking to develop new classes of drugs that are
designed to remedy excitotoxicity in a potentially more complete
and effective manner by reducing EAA release from nerve cells,
thereby reducing the over-stimulation of all EAA receptor
subtypes. This pre-synaptic approach to neuroprotection is viewed
by the Company as potentially more effective than blocking
receptors post-synaptically.
Specifically, the Company is seeking to develop separate classes
of small-molecule drugs that act as neuronal calcium channel
blockers ("NCCB"), which it has labelled as the CPC-300, CPC-800
and CPC-8000 series; the Company has synthesized over 100
compounds in this series. If successful, these drugs would have
the ability to normalize or decrease EAA release and thereby
comprehensively reduce the over-stimulation of EAA receptors.
Prototype agents such as CPC-8027 have shown the desired effect
of acting at the neuronal calcium channels, which controls EAA
release. The Company has demonstrated neuroprotection in several
pre-clinical models with CPC-304, CPC-317, CPC-877 and CPC-8027
and intends to further modify them structurally with the goal of
improved drug delivery to the central nervous system. These
modifications will require additional pre-clinical testing.
The Company has devised a novel human cell assay which enables it
to determine whether various NCCBs have the desired functional
attributes. The assay involves using human cells which have the
functional neuronal-type calcium channel within their membrane.
Studies conducted by the Company indicate that the neuronal-type
calcium channel on these cells is pharmacologically similar to
that present on nerve cells, and the Company believes that
possession of this assay technology confers a competitive
advantage in the development of neuronal calcium antagonists.
The channel is also coupled to a function that can be measured
using conventional laboratory techniques. The Company has filed
two U.S. patent applications covering certain compounds with
activity at the neuronal calcium channel as well as the
functional neuronal-type calcium channel assay in human cells.
Licenses
The Company believes its strategic objectives can best be met by
combining its in-house research and development efforts with
licenses and research collaborations with scientists at outside
academic and clinical research centers.
The principal sources of the Company's existing licenses are:
Angel K. Markov, M.D.
CPC-111. The Company has obtained an exclusive license from Dr.
Markov to four U.S. patents covering the use of CPC-111 in a
number of indications including acute ischemic heart disease
(such as AMI, congestive heart failure and unstable angina),
surgically-induced ischemia, sickle cell anemia, ARDS, sepsis and
other ischemic disorders. The Company is funding clinical
development in Dr. Markov's laboratories at the University of
Mississippi Medical Center (and is currently funding a Phase II
clinical trial there in ARDS patients under his IND). In this
regard, the Company has undertaken certain development
obligations which must be met in order to maintain this license
in force. In the event the Company breaches the license
agreement, such as by not meeting certain milestones within the
specified time periods or by failing to expend certain amounts in
connection with clinical trials within specified time periods,
the license will automatically terminate and all rights under the
license and information acquired by the Company concerning any
products based on the licensed technology will revert to Dr.
Markov. In the event of such termination, the Company will
retain the rights to market products for which sales occurred
within the calendar year prior to the termination, and all other
products and information related thereto based on the licensed
technology will revert to Dr. Markov. To date, the Company has
met all milestones.
University of Cincinnati
CPC-211. The Company has an exclusive license from University of
Cincinnati ("UC") to a U.S. patent covering the use of CPC-211 in
cerebral ischemia. The Company has undertaken certain
development obligations which must be met in order to maintain
its rights in force. If certain milestones are not met by the
Company within specified time periods, UC may, in its sole
discretion, elect to continue the agreement, negotiate in good
faith with the Company to modify the agreement or terminate the
agreement upon 30 days' written notice in which event all rights
under the license would revert to UEM. To date, the Company has
met all milestones.
Elie Abushanab, Ph. D.
Adenosine Metabolism Inhibitor. The Company obtained a license to
certain adenosine metabolism inhibiting compounds developed by
Dr. Elie Abushanab, which the Company believes will enhance the
levels of adenosine in cardiovascular ischemia situations.
Composition of matter claims on a patent application covering
certain of these compounds have been recently allowed. Under the
license, the Company must pay Dr. Abushanab certain milestone
payments relating to the development of any drug covered by the
license. To date, the Company has met all milestones.
Manufacturing
The Company does not currently intend to undertake the
manufacture of any drugs which may derive from its technologies.
Glofil is manufactured for the Company by the former owner of the
drug and Inulin is manufactured for the Company by one of its
existing contract manufacturers. In the case of CPC-111 and CPC-
211, there are alternative sources of supply for the bulk drug in
existence, and the Company has entered into arrangements with
third parties to manufacture and formulate CPC-111 and CPC-211
for clinical trials. There can be no assurance that any of the
Company's contract manufacturers will continue to meet the
Company's requirements for quality, quantity and timeliness or
the FDA's current Good Manufacturing Practice ("cGMP")
requirements or that the Company would be able to find a
substitute manufacturer for Glofil, Inulin, CPC-111, CPC-211 or
any other of its drugs which would meet these requirements or
that lots will not have to be recalled with the attendant
financial consequences to the Company. The Company's dependence
upon others for the manufacture of its drugs may adversely affect
the future profit margin, if any, on the sale of those drugs and
the Company's ability to develop and deliver products on a timely
and competitive basis. In the event the Company is unable to
obtain or retain contract manufacturers or to obtain
manufacturing on commercially acceptable terms, it may not be
able to commercialize its drugs as planned.
Sales and Marketing
The commercialization of drug products is an expensive and time-
consuming enterprise. The Company currently has a customer
service representative and three field sales representatives for
Glofil and Inulin and is hiring additional sales representatives.
The Company believes that it will be able to serve the hospital
market in North America with a 50 to 70 person sales and
marketing staff. There can be no assurance that the Company will
be able to establish sales and distribution capabilities or be
successful in gaining market acceptance for its drugs.
Competition
The pharmaceutical industry in general is highly competitive.
Competition in the areas of the Company's activities is
substantial and expected to increase. The Company faces
competition from specialized biotechnology companies, large
pharmaceutical companies, academic institutions, government
agencies and public and private research organizations, many of
which have extensive resources and experience in research and
development, clinical testing, manufacturing, regulatory affairs,
distribution and marketing. Some of these entities have
significant research activities in areas upon which the Company's
programs focus. Many of the Company's competitors possess
substantially greater research and development, financial,
technical, marketing and human resources than the Company and may
be in a better position to develop, manufacture and market drugs.
These entities may discover and develop drugs competitive with or
superior to those developed by the Company.
Government Regulation
The manufacture and sale of drugs are subject to extensive and
arduous regulation by United States and foreign governmental
authorities prior to commercialization. In particular, drugs are
subject to rigorous preclinical and clinical testing and other
approval requirements by the FDA and comparable foreign
regulatory authorities. The process for obtaining the required
regulatory approvals from the FDA and other regulatory
authorities takes many years and is very expensive. There can be
no assurance that any drug developed by the Company will prove to
meet all of the applicable standards to receive marketing
approval in the United States or abroad. There can be no
assurance that any such approvals will be granted on a timely
basis, if at all. Delays and costs in obtaining these approvals
and the subsequent compliance with applicable federal and state
statutes and regulations could materially adversely affect the
Company's ability to commercialize its drugs and its ability to
receive sales revenues.
The research activities required by the FDA before a drug can be
approved for marketing begin with extensive preclinical animal
and laboratory testing. The tests include laboratory evaluation
of product chemistry and animal studies for the safety and
efficacy of the drug. The results of these studies are submitted
to the FDA as part of an IND which is reviewed by the FDA prior
to beginning clinical trials, first in normal volunteers and then
in patients with the disease.
Clinical trials involve the administration of the investigational
new drug to healthy volunteers or to patients, under the
supervision of a qualified physician-principal investigator.
Clinical trials are conducted in accordance with
government-established statutes, regulations and guidelines and
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 evaluated
by an independent Institutional Review Board ("IRB") at the
institution at which the study will be conducted. The IRB
considers, among other things, ethical factors, the safety of
human subjects and the possible liability of the institution, and
approves the informed consent to be obtained from all subjects
and patients in the clinical trials. The Company will have to
monitor the conduct of clinical investigators in performing
clinical trials and their compliance with FDA requirements.
Clinical trials are typically conducted in three sequential
phases (Phase I, Phase II and Phase III), but the phases may
overlap. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of the
Company's drugs. Furthermore, the Company or the FDA may suspend
clinical trials at any time if it is felt that the subjects or
patients are being exposed to an unacceptable health risk or that
the investigational product lacks any demonstrable efficacy.
The results of the pharmaceutical development, preclinical
studies and clinical studies are submitted to the FDA in the form
of a New Drug Application ("NDA") for approval of the marketing
and commercial shipment of the drug. The testing and approval
process is likely to require substantial time (frequently five to
eight years or more) and expense and there can be no assurance
that any approval will be granted on a timely basis, if at all.
The FDA may deny an NDA if applicable regulatory criteria are not
satisfied, require additional testing or information, or require
post-marketing testing and surveillance to monitor the safety of
the Company's drugs. Notwithstanding the submission of the NDA
and any additional testing data or information, the FDA may
ultimately decide that the application does not satisfy its
regulatory criteria for approval. Finally, drug approvals may be
withdrawn if compliance with labeling and cGMP regulatory
standards is not maintained or if unexpected safety problems
occur following initial marketing.
Among the conditions for clinical studies and NDA approval is the
requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to CGMP, 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.
The U.S. Congress has recently enacted the Prescription Drug Act
of 1992 requiring companies engaged in pharmaceutical
development, such as the Company, to pay user fees in the amount
of at least $100,000 upon submission of an NDA. In addition to
regulations enforced by the FDA, the Company also is subject to
regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act and other present and
potential future federal, state or local regulations. For
marketing outside the United States, the Company is subject to
foreign regulatory requirements governing human clinical trials
and marketing approval for drugs. The requirements governing the
conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.
Patents and Proprietary Rights
The Company's success may depend in large measure upon its
ability to obtain patent protection for its drugs, maintain
confidentiality and operate without infringing upon the
proprietary rights of third parties. The Company has obtained
patent coverage, either directly or through licenses from third
parties, for certain of its drugs. It has licensed (i) four U.S.
patents on CPC-111 which have expiration dates ranging from 2002
to 2008 and (ii) one U.S. patent on CPC-211 which has an
expiration date of 2003. During the fiscal year ended July 31,
1996, the Company also received a notice of allowance on a U.S.
patent on a novel dosing regimen for CPC-211.
The Company has filed patent applications with respect to other
programs and expects to file additional applications in the
future. There can be no assurance that any of these patent
applications will be approved, except where claims have already
been examined and allowed, or that the Company will develop
additional proprietary products that are patentable. Nor can
there be any assurance that any patents issued to the Company or
its licensors will provide the Company with any competitive
advantages or will not be challenged by third parties or that
patents issued to others will not have an adverse effect on the
ability of the Company to conduct its business. Furthermore,
because patent applications in the United States are maintained
in secrecy until issue, and because publication of discoveries in
the scientific and patent literature often lag behind actual
discoveries, the Company cannot be certain that it was the first
chronologically to make the inventions covered by each of its
pending U.S. patent applications, or that it was the first to
file patent applications for such inventions. In the event that
a third party has also filed a U.S. patent application for any of
its inventions, the Company may have to participate in
interference proceedings declared by the United States Patent and
Trademark Office to determine priority of the invention, which
could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company. In addition, there
can be no assurance that the Company's U.S. patents, including
those of its licensors, would be held valid by a court of law of
competent jurisdiction. If patents are issued to other companies
that contain competitive or conflicting claims which ultimately
may be determined to be valid, there can be no assurance that the
Company would be able to obtain a license to any of these
patents.
Under Title 35 of the United States Code, as amended by the
General Agreement on Tariffs and Trade implementing the Uruguay
Round Agreement Act of 1994 ("GATT"), patents that issue from
patent applications filed prior to June 8, 1995, will enjoy a 17-
year period of enforceability as measured from the date of patent
issue while those that issue from applications filed on or after
June 8, 1995 will enjoy a 20-year period of enforceability as
measured from the date the patent application was filed or the
first claimed priority date, whichever is earlier. Patents that
issue from applications filed on or after June 8, 1995, may be
extended under the term extension provisions of GATT for a period
up to five years to compensate for any period of enforceability
lost due to interference proceedings, government secrecy orders
or appeals to the Board of Patent Appeals or the Federal Circuit.
Under the Drug Price Competition and Patent Term Restoration Act
of 1984, including amendments implemented under GATT (the "Patent
Term Restoration Act"), the period of enforceability of a first
or basic product patent or use patent covering a drug may be
extended for up to five years to compensate the patent holder for
the time required for FDA regulatory review of the product. This
law also establishes a period of time following FDA approval of
certain drug applications during which the FDA may not accept or
approve applications for similar or identical drugs from other
sponsors. Any extension under the Patent Term Restoration Act and
any extension under GATT are cumulative. There can be no
assurance that the Company will be able to take advantage of such
patent term extensions or marketing exclusivity provisions of
these laws. While the Company cannot predict the effect that such
changes will have on its business, the adoption of such changes
could have a material adverse effect on the Company's ability to
protect its proprietary information and sustain the commercial
viability of its products. Furthermore, the possibility of
shorter terms of patent protection, combined with the lengthy FDA
review process and possibility of extensive delays in such
process, could effectively further reduce the term during which a
marketed product could be protected by patents.
The Company also relies on trade secrets and proprietary
know-how. The Company has been and will continue to be required
to disclose its trade secrets and proprietary know-how to
employees and consultants, potential corporate partners,
collaborators and contract manufacturers. Although the Company
seeks to protect its trade secrets and proprietary know-how, in
part by entering into confidentiality agreements with such
persons, there can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for
any breach or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.
Scientific Advisory and Clinical Trials Advisory Boards
Scientific Advisory Board
The Company currently has a Scientific Advisory Board ("SAB")
whose members periodically advise the Company with respect to the
Company's scientific research and development programs. The SAB
does not meet as a group; rather individual member(s) are
contacted for advice on an as-needed basis. The members are
compensated through the grant of stock options and, if meetings
are held, will receive fees for attending meetings as well as
reimbursement for expenses. The Company has hired certain SAB
members to perform services for the Company such as assay
development and compound preparation.
The members of the Company's SAB are:
Name and Affiliation / Area of Expertise
Chung Hsu, M.D., Ph.D.
Director of Stroke Clinical Trials,
Washington University, St. Louis
School of Medicine
Animal models of stroke/clinical trials
Ronald Hayes, Ph.D.
Professor of Neurosurgery,
University of Texas, Houston
Animal models of head trauma
Bruce P. Bean, Ph.D.
Professor of Neurobiology,
Harvard University
Neuronal ion channels
Robert Parks, M.D., Ph.D.
Professor of Pharmacology,
Brown University
Biochemical pharmacology
John Olney, M.D.
Professor of Psychiatry and Neuropathology,
Washington University, St. Louis
Excitotoxicity; animal models of stroke
Edward J. Cragoe, Ph.D.
Former Senior Director of Medicinal Chemistry,
Merck Sharp & Dohme Research Laboratories
Medicinal chemistry/ion channels
K.C. Nicolaou, Ph.D.
Head of Chemistry,
The Scripps Research Institute
Professor of Chemistry,
University of California, San Diego
Medicinal chemistry
Harold Kimelberg, Ph.D.
Professor, Division of Neurology,
Albany Medical College
Glial cell release of glutamate
Elie Abushanab, Ph.D.
Professor of Medicinal Chemistry
and Chemistry
College of Pharmacy
University of Rhode Island
Medicinal chemistry/adenosine
Thomas J. Maloney
President
The Iso-Tex Companies
Friendswood, Texas
Radioisotopes/Nuclear Medicine
Claude Wasterlain, M..D.
Chief of Neurology Services
Sepulveda VA Medical Center/
Professor of Neurology
University of California Los Angeles
Stroke and epilepsy
Clinical Trials Advisory Boards
The Company has assembled two Clinical Trials Advisory Boards
("CTABs"), composed of physician "thought leaders" in the
cardiology and neurology area, to assist in the planning, design
and execution of the Company's clinical trials involving CPC-111
and CPC-211. The individuals who constitute each of the CTABs
are paid consultants to the Company and are listed below:
Cardiovascular Clinical Trials Advisory Board
Eric J. Topol, M.D. (Chair)
Chairman, Department of Cardiology,
Director, Center for Thrombosis and Vascular Biology,
Cleveland Clinic and Foundation
Robert M. Califf, M.D.
Associate Professor of Medicine,
Duke University Medical Center
David R. Holmes, Jr., M.D.
Associate Professor of Medicine,
Mayo Clinic Medical School
Cerebrovascular Clinical Trials Advisory Board
William G. Barsan, M.D. (Chair)
Director of Emergency Medicine,
University of Michigan Medical School
Charles G. Brown, M.D.
Associate Professor & Research Director,
Department of Emergency Medicine
Ohio State University
Randall M. Chestnut, M.D.
Oregon Health Sciences Center
School of Medicine, Division of Neurosurgery
Portland, Oregon
Patrick D. Lyden, M.D.
Chief, Stroke Clinic
University of California, San Diego
Anthony Marmarou, Ph.D.
Medical College of Virginia
Division of Neurosurgery
Richmond, Virginia
The members of the SAB and the CTABs may be employed by or have
consulting agreements with entities other than the Company, some
of which may compete with the Company. These other obligations
may limit the availability of the members to the Company. Most
are not expected to participate actively in the Company's
development. Certain of the institutions with which the members
are affiliated may have regulations or policies which are unclear
with respect to the ability of such persons to act as part-time
consultants or in other capacities for a commercial enterprise.
Regulations or policies now in effect or adopted in the future
may limit the ability of the members to consult with the Company.
The loss of the services of certain of the members could
adversely affect the Company.
Furthermore, inventions or processes discovered by the SAB and
CTAB members will not, unless otherwise agreed, become the
property of the Company but will remain the property of such
persons or of their full-time employers. In addition, the
institutions with which the members are primarily affiliated may
make available the research services of their scientific and
other skilled personnel, including the members, to entities other
than the Company. In rendering such services, such institutions
may be obligated to assign or license to a competitor of the
Company patents and other proprietary information which may
result from such services, including research performed by a
member for a competitor of the Company.
Scientific and Other Personnel
As of September 30, 1996, the Company had 31 full-time employees,
seven of whom hold Ph.D. degrees, one of whom also holds an M.D.
degree and one of whom holds a J.D. degree. Twelve of the full-
time employees are employed in finance and general
administration, seven in clinical and regulatory affairs and
quality assurance, seven in research and development, and five in
sales and marketing, customer service and business development.
The Company believes that it maintains good relations with its
employees.
Executive Officers of Registrant
<TABLE>
<CAPTION>
Set forth below is certain information with respect to the
executive officers of the Company at September 30, 1996:
Name Age Position
<S> <C> <C>
Paul J. Marangos, Ph.D. 49 Chairman of the Board,
President and Chief Executive
Officer
Stephen C. Eisold 50 Executive Vice President of
Commercial Development and
Chief Operating Officer
Anthony W. Fox, M.D., Ph.D. 40 Vice President, Drug
Development
David W. Nassif, J.D. 42 Vice President, Chief Financial
Officer and Secretary
</TABLE>
Paul J. Marangos, Ph.D., has been President and Chairman of the
Board since he founded the Company in November 1990. In February
1993, he became Chief Executive Officer. From April 1988 to
November 1990, he was Senior Director of Research at Gensia
Pharmaceuticals, Inc., a biotechnology company. From 1980 to
1988, he was Chief of Neurochemistry in the Biological Psychiatry
Branch, National Institute of Mental Health. Dr. Marangos
obtained his doctorate in biochemistry from the University of
Rhode Island and did his post-doctoral work at the Roche
Institute of Molecular Biology. He has published 250 research
papers and four books in the field of biochemistry and
pharmacology. Dr. Marangos' most recent book, published in July
1992, is entitled Emerging Strategies in Neuroprotection. He is
a member of the Society for Neuroscience and the American Academy
for the Advancement of Science. Dr. Marangos is the founding
editor of the Journal of Molecular Neuroscience published by
Humana Press.
Stephen C. Eisold joined the Company in May 1996 as the Executive
Vice President of Commercial Development and Chief Operating
Officer. From February 1990 to May 1996, he held various
executive positions at Gensia Inc., most recently as Vice
President and General Manager of the North American
Pharmaceuticals Division. Prior thereto, Mr. Eisold held various
sales, marketing and commercial development positions in the
pharmaceutical industry since 1973. He received his bachelor of
science from Springfield College and his masters in business
administration from Rockhurst College.
Anthony W. Fox, M.D., Ph.D., joined the Company in April 1994 as
the Vice President of Drug Development. From March 1990 to April
1994, he was employed by Glaxo, Inc., a pharmaceutical company,
the last three years as Director, Cardiovascular and
Anesthesiology Clinical Research. Dr. Fox was Group Leader,
Division of Clinical Affairs, Norwich Division, of Procter &
Gamble, a consumer products company, from May 1987 to March 1990.
He received his bachelor of science in pharmacology with honors,
his bachelor of medicine, bachelor of surgery and doctor of
medicine degrees from the University of London, is a member of
the Royal Colleges of Physicians and is a fully registered
medical practioner in the United Kingdom.
David W. Nassif, J.D., joined the Company in August 1993 as Vice
President, Chief Financial Officer and Secretary. From January
1993 to August 1993, he was a consultant to various public and
private companies in the areas of capital raising, investor
relations and securities compliance. From July 1992 to January
1993, he was the Vice President, Chief Financial Officer and
Assistant Secretary of 999, Inc., a diversified manufacturing and
environmental services company. From December 1987 to July 1992,
he was the Vice President and Assistant Secretary of Showscan
Corporation, a technology company. Mr. Nassif holds honors
finance, management information systems and law degrees from the
University of Virginia.
Item 2. Properties.
The Company leases and occupies two buildings in Carlsbad,
California at a total monthly rental of $30,000. The Company's
executive offices and distribution facility are located in
14,595 square feet of space located at 2714 Loker Avenue West
(the "2714 Space") and the Company's pre-clinical research
group and laboratories are located in 8,547 square feet at
2732 Loker Avenue West (the "2732 Space"). The lease on the
2714 Space commenced April 1996 and has a term of 69 months.
The lease on the 2732 Space commenced in December 1993 and has
a term of 81 months. Both leases have clauses providing for
rent increases at various points in time during the term of the
leases.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended July
31, 1996.
PART II.
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.
The Common Stock of the Company was quoted on the Nasdaq SmallCap
Market under the symbol "CYPR" from November 3, 1992, the date of
the Company's initial public offering, until April 11, 1995 when
it commenced trading on the Nasdaq National Market System under
the same trading symbol. The Redeemable Class B Warrants are
also quoted on the Nasdaq National Market System under the symbol
"CYPRZ". The following table sets forth for the calendar quarters
indicated, the high and low sales prices of the Common Stock on
the Nasdaq SmallCap Market or the Nasdaq National Market System,
as the case may be, as reported in published financial sources.
On May 8, 1995, the Company split its stock on a 2.5:1 basis. All
of the prices shown in the table have been adjusted for the
split.
<TABLE>
<CAPTION>
Year ended July 31, 1996 High Low
<S> <C> <C>
First Quarter $9.13 $3.00
Second Quarter $6.13 $3.13
Third Quarter $6.19 $4.56
Fourth Quarter $6.13 $3.63
Year ended July 31, 1995 High Low
First Quarter $5.50 $5.00
Second Quarter $5.90 $4.60
Third Quarter $6.70 $3.20
Fourth Quarter $9.50 $6.88
</TABLE>
The last sales price of the Common Stock on October 21, 1996 was
$4.00.
According to a survey as of September 23, 1996, there were 1,562
beneficial owners of the Common Stock.
The Company has not paid any dividends since its inception and
does not intend to pay any dividends on its Common Stock in the
foreseeable future.
Item 6. Selected Financial Data.
The following table sets forth certain financial data with
respect to the Company. The selected financial data should be
read in conjunction with the Company's Financial Statements
(including the Notes thereto) and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Report.
<TABLE>
<CAPTION>
Years
ended
July
31,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <<C> <C>
C
Statement of
Operations Data:
Net sales $ $ - $ - $ - $ 1,275
-
Gross Profit - - - - 870
Total operating 359 1,715 2,565 3,910 4,988
expenses
Loss from operations (359) (1,715) (2,565) (3,910) (4,118)
Other income, net 51 121 190 797 1,028
Net loss (308) (1,594) (2,375) (3,113) (3,090)
Net loss per share (0.07) (0.28) (0.32) (0.32) (0.27)
Shares used in
computing
net loss per 4,350 5,637 7,357 9,860 11,518
share
July
31,
Balance Sheet Data: 1992 1993 1994 1995 1996
Cash, cash
equivalents and
short-term $ $ $ $ $
investments 220 4,444 5,666 13,442 15,997
Working capital
27 4,311 5,284 12,934 15,384
Total assets
303 4,900 6,206 14,175 19,747
Long-term debt
- 160 240 195 228
Common stock
257 6,748 9,927 20,945 21,838
Accumulated deficit
(310) (1,904) (4,279) (7,392) (10,482
)
Total shareholders'
equity 110 4,578 5,476 13,366 18,510
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Except for the historical information contained herein, the
following discussion contains forward-looking statements that
involve risks and uncertainties, including statements regarding
the period of time during which the Company's existing capital
resources and income from various sources will be adequate to
satisfy its capital requirements. The Company's actual results
could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include but are not
limited to, those discussed in this section, as well as in the
sections entitled "Business", "Licenses", "Manufacturing", "Sales
and Marketing", "Competition", "Government Regulation", "Patents
and Proprietary Rights", those discussed in the S-3 Registration
Statement File No. 333-3507 filed with U.S. Securities and
Exchange Commission, as well as those discussed in any documents
incorporated by reference herein or therein..
The Company was founded in 1990, commenced its research and
development activities in 1991, completed an initial public
offering (the "IPO") in November 1992, commenced clinical trials
in December 1994 and acquired two FDA-cleared products, Glofil
and Inulin, (the "Acquisitions") in August 1995. The Company has
sustained an accumulated deficit of $10,480,000 from inception
through July 31, 1996. As the Company will not have significant
positive net operating cash flow for the next few years and the
Company's research and development, clinical testing and
regulatory, sales and marketing and general and administrative
expenses during these years will be substantial and increasing,
the Company expects to incur increasing losses for the
foreseeable future.
Results of Operations
Year ended July 31, 1996 compared to year ended July 31, 1995
During the fiscal year ended July 31, 1996, the Company sustained
a loss of $3,090,000 (or $.27 per share) compared to a loss of
$3,113,000 (or $.32 per share) for the prior fiscal year. The
gross profit of $870,000 on sales of Glofil and Inulin and other
income of $1,028,000 (principally interest income) during the
current fiscal year was offset by $4,988,000 in expenses in the
sales and marketing, general and administrative, clinical testing
and regulatory and research and development areas. During the
prior fiscal year, there were no product sales and other income
of $797,000 (principally interest income) was offset by
$3,910,000 in expenses in the above areas.
During the current year, the Company spent $343,000 on sales and
marketing, principally in the hiring of a field sales force and a
customer service function and in various marketing and
promotional programs. No such expense was recorded in the prior
fiscal year as the Company was still in the development stage and
had not yet acquired Glofil and Inulin.
General and administrative expense increased $671,000 during the
current year, principally due to $438,000 in amortization expense
of the purchased technology related to the acquisition of Glofil
and Inulin. The Company also recorded a $196,000 increase in the
amortization of deferred compensation related to the issuance of
stock, stock options and warrants at prices below market value
and a $178,000 increase in salary expense due to increased hiring
of staff.
Clinical testing and regulatory expense decreased by $149,000
during the current year, principally due to a decrease of
$209,000 in contract research organization costs because of a
lower accrual for the Company's Phase II congestive heart failure
trial on CPC-111 and a decrease of $177,000 in licensing
milestone expenses, offsetting increases in other areas,
including a $180,000 increase in salary expense due to additional
hiring. During the prior year, the Company recorded a one-time
milestone expense from the issuance of a non-qualified stock
option grant to the licensor of CPC-211 as a milestone payment
for the completion of that drug's Phase I trial.
Research and development increased by $214,000 during the current
year due to increases in salary expense, the use of outside
collaborators and expense related to the Phase II Small Business
Innovation Research Grant for the neuronal calcium channel
blocker program (which grant was completed during the year) and
the six-month Phase I Small Business Innovation Research Grant
for the CPC-111 pro-drug program (which was awarded to the
Company during the current year).
In addition, net interest and other income for the current year
increased by $231,000 principally due to (i) the interest income
from a larger investment portfolio as a result of the various
private placements during the year (described below in Liquidity
and Capital Resources) and the Class A Warrant Program (also
described below in Liquidity and Capital Resources), which was
not available for all of the prior-year period because the
program began in November 1994 and was completed in February 1995
and (ii) fees and interest earned on a loan that the Company made
during the current year to a financial advisor.
Year ended July 31, 1995 compared to year ended July 31, 1994
During the fiscal year ended July 31, 1995 (the "1995 Year"), the
Company sustained a loss of $3,113,000 (or $.32 per share)
compared to a loss of $2,375,000 (or $.32 per share) for the
prior fiscal year. Increased payroll caused increases in research
and development, clinical testing and regulatory and general and
administrative expenses. Clinical testing and regulatory expenses
during the 1995 Year also reflected the commencement and
completion of the Phase I trial on CPC-211 (and the expense
related to a milestone payment to the licensor of CPC-211 to the
Company in the form of a common stock purchase warrant), the
commencement of the Phase II trial on CPC-111 in congestive heart
failure patients and the commencement of the Phase II trial on
CPC-111 in cardiac surgery patients. Financial advisory and
investor relations costs accounted for significant increases in
general and administrative expenses during the 1995 Year,
including $315,000 of expense recognized in connection with the
issuance (and subsequent repricing) of a warrant as compensation
for services performed through July 31, 1995.
During the 1995 Year, the Company received $250,000 of income
from the Phase II Small Business Innovation Research Grant
awarded to the Company by the National Institutes of Health in
July 1994 (the "Grant"). Research and development expense for the
quarter includes expenses incurred in connection with the Grant.
In addition, net interest and other income for the 1995 Year
increased 269% to $590,000 due principally to the interest income
from a larger investment portfolio and the investment of the
proceeds of the Special Class A Warrant Program at higher rates
than the Company's then-existing investment portfolio for similar
securities and maturities.
Liquidity and Capital Resources
The Company has principally funded its activities to date
through its initial public offering ("IPO") in November 1992,
which raised $5,951,000, subsequent exercises of its Redeemable
Class A Warrants in 1994 and early 1995, which raised
$10,497,000, exercises by the underwriter of the IPO of its unit
purchase options (and the Redeemable Class A Warrants within such
options), which raised $1,681,000, that it had received as part
of its compensation for the IPO and a private placement of
mandatorily convertible notes during July 1996, which raised
$7,000,000. At July 31, 1996, the Company had cash, cash
equivalents and short-term investments of $13,442,000, compared
to $13,442,000 at July 31, 1995. The period-to-period increase
was principally due to the private placement of convertible
notes. This factor also contributed to the increase in working
capital at July 31, 1996 to $15,384,000, compared to $12,934,000
at July 31, 1995.
The Company expects that its cash needs will increase
significantly in future periods due to expansion of its research
and development programs, increased clinical testing activity,
growth of administrative, clinical and laboratory staff and
their related equipment and space needs. Management believes that
the Company's working capital will be sufficient to fund the
operations of the Company for approximately 36 months dependent,
in part, on the timing of the commencement of each phase of the
clinical trials on CPC-111 and CPC-211 and the funding priorities
that it gives its various research programs, the results of
clinical tests and research programs; competing technological and
market developments; the time and costs involved in obtaining
regulatory approvals and in obtaining, maintaining and enforcing
patents; the cost of product acquisitions and their resulting
cash flows and other factors.
The Company expects to seek additional funds through exercises of
its currently outstanding options and warrants, public or private
equity financings, collaborations or from other sources. There
can be no assurance that funds can be obtained on desirable terms
or at all. The Company may seek to raise additional capital
whenever conditions in the financial markets are favorable, even
if the Company does not have an immediate need for additional
cash at that time.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements of the Company and Report of
Independent Auditors are filed as exhibits hereto, listed under
Item 14 of this Report and incorporated herein by reference.
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 regarding directors is hereby incorporated by
reference to the section entitled "Election of Directors" in the
Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the
Company's 1997 Annual Meeting of Shareholders (the "Proxy
Statement").
The information regarding executive officers appears under the
section entitled "Executive Officers of Registrant" appearing in
Item 1 of Part I of this Report.
Item 11. Executive Compensation.
The information required by this item is hereby incorporated by
reference to the section entitled "Executive Compensation" in the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is hereby incorporated by
reference to the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is hereby incorporated by
reference to the section entitled "Transactions with Related
Parties" in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1)(2) Financial Statements and Schedules.
The financial statements are incorporated herein by reference
from Exhibit 99.1, which begins with the Table of Contents on
Page F- 1.
(a) (3) Exhibits.
See Exhibit Index on page 29.
The following management compensation plans and arrangements are
required to be filed as exhibits pursuant to Item 14(c) of this
report.
Exhibit
Number Description
10.1 Forms of Incentive Stock Option and Nonstatutory Stock
Option.*
10.2 Amended 1992 Stock Option Plan.**
10.3 Form of Stock Purchase and Right of First
Refusal Agreement, with related schedule.*
10.4 Employment Agreement, dated July 10, 1991 as amended
and restated September, 1992, between the Registrant
and Paul J. Marangos, Ph.D. *
10.5 Amendment No. 1 to Employment Agreement, dated May 9,
1994, between the Registrant and Paul J. Marangos,
Ph.D.***
10.6 Amendment No. 2 to Employment Agreement, dated March 9, 1995,
between the Registrant and Paul J. Marangos, Ph.D.***
10.7 Amendment No. 3 to Employment Agreement, dated
October 1, 1996, between the Registrant and Paul J. Marangos,
Ph.D.
10.8 1993 Non-Employee Directors Stock Option Plan and
related form of Nonstatutory Stock Option. ****
____________
* Filed as an exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-51682, and
incorporated herein by reference.
** Filed as an exhibit to the Registrant's Form 10-Q for the
period ended January 31, 1995, and incorporated herein by
reference.
*** Filed as an exhibit to the Registrant's Form 10-K for the fiscal
year ended July 31, 1994.
**** Filed as an exhibit to the Registrant's Form 10-K for the fiscal
year ended July 31, 1993.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth quarter
of 1996.
(c) Exhibits.
The exhibits required by this Item are listed under Item 14
(a) (3).
(d) Financial Statement Schedules.
The financial statement schedule required by this Item is
incorporated herein by reference from Exhibit 99.1, which
begins with the Table of Contents to the Financial Statements on
Page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in
the City and County of San Diego, State of California, on the 24th day
of October, 1996.
CYPROS PHARMACEUTICAL CORPORATION
(Signature)
Paul J. Marangos
Chairman of the Board, President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul J. Marangos, and David W.
Nassif, and each of them, his attorney-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any
amendments to this report, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
Paul J. Marangos Chairman of the Board October 24,1996
(Signature) President and Chief Executive
Officer and Director
(Principal Executive Officer) October 24, 1996
David W. Nassif Vice President, Chief
(Signature) Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
Digby W. Barrios Director October 24, 1996
(Signature)
Bernard B. Levine Director October 24, 1996
Virgil Thompson Director October 24, 1996
(Signature)
Robert A. Vukovich Director October 24, 1996
(Signature)
Exhibit Index
Exhibit
Number Description Page No.
2.1 (1) Pharmaceutical Products Purchase and Distribution
Support Agreement as of August 9, 1995 by and among Iso-Tex
Diagnostics, Inc., Cypros Pharmaceutical Corporation and Thomas
J. Maloney. (2)
2.2 (1) Glofil Contract Manufacturing and Royalty
Agreement as of August 9, 1995 by and among Iso-Tex Diagnostics,
Inc., Cypros Pharmaceutical Corporation and Thomas J. Maloney. 2)
2.3 (1) Merger Agreement as of August 9, 1995 among Cypros
Pharmaceutical Corporation, Iso-Tex Diagnostics "B", Inc. and
Jean and Thomas Maloney. (2)
3.1 (3) Restated Articles of Incorporation of the Registrant.
3.2 (4) Amendment to Restated Articles of Incorporation.
3.3 (3) Bylaws, as amended.
4.1 (3) Specimen stock certificate.
4.3 (3) Specimen Redeemable Class B Warrant.
4.5 (3) Form of Warrant Agreement.
4.6 Reference is made to Exhibits 3.1 and 3.2.
10.1 (3) Forms of Incentive Stock Option and Nonstatutory Stock Option.
10.2 (4) Amended 1992 Stock Option Plan.
10.3 (3) Form of Restricted Stock Purchase Agreement, with related
schedule.
10.4 (3) Employment Agreement, dated July 10, 1991 as amended
and restated September 1, 1992, between the Registrant and Paul
J. Marangos, Ph.D
.
10.5 (5) Amendment No. 1 to Employment Agreement, dated May 9,
1994, between the Registrant and Paul J. Marangos, Ph.D.
10.6 (6) Amendment No. 2 to Employment Agreement, dated March 9,
1995, between the Registrant and Paul J. Marangos, Ph.D.
10.7 (7) 1993 Non-Employee Directors Stock Option Plan and
related form of Nonstatutory Stock Option.
10.8 Amendment No. 3 to Employment Agreement, dated
October 1, 1996, between the Registrant and Paul J. Marangos, Ph.D. 30
10.9 (3) License Agreement, dated as of August 20, 1992, between
the Registrant and Angel K. Markov, M.D. (with certain
confidential infomation in brackets deleted). (7)
10.11 (3) License Agreement, dated as of August 27, 1992, between
the Registrant and University E..M., Inc. (with certain
confidential information in brackets deleted). (7)
10.12 (4) Assignment of and Amendment to License Agreement by and
between University E.M., Inc., University of Cincinnati and the
Registrant.
10.13 (6) License and Support Agreement, dated as of February 18,
1993, between the Registrant and Elie Abushanab, Ph.D. (with
certain confidential information in brackets deleted). (8)
10.14 (9) Note Purchase Agreement dated July 11, 1996 by and
among Cypros Pharmaceutical Corporation and Paresco, Inc.
10.15 (9) Note Purchase Agreement dated July 31, 1996 by and
among Cypros Pharmaceutical Corporation and Cameron Capital Ltd.
23.1 Consent of Ernst & Young LLP, Independent Auditors. 31
24.1 Power of Attorney. Reference is made to page 27.
27. Financial Data Schedule - as filed electronically by
Registrant (for SEC use only)
99.1 Financial Statements. 32
______________
(1) Filed as an exhibit to the Registrant's Form 8-K dated
August 10, 1995 and incorporated herein by reference.
(2) Certain confidential portions deleted pursuant to an
application for Order Granting Confidential Treatment Under the
Securities Exchange Act of 1934 and Rule 24b-2 Thereunder filed
concurrently with the Form 8-K.
(3) Filed as an exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-51682, and
incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Form 10-Q for
the period ended January 31, 1995, and incorporated herein by
reference.
(5) Filed as an exhibit to the Registrant's Form 10-K for
the fiscal year ended July 31, 1994.
(6) Filed as an exhibit to the Registrant's Form 10-K for
the fiscal year ended July 31, 1993.
(7) Certain confidential portions deleted pursuant to Order
Granting Application Under the Securities Act of 1933 and Rule
406 Thereunder Respecting Confidential Treatment, dated November
3, 1992.
(8) Certain confidential portions deleted pursuant to Order
Granting Application Pursuant to Rule 24B-2 Under the Securities
Exchange Act of 1934 Respecting Confidential Treatment, dated
December 20, 1993.
(9) Filed as an exhibit to the Registrant's Form 8-K dated
September 20, 1996 and incorporated herein by reference.
Form 10-K Items 14(a) (1) and (2)
Cypros Pharmaceutical Corporation
Years ended July 31, 1996, 1995 and 1994
wi33th Report of Independent Auditors
Cypros Pharmaceutical Corporation
Form 10-K Items 14(a) (1) and (2)
Contents
Report of Ernst & Young LLP, Independent Auditors F-2
Financial Statements (Item 14(a) (1)):
Balance Sheets F-3
Statements of Operations F-4
Statements of ShareholdersO Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Financial Statement Schedules (Item 14(a) (2)):
All financial statement schedules are omitted because the
information described therein is not applicable, not required or
is furnished in the financial statements or notes thereto.
Report of Independent Auditors
The Board of Directors and Shareholders
Cypros Pharmaceutical Corporation
We have audited the accompanying balance sheets of Cypros
Pharmaceutical Corporation as of July 31, 1996 and 1995, and the
related statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended July 31,
1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the 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 Cypros Pharmaceutical Corporation at July 31, 1996 and 1995,
and the results of its operations and its cash flows for each of
the three years in the period ended July 31, 1996 in conformity
with generally accepted accounting principles.
ERNST & YOUNG
(Signature)
August 26, 1996
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Balance Sheets
July 31,
1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $8,306,752 $5,026,745
Short-term investments, held
to maturity (Notes 1 and 2) 7,690,297 8,415,250
Accounts receivable 149,626 -
Inventory 63,386 -
Prepaid expenses and other
current assets 61,409 25,910
Total current assets 16,271,470 13,467,905
Property, equipment and leasehold
improvements, net (Note 2) 608,206 411,651
Purchased technology, net of
accumulated amortization of
$438,238 at July 31, 1996
(Note 1) 2,629,427
Licenses and patents, net of
accumulated amortization of
$87,277 and $61,418 at
July 31, 1996 and 1995,
repectively (Note 4) 111,231 99,591
Deposits and other assets 126,180 195,692
Total assets
$ 19,746,514 $ 14,174,839
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ $ 138,537
119,092
Accrued compensation 155,748 83,594
Other accrued liabilities 231,864 189,713
Purchased asset obligation
(Note 1) 200,000 -
Current portion of long-term
debt (Note 3) 99,282 99,282
Current portion of capital
lease obligation (Note 4) 81,035 22,517
Total current liabilities 887,021 533,643
Long-term debt (Note 3) 41,367 140,650
Capital lease obligations
(Note 4) 187,265 54,149
Deferred rent (Note 4) 120,411 80,519
Commitments (Note 4)
Shareholders' equity: (Note 5)
Common stock, 30,000,000 shares
authorized, 11,613,748
and 11,352,017 shares issued
and outstandingas of July 31,
1996and 1995, respectively 21,838,493 20,944,995
Mandatorily convertible notes -
7,458,498
Deferred compensation (186,993)
(304,309)
Accumulated deficit
(10,482,232) (7,392,124)
Total shareholders' equity
18,510,450 13,365,878
Total liabilities and
shareholder's equity
$ 19,746,514 $ 14,174,839
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical
Corporation
Statements of Operations
Years
ended July
31,
1996 1995 1994
<S> <C> <C> <C>
Net sales $ 1,275,240 - -
Cost of sales 405,142 - -
Gross profit 870,098 - -
Operating expenses:
Sales and marketing 343,054 -
-
General and
administrative 2,254,000 1,583,420 1,015,666
Clinical testing and
regulatory 1,389,128 1,537,964 1,022,134
Research and development 1,002,226 788,424 526,835
Total operating expenses 4,988,408 3,909,808 2,564,635
Loss from operations (4,118,310) (3,909,808) (2,564,635)
Research grant income 270,510 250,000 -
Interest income, net (Note
3) 757,692 547,107 189,372
Net loss $ (3,090,108) $(3,112,701) $ (2,375,263)
Net loss per share $ (0.27) $ (0.32) $ (0.32)
Shares used in computing net
loss per share 11,518,169 9,859,857 7,357,960
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Shareholders' Equity
For each of the three years ended July 31, 1996,
1995 and 1994
Mandator
ily
Common stock Converti
ble
Notes
Shares Amount
<S> <C> <C> <C>
Balance at July 31, 1993 6,083,32 $6,748,4 $
9 19 -
Exercise of warrants
1,343,75 725,625 -
0
Exercise of Class A warrants (Program I)
760,306 2,355,12 -
3
Issuance of common stock for cash and
services 35,650 83,641 -
Common stock repurchased (203,255
) (53,205) -
Deferred compensation related to grant of
stock options - 66,958 -
Amortization of deferred compensation
- - -
Net loss
- - -
Balance at July 31, 1994
8,019,78 9,926,56 -
0 1
Exercise of Class A warrants (program II)
2,605,18 8,205,21 -
0 5
Exercise of Unit
543,745 1,681,26 -
6
Exercise of stock options
183,312 528,924 -
Deferred compensation related to grant of
stock options and - 603,029 -
warrants
Amortization of deferred compensation
- - -
Net loss
- - -
Balance at July 31, 1995 11,352,0
17 20,944,9 -
95
Issuance of mandatorily convertible notes,
net - - 7,458,49
8
Issuance of common stock, net of offering
costs 162,500 940,956 -
Issuance of common stock in business
acquisitions 169,231 1,032,30 -
9
Issuance of common stock for services
200,000 284,375 -
Common stock repurchased (1,540,0
(280,000 00) -
)
Exercise of stock options
10,000 35,163 -
Deferred compensation related to grant of
stock options - 140,695 -
Amortization of deferred compensation
- - -
Net loss
- - -
Balance at July 31, 1996 11,613,7 $21,838, $7,458,4
48 493 98
</TABLE>
<TABLE>
<CAPTION>
Total
Deferred Accumulate Sharehold
Compensat d Deficit ers'
ion Equity
<C> <C> <C>
$(266,273 $1,904,16 $4,577,986
) 0)
- - 725,625
- - 2,355,123
- - 83,641
51,624 - (1,581)
(66,958) - -
110,667 - 110,667
- (2,375,263 (2,375,26
) 3)
(170,940) (4,279,423 5,476,198
)
- - 8,205,215
- - 1,681,266
- - 528,924
(110,842) - 492,187
94,789 - 94,789
- (3,112,701 (3,112,70
) 1)
(186,993) (7,392,124 13,365,87
) 8
- - 7,458,498
- - 940,956
- - 1,032,309
(284,375) - -
- - (1,540,00
0)
- - 35,163
(140,695) - -
307,754 - 307,754
- (3,090,108 (3,090,10
) 8)
$(304,309 $(10,482,2 $18,510,4
) 32) 50
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Cash Flows
1996 1995 1994
<S> <C> <C> <C>
Operating activities
Net loss $(3,090,10 $(3,112,70 $(2,375,26
8) 1) 3)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferred 307,754 94,789 110,667
compensation
Expense related to warrant
issuances - 492,187 -
Depreciation and amortization
173,610 112,713 81,002
Amortization of purchased
technology 438,238 - -
Deferred rent expense
39,892 10,889 69,630
Write off of patent
- 14,000 -
Issuance of common stock for
property - - 12,000
and services
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable
(149,626) - -
Inventory
18,829 - -
Prepaid expenses and other
current 18,536 (41,897) (8,832)
assets
Accounts payable
(19,445) (138,572) 187,254
Other accrued liabilities
114,305 233,909 2,618
Net cash flows used in operating
activities (2,148,015 (2,334,683 (1,920,924
) ) )
Investing activities
Payment for purchase of inventory in - -
business acquisitions (82,215)
Payment for purchase of acquired
businesses (1,835,356 - -
)
Short-term investments
724,953 (3,957,538 (828,137)
)
Purchase of property, equipment and
leasehold improvements (100,770) (193,689) (134,174)
Increase in licenses and patents
(37,499) (10,863) (45,455)
Decrease in deposits and other assets
6,197 16,673 22,729
Net cash flows used in investing
activities (1,324,690 (4,145,417 (985,037)
) )
Financing activities
Issuance of common stock, net
976,119 10,415,405 3,150,808
Issuance of mandatorily convertible
notes 7,458,498
Repurchase and retirement of common
stock (1,540,000
)
Proceeds from long-term debt
- - 267,759
Repayments of long-term debt
(99,283) (99,282) (119,129)
Repayments of capital leases -
(42,622) (17,439)
Net cash flows provided by financing
activities 6,752,712 10,298,684 3,299,438
Increase in cash and cash equivalents
3,280,007 3,818,584 393,477
Cash and cash equivalents at
beginning of year 5,026,745 1,208,161 814,684
Cash and cash equivalents at end of
year $8,306,752 $ $
5,026,745 1,208,161
Supplemental disclosures of cash flow
information:
Cash paid for interest $ $ $
47,953 39,170 28,450
Noncash investing and financing
activities:
Equipment financed under capital $ $ $
leases 234,256 89,549 6,427
Purchased asset obligation $ $ $
200,000 - -
Common stock issued for business
Acquisitions $ $ $
1,032,309 - -
</TABLE>
See accompanying notes.
Cypros Pharmaceutical Corporation
Notes to Financial Statements
July 31, 1996
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Cypros Pharmaceutical Corporation (the "Company") was
incorporated in San Diego, California on November 2, 1990. The
Company develops and markets acute-care, hospital-based products.
The Company is currently marketing Glofil and Inulin, two
injectable renal diagnostic products. The Company's pre-clinical
and clinical development programs focus on cytoprotective drugs
designed to reduce ischemia (low blood flow) induced tissue
damage in acute-care settings. The Company's two clinical
programs are currently in six Phase II trials, which include four
for CPC-111 (acute complications of angioplasty, coronary artery
bypass grafting surgery, congestive heart failure and sickle cell
anemia crises), and two for CPC-211 (stroke and head injury).
Through July 31, 1995, the Company was considered to be in the
development stage.
On August 9, 1995, the Company acquired two businesses, including
(i) the New Drug Application for Glofil and finished goods
inventory of Glofil on hand at the time of closing from Iso-Tex
Diagnostics, Inc., a Texas corporation, (the "Glofil
Acquisition") and (ii) the New Drug Application for Inulin and
the raw material and finished goods inventory of Inulin on hand
at the time of closing from Iso-Tex Diagnostics "B", Inc.
("ITDB"), a Texas corporation (the "Inulin Acquisition"). The
Glofil Acquisition was accomplished in an arms' length
negotiation through a purchase of assets and the Inulin
Acquisition was accomplished through a merger of ITDB with and
into the Company (the "Merger"). The total purchase price was
$3,149,880, of which $1,582,215 in cash and 169,231 newly issued
shares of restricted common stock of the Company (the "Restricted
Shares") were paid at closing. The Company used its working
capital to make the cash payments for the acquisitions at
closing. Both acquisitions were accounted for using the purchase
method and, accordingly, the financial statements include the
operations of the businesses from the date of acquisition.
As part of the Glofil Acquisition, the Company made an additional
cash payment of $200,000 on January 15, 1996 and a final cash
payment of $200,000 on August 9, 1996. As part of the Inulin
Acquisition, the Company has agreed to register the Restricted
Shares, upon the request of the sole stockholder of ITDB, at any
time after one year from the date of closing and if the
registration statement has not become effective within 90 days of
the date of the holder's request, the Company is obligated to
repurchase the Restricted Shares at their market value based upon
the closing bid price of the Company's common stock on such date.
As a result of the acquisitions of Glofil and Inulin, the Company
commenced product sales and is therefore an operating company.
1. Organization and Summary of Significant Accounting Policies
(continued)
Organization and Business Activity (continued)
The following unaudited pro forma data reflects the combined
results of operations of the Company and the two businesses as if
the acquisitions had occurred on August 1, 1994:
<TABLE>
<CAPTION>
July 31,
1996 1995
<S> <C> <C>
Net revenue $ 1,275,240 $ 1,031,486
Net loss (3,090,108) (2,993,386)
Net loss per share (0.27) (0.30)
</TABLE>
In January 1996, the Company entered into an agreement with
Syncor International ("Syncor") to distribute Glofil in unit
doses through Syncor's nationwide pharmacies. Under the
agreement, the Company ships whole vials of Glofil on consignment
to selected pharmacies which then repackage them into unit doses
and ship them to customers upon request. Syncor is also
responsible for billing, collections and disposal of expired
unused vials.
Cash, Cash Equivalents and Short-term Investments
The Company considers highly liquid investments with remaining
maturities of three months or less when acquired, primarily money
market funds, to be cash equivalents. Short-term investments
consist of certificates of deposit, U.S. government securities
and investment grade corporate obligations. The Company has
established guidelines relative to diversification and maturities
that maintain safety and liquidity. The Company has not
experienced any losses on its cash equivalents or short-term
investments. Management believes the credit risk associated with
these investments is limited due to the nature of the
investments.
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such
designations as of each balance sheet date. Debt securities are
classifed as held-to-maturity when the Company has the positive
intent and the ability to hold the securities to maturity. Held-
to-maturity securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts. Interest,
dividends and amortization on the securities classified as held-
to-maturity are included in interest income.
Concentration of Credit Risk
The Company extends credit to its customers, primarily hospitals
and large pharmaceutical companies conducting clinical research,
in connection with its product sales. The Company has not
experienced significant credit losses on its customer accounts.
Two customers individually accounted for 39% and 15% of current
year sales.
1. Organization and Summary of Significant Accounting Policies
(continued)
Inventory
Inventory is stated at the lower of cost (first-in, first-out
method) or market and is comprised of raw materials of $3,437
and finished goods of $59,949.
Depreciation and Amortization
Property and equipment are stated at cost and depreciated over
the estimated useful lives of the assets (generally 5 years)
using the straight-line method. Leasehold improvements are
amortized over the lesser of the estimated useful lives (7 years)
or the remaining term of the lease, whichever is less.
Purchased Technology
Purchased technology associated with the acquisitions of Glofil
and Inulin is stated at cost and amortized on a straight-line
basis over the period estimated to be benefited (7 years).
Effective August 1, 1996, the Company will adopt Statement of
Financial Accounting Standards No. 121 ("FAS 121"), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. The Company does not believe the adoption of
FAS 121 will have a material effect on the its financial position
or results of operations.
License and Patent Costs
The Company capitalizes certain costs related to license rights
and patent applications. Accumulated costs are amortized over
the estimated economic lives of the license rights and patents
(generally 6 years) using the straight-line method commencing at
the time the license rights are granted or the patents are
issued.
Revenue Recognition
Revenues from product sales of whole vials of Glofil and Inulin
are recognized upon shipment. Revenues from Glofil sales under
the Syncor agreement are recognized upon receipt by the Company
of monthly sales reports from Syncor on unit dose sales by its
pharmacies. The Company is not obligated to accept returns of
products sold that have reached their expiration date.
Net Loss Per Share
Net loss per share is computed using the weighted average number
of common shares outstanding during the periods.
1. Organization and Summary of Significant Accounting Policies
(continued)
Reclassifications
Certain previously reported amounts have been reclassified to
conform with the 1996 presentation.
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 amounts reported
in the financial statements and disclosures made in the
accompanying notes to the financial statements. Actual results
could differ from those estimates.
Accounting and Disclosure of Stock Based Compensation
Effective August 1, 1996, the Company will adopt Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting
and Disclosure of Stock-Based Compensation. As allowed under FAS
123, the Company will elect to continue to account for stock
option grants in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees and related interpretations. Accordingly, when the
Company grants stock options with an exercise price equal to the
fair market value of the shares on the date of grant, no
compensation expense is recorded. The Company does not believe
the adoption of FAS 123 will have a material effect on its
financial position or results of operations.
2. Financial Statement Details
Short-Term Investments
All short-term investments of the Company are classified as held-
to-maturity. The following is a summary of held-to-maturity
investments at amortized cost as of July 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Corporate Debt Securities $ 6,902,848 $ 5,210,665
U.S. Government Obligations 749,780 2,778,223
Certificates of Deposit 37,669 426,362
$ 7,690,297 $ 8,415,250
</TABLE>
As of July 31, 1996, the difference between cost and estimated
fair value of the held-to-maturity investments was not
significant. Of the above-referenced 1996 investments,
$6,715,067 will mature at various dates through July 31, 1997 and
$975,230 will mature at various dates after July 31, 1997 through
July 31, 1998.
2. Financial Statement Details (continued)
Property, Equipment and Leasehold Improvements
<TABLE>
<CAPTION>
Property, equipment and leasehold improvements consist of the
following as of July 31:
1996 1995
<S> <C> <C>
Laboratory equipment $ 570,865 $ 337,622
Office equipment, furniture and fixtures 224,932 124,553
Leasehold improvements 89,517 88,113
885,314 550,288
Less accumulated depreciation and (277,108) (138,637)
amortization
$ 608,206 $ 411,651
</TABLE>
Depreciation expense was $138,471, $83,313 and $44,252 for the
years ended July 31, 1996, 1995 and 1994, respectively.
Other Accrued Liabilities
At July 31, 1996 and 1995, other accrued liabilities consist
primarily of clinical costs related to the Phase II clinical
trials of CPC-111.
3. Long-Term Debt
As of July 31, 1996, the Company had an installment note payable
to a financial institution of $140,649, of which $99,282 was
classified as current. The outstanding balance was
collateralized by $242,000 of the Company's short-term
investments as of July 31, 1996. The installment note bears
interest at the prime rate plus 1.6% (or 9.85% at July 31, 1996)
and is being repaid in monthly installments through December
1997. Interest expense incurred on the installment note was
$19,897, $29,947 and $25,971 for the years ended July 31, 1996,
1995 and 1994, respectively.
4. Commitments
Leases
The Company leases its office and research facilities under
operating lease agreements and certain equipment under capital
lease agreements. A security deposit of $85,714 under one of the
facilities lease agreements is included in deposits and other
assets.
4. Commitments (continued)
Leases (continued)
<TABLE>
<CAPTION>
Minimum future obligations under both
operating and capital leases as of July 31,
1996 are as follows:
Operating Capital
Leases Leases
<S> <C> <C>
1997 $ 355,780 $ 111,236
1998 378,040 106,832
1999 397,550 70,134
2000 421,561 35,231
2001 310,573 -
Thereafter 102,749 -
$1,966,253 $323,433
Less amounts representing interest 55,133
Present value of net minimum lease payments 268,300
Current portion of obligations under
capital leases 81,035
Long-term obligations under capital leases 187,265
</TABLE>
Rent expense totaled $193,880, $107,952 and $80,127 for the
years ended July 31, 1996, 1995 and 1994, respectively.
Equipment acquired under capital leases totaled $277,669 and
$82,614 (net of accumulated amortization of $52,564 and $13,362)
as of July 31, 1996 and 1995, respectively.
License Agreements
The Company has various license agreements which require the
payment of royalties to the licensors upon the commercial sale of
products incorporating the licensed compound. Under one such
agreement, the Company issued a warrant in fiscal 1995
exercisable into 43,750 shares of the Company's Common Stock at
an exercise price of $1.60 per share. In the event certain
milestones are not met by the Company within specified time
periods, two of the licensors may elect to terminate their
license agreements and all rights thereunder. Such a termination
could have a significant adverse impact upon the Company.
5. Shareholders' Equity
Preferred Stock
The Company has authorized 1,000,000 shares of convertible
preferred stock. As of July 31, 1996, no such shares were issued
or outstanding.
5. Shareholders' Equity (continued)
Common Stock
During the year ended July 31, 1996, the Company purchased and
retired 280,000 shares of its outstanding Common Stock at $5.50
per share in a privately negotiated transaction.
Mandatorily Convertible Notes
During the year ended July 31, 1996, the Company issued $8
million in principal amount of non-interest bearing, mandatorily
convertible notes to institutional investors in private
placements under the provisions of the Securities and Exchange
Commission ("SEC") Regulation D. The notes are convertible at
the option of the investors into shares of the Company's Common
Stock at various dates from January 31, 1997 through July 31,
1999 at a discount to the market price of the stock immediately
preceding conversion, ranging from 15% to 25%, with the actual
discount depending on the length of time each investor has held
the note being converted. The notes must be converted at various
dates through July 31, 1999. The Company is required to register
with the SEC the shares of Common Stock issuable upon conversion
of the notes on or prior to the expiration of the allowable
conversion periods.
Warrants
In connection with the Company's initial public offering in 1992
(the "Offering"), the Company issued 2,875,000 Redeemable Class A
and Class B Warrants. During fiscal years 1994 and 1995, the
Company initiated special programs designed to encourage holders
of Redeemable Class A Warrants to exercise their warrants
immediately (the "Special Class A Warrant Programs"). Under the
Special Class A Warrant Programs, the Company received net
proceeds of $10,497,005 from the exercise of 2,847,037 Redeemable
Class A Warrants and the concurrent issuance of 3,345,236 shares
of Common Stock and 1,423,512 Redeemable Class B Warrants.
Subsequent to the end of the Special Class A Warrant Programs,
the Company issued a notice of mandatory redemption to the
remaining holders of Class A Warrants. The holders of 20,250
Class A Warrants exercised their warrants upon their original
terms, resulting in $63,787 proceeds to the Company and the
issuance of 20,250 shares of Common Stock. The Company
repurchased all of the unexercised Class A Warrants outstanding
at the end of the 30-day mandatory redemption period for $0.02
per warrant. As of July 31, 1996, there were no Redeemable Class
A Warrants outstanding.
During the course of the Special Class A Warrant Programs, all of
the 250,000 Unit Purchase Options issued to the underwriter of
the Offering were exercised at $3.02 per option, and the 250,000
Redeemable Class A Warrants within such units were immediately
exercised resulting in aggregate net proceeds of $1,681,266 and
the concurrent issuance of 543,745 shares of Common Stock and
375,000 Redeemable Class B Warrants.
5. Shareholders' Equity (continued)
Warrants (continued)
The Company issued an additional warrant in 1995 exercisable into
312,500 shares of the Company's Common Stock at a purchase price
of $5 per share to a firm as consideration for financial advisory
services. In January 1996, the Company cancelled the warrant and
issued 200,000 shares of Common Stock at $3.39 in lieu of the
cancelled warrant.
As of July 31, 1996, 4,673,512 Redeemable Class B Warrants were
outstanding. Warrant holders are entitled to purchase one share
of Common Stock at $5.50 per share for each warrant until
November 3, 1997. The Company is entitled to redeem the warrants
on not less than than 30 days written notice at $0.02 per warrant
when the average closing bid price of the Common Stock exceeds
$9.60 per share over a period of 20 consecutive trading days,
ending within 15 days of the date of notice of redemption.
Stock Option Plans
As of July 31, 1996, 2,274,038 shares of Common Stock were
reserved for issuance under the 1992 Stock Option Plan (the "1992
Plan"). The 1992 Plan provides for the grant of incentive and
nonstatutory stock options with various vesting periods,
generally four years, to employees, directors and consultants.
The exercise price of incentive stock options must equal at least
the fair market value on the date of grant, and the exercise
price of nonstatutory stock options may be no less than 85% of
the fair market value on the date of grant. The maximum term of
options granted under the Plan is ten years.
In June 1993, the Company adopted the 1993 Non-Employee
Directors' Stock Option Plan (the "1993 Plan"), under which
250,000 shares of Common Stock were reserved for issuance. The
1993 Plan provides for the granting of 25,000 options to purchase
Common Stock upon appointment as a non-employee director and an
additional 3,000 options each January thereafter, beginning
January 1, 1994. Options vest over four years. The exercise
price of the options is 85% of the fair market value on the date
of grant.
5. Shareholders' Equity (continued)
Stock Option Plans (continued)
<TABLE>
<CAPTION>
The following table summarizes stock option activity
under the 1992 and 1993 Plans:
Options Exercise Price
Outstanding per Share
<S> <C> <C>
Balance at July 31, 661,750 $1.44 - $4.05
1993
Granted 358,125 $3.06 - $4.70
Exercised (32,650) $1.44 - $2.90
Canceled (40,600) $1.58 - $2.90
Balance at July 31, 946,625 $1.44 - $4.70
1994
Granted 292,500 $4.25 - $6.40
Exercised (183,312) $1.44 - $4.60
Canceled (37,813) $3.87 - $4.60
Balance at July 31, 1,018,000 $1.44 - $6.40
1995
Granted 360,000 $3.08 - $8.50
Exercised (10,000) $3.44 - $4.60
Canceled (12,188) $5.40
Balance at July 31, 1,355,812 $1.44 - $8.50
1996
</TABLE>
At July 31, 1996, options to purchase 789,011 shares of Common
Stock were exercisable and there were 1,168,226 shares available
for grant under the Plans.
Deferred Compensation
The Company has recorded deferred compensation for the difference
between the price of certain stock sold and options granted and
the fair value of the Company's Common Stock. Deferred
compensation is amortized to expense during the vesting period of
the related stock or options.
6. Income Taxes
The Company accounts for income taxes using the liability method
under Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
6. Income Taxes (continued)
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax assets and
liabilities as of July 31, 1996 and 1995 are as follows:
1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,358,000 $ 2,366,000
Capitalized research and
development costs 404,000 264,000
Research and development tax
credit carryforwards 378,000 355,000
Other 231,000 168,000
Total deferred tax assets 4,371,000 3,153,000
Deferred tax liabilities:
Other (19,000) (16,000)
4,352,000 3,137,000
Valuation allowance (4,352,000) (3,137,000)
Net deferred tax assets $ - $ -
</TABLE>
As of July 31, 1996, the Company has federal and California tax
net operating loss carryforwards of approximately $9,305,000 and
$1,676,000, respectively. The federal and California tax loss
carryforwards will begin expiring in 2007 and 1997, respectively,
unless previously utilized. The Company also has federal and
California research and development tax credit carryforwards of
$288,000 and $138,000, respectively, which will begin expiring in
2007 unless previously utilized. The above carryforwards were
determined as if the Company were filing a tax return at July 31,
1996; however, for tax return purposes the Company uses a
calendar year end.
Use of the Company's net operating loss and credit carryforwards
will be limited because of the Offering which resulted in a
cumulative change in ownership of more than 50%. However, the
Company does not believe such change will have a material impact
upon the Company's ability to utilize these carryforwards.
The valuation allowance increased $1,215,000 from July 31, 1995
to July 31, 1996 due principally to the increase in deferred tax
assets resulting from the increase in tax net operating loss
carryforwards. Realization of deferred tax assets is dependent
on future earnings, the timing and amount of which will be
dependent on scientific success, results of clinical trials and
regulatory approval of the Company's products currently under
development. Accordingly, the full valuation reserve has been
established to reflect these uncertainties.
