<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 0-20954
COCENSYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0538836
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
213 TECHNOLOGY DRIVE, IRVINE, CA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(949) 753-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$.001 PAR VALUE 4,873,480
(CLASS OF COMMON STOCK) (OUTSTANDING AT AUGUST 10, 1999)
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COCENSYS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets as of June 30, 1999
and December 31, 1998 3
Condensed Statements of Operations for the
three- and six-month periods ended June 30, 1999 and 1998
and the period from inception (February 15, 1989) through
June 30, 1999 4
Condensed Statements of Cash Flows for the six-month
periods ended June 30, 1999 and 1998 and the period
from inception (February 15, 1989) through
June 30, 1999 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 25
SIGNATURES 26
</TABLE>
2
<PAGE>
COCENSYS, INC.
(A development stage company)
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,000 $ 2,222
Short-term investments 4,616 9,973
Other current assets 321 321
----------- ----------
TOTAL CURRENT ASSETS 5,937 12,516
Property and equipment, net 1,433 2,466
Notes receivable from officers - 56
Other noncurrent assets 75 61
----------- ----------
$ 7,445 $ 15,099
=========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 500 $ -
Accounts payable 279 534
Accrued compensation and benefits 312 748
Restructuring reserve 929 -
Due to corporate partners 1,371 1,322
Other accrued liabilities 852 1,326
Deferred revenue 3,000 2,955
Capital lease obligation - current portion 408 316
----------- ----------
TOTAL CURRENT LIABILITIES 7,651 7,201
Capital lease obligation, less current portion 186 366
Other liabilities - 26
Commitments and contingencies - -
Stockholders' (deficit) equity:
Preferred stock - $.001 par value,
5,000,000 shares authorized; 201,159
shares issued and outstanding at June 30, 1999
and 206,445 at December 31, 1998 11,472 16,386
Common stock - $.001 par value,
9,375,000 shares authorized; 4,872,480 shares
issued and outstanding at June 30, 1999 and
3,422,773 at December 31, 1998 109,022 107,381
Deficit accumulated during the development stage (120,851) (116,151)
Deferred compensation - (138)
Accumulated comprehensive income (35) 28
----------- ----------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (392) 7,506
----------- ----------
$ 7,445 $ 15,099
=========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
COCENSYS, INC.
(A development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS ENDED SIX MONTHS ENDED (FEBRUARY 15,
-------------------------------------------------- 1989) TO
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Co-promotion revenues from corporate partners $ - $ - $ - $ 540 $ 30,705
Co-development revenues from corporate partners 572 425 1,377 1,021 20,116
----------- ----------- ----------- ----------- -----------
Total revenues 572 425 1,377 1,561 50,821
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
Research and development 2,070 4,063 4,985 7,422 111,659
Marketing, general and administrative 819 884 1,622 2,032 53,672
Restructuring charges 2,196 - 2,196 - 2,196
Acquired research and development - - - - 14,879
----------- ----------- ----------- ----------- -----------
Total operating expenses 5,085 4,947 8,803 9,454 182,406
----------- ----------- ----------- ----------- -----------
OPERATING LOSS (4,513) (4,522) (7,426) (7,893) (131,585)
Gain on disposition of sales force - 750 - 750 5,728
Gain on disposition of interest in Cytovia, Inc. 3,326 - 3,326 - 3,326
Interest income 95 232 245 434 5,605
Interest expense (50) (20) (85) (44) (1,224)
----------- ----------- ----------- ----------- -----------
NET LOSS (1,142) (3,560) (3,940) (6,753) (118,150)
Accretion of preferred stock
for beneficial conversion feature - 168 - 168 890
Dividends on preferred stock 400 189 760 323 1,811
----------- ----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,542) $ (3,917) $ (4,700) $ (7,244) $ (120,851)
=========== =========== =========== =========== ===========
Basic and diluted loss per share $ (0.34) $ (1.32) $ (1.13) $ (2.49)
=========== =========== =========== ===========
Shares used in computing basic and
diluted loss per share 4,489 2,968 4,170 2,915
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
COCENSYS, INC.
(A development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD
FROM
INCEPTION
SIX MONTHS ENDED (FEBRUARY 15,
JUNE 30, 1989) TO
--------------------------- JUNE 30,
1999 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,940) $ (6,753) $ (118,149)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 412 437 8,144
Amortization of deferred compensation 138 86 3,889
Issuance of stock, stock options and warrants for services 5 199 2,581
Impairment of property, plant and equipment 585 - 585
Loss on sale of fixed assets 38 - 138
Gain on disposition of sales force - (750) (5,728)
Gain on disposition of interest in Cytovia, Inc. (3,326) - (3,326)
Increase in restructuring reserve 929 - 929
Acquired research and development - - 12,279
Decrease (increase) in other current assets (9) 129 (374)
Decrease (increase) in receivables from partners 9 394 (19)
Increase in amounts due to partners 49 751 1,371
Increase in deferred revenue 45 - 3,000
Increase (decrease) in accounts payable and other accrued liabilities (1,191) 146 (209)
---------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (6,256) (5,361) (94,889)
---------- ----------- -----------
INVESTING ACTIVITIES
Decrease (increase) in investments 5,294 (5,565) (4,651)
Purchase of property and equipment (17) (384) (7,683)
Decrease (increase) in other assets and notes receivable from officers 42 16 (1,231)
Cash received on sale of fixed assets 15 - 51
Cash received on disposition of sales force - 750 9,000
Cash received on disposition of interest in Cytovia, Inc. 3,326 - 3,326
Increase in deferred costs - - (2,475)
Acquisition of Acea Pharmaceuticals, net of cash acquired - - (62)
---------- ----------- -----------
NET PROVIDED BY (CASH USED) IN INVESTING ACTIVITIES 8,660 (5,183) (3,725)
---------- ----------- -----------
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 2 154 61,430
Net cash proceeds from issuance of preferred stock - 11,320 40,701
Redemptions of preferred stock (4,039) - (4,039)
Proceeds from line of credit 500 - 500
Proceeds from sale/leaseback of fixed assets and notes payable 209 150 5,725
Payments on capital lease obligations and notes payable (298) (102) (4,703)
---------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (3,626) 11,522 99,614
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,222) 978 1,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,222 3,410 -
---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,000 $ 4,388 $ 1,000
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 85 $ 44 $ 986
========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim financial information for the three and six-months periods
ended June 30, 1999 and 1998 is unaudited but includes all adjustments
(consisting only of normal recurring entries) which the CoCensys, Inc.'s
management believes to be necessary for the fair presentation of the
financial position, results of operations and cash flows for the periods
presented. The accompanying interim financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Securities and
Exchange Commission rules and regulations. Interim results of operations
for the three and six-month periods ended June 30, 1999 are not necessarily
indicative of operating results to be expected for the full year.
REVENUE AND EXPENSE RECOGNITION
See Notes 6 and 7 for revenue recognition policies related to
co-development revenues from corporate partners.
NET LOSS PER SHARE
In 1997, Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"), replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effect of options, warrants and convertible securities. All per share
amounts for all prior periods have been presented and, where appropriate,
restated to conform to the SFAS 128 requirements.
Both basic and diluted loss per share are computed using the weighted
average number of shares of common stock outstanding. Common equivalent
shares from stock options, warrants and convertible securities are excluded
from the computation of diluted earnings per share, as their effect would
be antidilutive.
REVERSE STOCK SPLIT
On April 15, 1999, the Company effected a one-for-eight reverse split of
its outstanding common stock. All share and per share amounts have been
adjusted to reflect this reverse stock split.
6
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME
Comprehensive loss was $1,556,000 and $3,980,000 for the three and
six-month periods ended June 30, 1999, respectively, and $3,557,000 and
6,781,000 for the comparable periods in the prior year.
SHORT-TERM BORROWING ON LINE OF CREDIT
In March of 1999 the Company established a short-term borrowing facility
with Wells Fargo Bank under which the Company can borrow up to
$1,000,000. Borrowings under this facility are secured in full by the
Company's investments and bear interest at 0.5% below Wells Fargo's
prime rate. At June 30, 1999, $500,000 was outstanding under this
facility. This amount was repaid on July 2, 1999.
2. SUBSEQUENT EVENTS
DEFINITIVE ACQUISITION AGREEMENT
On August 5, 1999, the Company, Purdue Pharma L.P. ("Purdue Pharma"),
and Purdue Acquisition Corporation, an indirect wholly owned subsidiary
of Purdue Pharma, entered into a definitive merger agreement (the
"Merger Agreement"). On August 12, 1999, Purdue Acquisition Corporation
commenced a tender offer to purchase for cash all of the outstanding
shares of common stock of the Company. Subject to the conditions set
forth in the Merger Agreement, upon successful completion of the tender
offer, Purdue Acquisition Corporation will acquire any shares of common
stock of the Company that are not tendered into the offer in a
second-step merger. The board of directors of the Company has
unanimously approved the transaction and has recommended that the
Company's stockholders accept the offer.
Purdue Acquisition Corporation has also entered into a Purchase
Agreement, dated as of August 5, 1999 (the "Series E Purchase
Agreement"), with the holder of the Series E Convertible Preferred Stock
of the Company (the "Series E Preferred"). Under the Series E Purchase
Agreement, the holder of the Series E Preferred has agreed to sell, and
Purdue Acquisition Corporation has agreed to purchase, all of the Series
E Preferred beneficially owned by it for an aggregate purchase price of
$2,200,000. The obligation of the holder of the Series E Preferred to
sell, and the obligation of Purdue Acquisition Corporation to purchase,
the Series E Preferred under the Series E Purchase Agreement, are
subject to Purdue Acquisition Corporation having accepted Shares for
payment under the Offer in accordance with the Merger Agreement. Purdue
Acquisition Corporation has indicated that it plans to convert the
Series E Preferred into common stock of the Company immediately
following consummation of the tender offer. When converted, the Series
E Preferred will represent approximately 31% of the Company's fully
diluted shares.
Purdue Acquisition Corporation's tender offer is conditioned upon, among
other things, there being validly tendered and not withdrawn such number of
shares that, when added to the number of shares of common stock to be
received by Purdue Acquisition Corporation upon conversion of the Series E
Preferred, equals at least ninety percent of the fully diluted outstanding
common shares of the Company. After the consummation of the tender offer,
Purdue Acquisition Corporation has agreed to acquire any of the remaining
outstanding shares of the Company pursuant to a second-step merger at the
same price per share paid for shares tendered. If Purdue Acquisition
Corporation acquires 90% or more of the outstanding shares of each class of
voting stock of the Company pursuant to the tender offer or otherwise,
Purdue Acquisition Corporation would be able to effect the merger described
above pursuant to the short-form merger provisions of the Delaware General
Corporation Law, without prior notice to, or any action by, any other
stockholder of the Company. In such event, Purdue Acquisition Corporation
could, and intends to, effect the merger without prior written notice to,
or any action by, any other stockholder of the Company.
7
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NASDAQ DELISTING
Effective with the close of business on July 13, 1999, the Nasdaq Stock
Market delisted the Company's common stock from the Nasdaq National Market,
citing a stock price below $1.00 per share and an insufficient public float
among the primary reasons for the delisting. The Company's common stock is
now traded on the OTC Bulletin Board under the symbol COCN.
3. RESTRUCTURING PLAN
On April 27, 1999, the Company announced a restructuring plan intended to
reduce its cash burn rate and focus resources on its drug discovery efforts
in the neurology area. On that date 34 employees in the drug development
and administrative areas were terminated, and in June 1999 the Company
terminated another 19 employees. As a result of the restructuring, CoCensys
recognized a charge of $2.2 million in the second quarter of fiscal 1999.
Approximately $1.5 million of this charge relates to severance and
outplacement costs for terminated employees, with the balance primarily for
fixed assets that were either abandoned, disposed of or will no longer be
of economic benefit to the Company. With respect to the fixed assets, the
Company abandoned certain leasehold improvements in a leased building that
was vacated as of June 30, 1999. The Company has no future lease
commitments related to this vacated facility. The Company also disposed of
certain furniture and office equipment that was in excess of its current
needs. Finally, certain computer hardware and software that were utilized
solely by the Company's terminated development staff has been fully
reserved for.
After this restructuring the Company has 38 employees, of whom 31 are
involved in drug discovery and 7 are in administration. As of June 30,
1999, the plan was essentially complete, except for the payment of
severance over the remaining severance terms.
4. PRIVATE PLACEMENT OF PREFERRED STOCK
In June 1998, the Company raised $8.0 million through the private placement
of the Series E Preferred and associated warrants to purchase common stock.
The Series E Preferred carries an annual dividend of 7.5 percent of the
value of the outstanding shares payable quarterly either in cash or by
adding the amount of the dividend to the conversion value of the Series E
Preferred. All dividends have been paid by adding the amount to the
conversion value. Additionally, $390,000 of the $8.0 million in proceeds
was allocated to certain warrants that were issued to the holders of the
Series E Preferred, and $890,000 was allocated to a beneficial conversion
feature that allows investors to convert at 90% of the market price of the
common stock. These two allocated amounts have been credited to additional
paid in capital and will be treated as issuance discounts. Accordingly, the
$890,000 was amortized over the first 122 days as an accretion to preferred
stock and the $390,000 will be amortized over three years in the form of a
non-cash dividend.
8
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Since June 1998, the holders of the Series E Preferred have converted
$3,253,000, plus accrued dividends, of the original $8.0 million in face
value of preferred stock into approximately 1.8 million common shares. The
Company has repurchased an additional $3,588,000, plus accrued dividends,
for approximately $4.0 million in cash. The holder of the outstanding
Series E Preferred has agreed to sell the remaining $1,159,000 of Series E
Preferred, plus accrued dividends, to Purdue Pharma for $2.2 million in
cash contingent on the successful completion of the tender offer
described in Note 2 above.
5. SALE OF CYTOVIA, INC. STOCK
In May 1999, the Company sold to certain entities affiliated with Domain
Associates, L.L.C., all of the Company's stock holdings in Cytovia, Inc.,
for an aggregate purchase price of $3,325,500. James C. Blair, Ph.D., a
director of the Company, is a managing member of Domain Associates, L.L.C.
The Company used the proceeds from this sale to repurchase shares of the
Series E Preferred as discussed in Note 4 above.
6. DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH WYETH-AYERST
LABORATORIES
In May 1997, the Company entered into a development and commercialization
agreement for Co 2-6749, its lead anxiolytic compound, with the
Wyeth-Ayerst Laboratories Division ("Wyeth-Ayerst") of American Home
Products Corporation ("AHP"). Under the terms of the agreement,
Wyeth-Ayerst paid CoCensys a non-refundable $5.0 million licensing fee and
AHP paid $5.0 million to purchase 100,000 shares of the Company's Series C
Convertible Preferred Stock. Additionally, CoCensys will receive specified
milestone payments dependent upon the achievement of key development events
and $750,000 per quarter for two years, with an option to extend for a
third year, to identify back-up compounds. However, if Co 2-6749 fails to
meet certain criteria, and the back-up program fails to produce a back-up
compound that meets other criteria, Wyeth-Ayerst has the right to terminate
the back-up program and require CoCensys to reimburse it for fifty percent
of the back-up funding. Accordingly, As of June 30, 1999, the Company had
$3.0 million recorded as deferred revenue related to the Wyeth-Ayerst
back-up program; this deferred amount will be recognized as revenue if and
when Co 2-6749 or a back-up compound meets applicable criteria for
acceptance by Wyeth-Ayerst.
Wyeth-Ayerst is responsible for the costs associated with developing
Co 2-6749. Wyeth-Ayerst and the Company will co-promote any resulting
product in certain market segments in the United States, while
Wyeth-Ayerst will have rights to develop, register and market any drugs
derived from the collaboration in the rest of the world, subject to royalty
obligations to CoCensys. The preferred stock is convertible into common
stock after May 12, 1999, at the election of Wyeth-Ayerst, at a conversion
price based on the market price of the common stock at that time, subject
to a minimum conversion price of $35.00 per share.
9
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
7. MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY
In October 1995, the Company entered into a collaboration with
Warner-Lambert Company ("Warner-Lambert") and its Parke-Davis division to
develop and market therapeutic drugs for the treatment of certain central
nervous system disorders. This arrangement consisted of the Research,
Development and Marketing Collaboration Agreement (the "1995 Warner
Collaboration Agreement") for the worldwide development and
commercialization of a new class of neurological and psychiatric drugs,
termed subtype selective NMDA receptor antagonists ("SSNRAs"), and the
Parke-Davis Promotion Agreement. Pursuant to the Parke-Davis Promotion
Agreement, the Company co-promoted Parke-Davis' central nervous system
drug, Cognex-Registered Trademark-, until June 1997 when Parke-Davis
terminated the co-promotion agreement. In October 1997, the 1995 Warner
Collaboration Agreement was amended, restated and extended until October
1999 (the "1997 Amended Warner Collaboration Agreement").
Under the 1997 Amended Warner Collaboration Agreement, the parties are
obligated to devote the time of a specified number of scientists to conduct
research directed toward the identification of SSNRAs as drug development
candidates. Warner-Lambert is obligated to pay for all costs to develop any
development candidates arising from the agreement, subject to CoCensys'
right to re-engage in the development by funding a percentage of the
development costs. Warner-Lambert is also obligated to pay for all costs to
promote any product developed under the 1997 Amended Warner Collaboration
Agreement, subject to CoCensys' right to co-promote in the United States
(including sharing promotion costs) any product for which CoCensys
re-engaged development rights. CoCensys will receive royalties on sales of
any products developed under the 1997 Amended Warner Collaboration
Agreement, at rates based in part upon whether CoCensys co-developed and
co-promoted such product. In addition, upon achievement of certain clinical
development and regulatory milestones, Warner-Lambert will make
nonrefundable milestone payments to CoCensys.
Pursuant to the 1995 Warner Collaboration Agreement, Warner-Lambert
purchased $2.0 million of CoCensys Common Stock in October 1995 and an
additional $2.0 million of CoCensys Common Stock in March 1997. Pursuant to
the 1997 Amended Warner Collaboration Agreement extension of the Warner
Collaboration Agreement, Warner-Lambert purchased 14,286 shares of the
Company's Series C Convertible Preferred Stock for $1.0 million in October
1997 and an additional 85,714 shares of the same series of convertible
preferred stock for $6.0 million in January 1998.
As part of the extension of the Warner Collaboration Agreement in October
1997, the companies agreed to expand the collaboration to allow the
companies to analyze and consider for collaborative development each
company's AMPA modulator technologies. In January 1998, the parties agreed
to return the focus of their collaboration agreement solely to SSNRAs. Each
party retained all rights to its respective AMPA modulator technology. In
addition, as part of removal of the AMPA modulator technology from the
Warner Collaboration Agreement, the Company is obligated to pay to
Warner-Lambert $1 million on December 31, 1999. The due date for this
amount, which originally was January 1999, has been extended to December
31, 1999 and is payable in common stock (based on the then current stock
price) or cash at the election of Warner-Lambert and is secured by the
Company's assets.
10
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
In connections with the execution of the Merger Agreement, the Company
elected to convert Warner-Lambert's $7.0 million of preferred stock into
227,425 shares of common stock of the Company. Additionally, contingent
upon the successful completion of the tender offer described in Note 2
above, the Company will prepay in cash its outstanding $1.0 million note
payable to Warner-Lambert.
8. SEGMENT INFORMATION
Historically, the Company operated in two business segments, drug promotion
and drug development. Promotion revenues have arisen from contractual
agreements under which the Company promoted other pharmaceutical companies'
products in return for commissions. Development revenues arise from
contractual agreements with large pharmaceuticals companies pursuant to
which the Company licenses various commercialization or development rights
relating to compounds or performs research activities in exchange for
licensing fees, milestone payments or research funding. In October 1997,
the Company sold its sales and marketing force to Watson and ceased all
drug promotion activities, although some residual revenue was recognized in
the first quarter of fiscal 1998. The accounting policies of these segments
are the same as those described in the summary of significant accounting
policies except that interest income and certain expenses are not allocated
to the segments. Assets allocated to the segments include only other
current and noncurrent assets and net property and equipment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES FROM EXTERNAL PARTNERS
Drug promotion segment $ - $ - $ - $ 540,000
Drug development segment 572,000 425,000 1,377,000 1,021,000
------------- ------------- -------------- -------------
$ 572,000 $ 425,000 $ 1,377,000 $ 1,561,000
============= ============= ============== =============
OPERATING INCOME
Drug promotion segment $ - $ - $ - $ 540,000
Drug development segment (4,513,000) (4,522,000) (7,426,000) (8,433,000)
-------------- -------------- --------------- --------------
$ (4,513,000) $ (4,522,000) $ (7,426,000) $ (7,893,000)
============== ============== =============== ==============
ASSETS
Drug promotion segment $ - $ - $ - $ -
Drug development segment 1,830,000 3,343,000 1,830,000 3,343,000
------------- ------------- -------------- -------------
$ 1,830,000 $ 3,343,000 $ 1,830,000 $ 3,343,000
============= ============= ============== =============
</TABLE>
11
<PAGE>
ITEM 2. 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. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN THE COMPANY'S 1998 ANNUAL
REPORT ON FORM 10-K.
OVERVIEW
CoCensys, Inc. is a biopharmaceutical company dedicated to the discovery,
development, marketing and sales of small molecule drugs to treat
neurological and psychiatric disorders. The Company's product discovery and
development programs are focused on the exploration of novel receptors and
enzymes and their ligands and inhibitors through three technology
platforms: GABAA receptor modulators named Epalons; glutamate receptor
antagonists; and sodium channel blockers.
Since its inception in February 1989, the Company has devoted substantially
all of its resources to the discovery and development of
neuropharmaceutical products for the treatment of disorders affecting the
central nervous system. The Company has incurred losses since inception and
expects losses to continue for the foreseeable future, primarily due to the
expansion of programs for research and development. Operating results are
expected to fluctuate as a result of uncertainty in the timing and amount
of revenues to be earned from achievement of research and development
milestones, and uncertainty in the timing and amount of expenses for
product development, including clinical trials. As of June 30, 1999, the
Company's accumulated deficit was approximately $120.9 million.
On August 5, 1999, the Company, Purdue Pharma L.P. ("Purdue Pharma"),
and Purdue Acquisition Corporation, an indirect wholly owned subsidiary
of Purdue Pharma, entered into a definitive merger agreement (the
"Merger Agreement"). On August 12, 1999, Purdue Acquisition Corporation
commenced a tender offer to purchase for cash all of the outstanding
shares of common stock of the Company. Subject to the conditions set
forth in the Merger Agreement, upon successful completion of the tender
offer, Purdue Acquisition Corporation will acquire any shares of common
stock of the Company that are not tendered into the offer in a
second-step merger. The board of directors of the Company has
unanimously approved the transaction and has recommended that the
Company's stockholders accept the offer. See Note 2 of the Notes to
Condensed Financial Statements for additional information with respect
to the proposed acquisition by Purdue Pharma.
RESULTS OF OPERATIONS
The Company had no co-promotion revenues for the six-month period ended
June 30, 1999, compared to $540,000 in the first quarter of fiscal 1998.
The 1998 co-promotion revenue is attributable to a bonus for fiscal 1997
activity that was received and recognized in March 1998. In October 1997,
the Company sold its sales and marketing force to Watson Pharmaceuticals,
Inc. ("Watson") and is no longer involved in co-promotional activities.
The Company recognized $572,000 and 1,377,000 in co-development revenues
for the three and six-month periods ended June 30, 1999, respectively,
compared to $425,000 and $1,021,000 for the
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same periods of 1998. In 1999, co-development revenues were mainly
associated with the anxiolytic backup program with Wyeth-Ayerst and the
SSNRA (subtype-selective NMDA receptor antagonists) program with
Warner-Lambert. In 1998, co-development revenues were primarily
related to the SSNRA program.
Research and development expenses decreased to $2.1 and $5.0 million for
the three and six-month periods ended June 30, 1999, respectively, from
$4.1 and $7.4 million in the same periods of the prior year. This decrease
reflects a lower level of external clinical activity in the current year
compared to the same periods a year earlier and, beginning in May, savings
from the restructuring.
Marketing, general and administrative expense decreased to $819,000 and
$1.6 million in the three and six-month periods ended June 30, 1999,
respectively, from $884,000 and $2.0 million in the first quarter of 1998.
The first quarter of the prior fiscal year had higher headcount levels
resulting in higher compensation costs and included certain nonrecurring
expenses associated with the formation of Cytovia, Inc., an independent
company involved in the commercialization of patented drug screening
technology.
Interest income was $95,000 and $245,000 for the three and six-month
periods ended June 30, 1999 compared to $232,000 and 434,000 for the
comparable periods in the prior year. This decrease is due to lower cash
and short-term investment balances in the current year.
Accretion of preferred stock for beneficial conversion feature was $168,000
in the second quarter of fiscal 1998 whereas there was none in the current
year. The beneficial conversion feature allows holders of the Company's
Series E stock to convert into common stock at a discount of 10% below the
market price of the common stock starting on October 8, 1998. At the time
the Series E stock was issued in June 1998, $890,000 of the $8.0 million in
proceeds was allocated to the beneficial conversion feature. This amount
was amortized over the 122-day period ended October 8, 1998.
Dividends on preferred stock increased to $400,000 and $760,000 for the
three and six-month periods ended June 30, 1999, respectively, compared to
$189,000 and 323,000 for the same periods in the prior year. These
preferred dividends related to both the Series E and the convertible
preferred held by Warner-Lambert. This increase is attributable to the fact
that the Series E was outstanding for the entire six months of fiscal 1999
while it was outstanding for only the last three weeks of the first six
months of fiscal 1998. The referred stock held by Warner-Lambert was
outstanding for essentially the whole six-month period in both years.
LIQUIDITY AND CAPITAL RESOURCES
From its inception in February 1989 through June 30, 1999, the Company has
financed its operations primarily through private and public offerings of
its equity securities, raising net proceeds of approximately $102.1 million
through sales of securities. At June 30, 1999, the Company's balances of
cash, cash equivalents and investments totaled $5.6 million, compared to
$12.2 million at December 31, 1998.
As of June 30, 1999, the Company had invested $7.7 million in leasehold
improvements, laboratory and computer equipment and office furnishings and
equipment. The Company has financed $3.6
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million of these capital additions through capital lease lines. In
addition, the Company leases its laboratory and office facilities under
operating leases. While additional equipment will be needed as the
Company increases its research and development activities, the Company
has no material commitments for the acquisition of property and equipment.
On June 8, 1998, the Company issued 8,000 shares of Series E Convertible
Preferred Stock with a stated value of $1,000 per share for an aggregate
of $8.0 million in a private placement pursuant to Regulation D of the
Securities Act of 1933, as amended. During the second quarter of fiscal
1999, the Company repurchased approximately $3.6 million of the
original $8.0 million in face value for approximately $4.0 million in
cash. Additionally, the remaining holder of the Series E has agreed to
sell the currently outstanding $1,159,000 in face value to Purdue Pharma
for $2.2 million in cash contingent on the successful closing of the
tender offer as described above. See Note 4 of the Notes to Condensed
Financial Statements above.
Pursuant to an agreement with Watson, in October 1997, the Company sold it
sales and marketing force, related co-promotion agreements and certain
other assets to Watson for $8.0 million in cash with an additional $1.0
million due to CoCensys contingent upon the occurrence of specified events.
Of this contingent amount, Watson paid the Company $750,000 in April 1998
and $250,000 in October 1998.
Pursuant to the 1995 collaboration agreement with Warner-Lambert, as
amended and extended in October 1997, Warner-Lambert is obligated to make
certain milestone payments for each compound selected for development, as
well as pay for its share of development costs. Under the terms of the 1995
agreement, Warner-Lambert purchased $2.0 million of CoCensys Common Stock
in October 1995 and an additional $2.0 million of CoCensys Common Stock in
March 1997. Under the terms of the 1997 amendment, Warner-Lambert purchased
preferred stock with a face value of $7.0 million, of which Warner-Lambert
paid the Company $1.0 million in October 1997 and $6.0 million in January
1998. Of this $7.0 million in total proceeds, the Company has allocated
$1.6 million to be recognized as co-development revenue during fiscal 1998,
$4.4 million as preferred stock and $1.0 million as a liability (payable in
cash or common stock at the election of Warner-Lambert) due to Warner
Lambert on December 31, 1999. The preferred stock accrues an imputed
non-cash dividend at 12 percent per annum until its mandatory conversion
date in October 2001.
Pursuant to the May 1997 Development and Commercialization Agreement with
Wyeth-Ayerst, Wyeth-Ayerst paid the Company a $5.0 million license fee and
purchased 100,000 shares of the Company's Series C Convertible Preferred
stock for $5.0 million. Furthermore, Wyeth-Ayerst is obligated to pay all
development costs associated with Co 2-6749, as well as make milestone
payments upon the occurrence of certain agreed upon events and pay the
Company $3.0 million per year for two years to identify back-up compounds.
However, if Co 2-6749 fails to meet certain criteria, and the back-up
program fails to produce a back-up compound that meets other certain
criteria, Wyeth-Ayerst has the right to terminate the back-up program and
require CoCensys to reimburse them for a portion of the back-up funding. As
of June 30, 1999, the Company had $3.0 million of deferred revenue recorded
on its balance sheet related to the Wyeth-Ayerst back-up program.
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CoCensys' operations to date have consumed substantial amounts of cash and
will continue to consume cash in the foreseeable future. As of June 30,
1999, the Company had $5.6 million in cash remaining, negative working
capital of $1.7 million and a negative net worth of $392,000.
Given the context of the current financial uncertainties, the Company
restructured its operations in the second quarter in an attempt to reduce
the its cash burn rate and re-focus itself on drug discovery and away
from drug development. The restructuring resulted in the termination of 54
employees mainly in the development and administration areas and should
produce annualized operating expense savings of $3.5 million. Additionally,
the Company will reduce the amount of external clinical trials that it
conducts on its own behalf. In the future, clinical development will be
primarily paid for and performed by corporate partners after licensing
agreements have been signed.
The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development programs,
the scope and results of preclinical testing and clinical trials, the time
and costs involved in obtaining regulatory approvals, the rate of
technological advances, determinations as to the commercial potential of
the Company's products under development, the status of competitive
products, the establishment of third-party manufacturing arrangements and
the establishment of additional collaborative relationships. There are no
assurances that the Company will find available to it the substantial
capital resources necessary to continue product development and other
Company operations.
As discussed above, the Company has entered into Merger Agreement with
Purdue Pharma, whereby Purdue Acquisition Corporation will acquire all
of the outstanding shares of the Company. In the absence of this
transaction, or other transaction that would result in the infusion of
a significant amount of capital into the Company, there can be no assurance
that the Company will be able to meet its financial obligations in the
foreseeable future.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs recognize a date using "00" as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations causing
disruptions of operations, including a temporary inability to process
transactions or engage in normal business activities.
The Company has developed a plan to address the Year 2000 issues. The plan
is segregated into four phases:
1. Information collection.
2. Risk assessment and testing of mission critical systems.
3. Remediation.
4. Monitoring and contingency planning
The Company has completed the first two phases of the project and has
tested, upgraded or developed plans to upgrade all individual software and
hardware applications that fall within the mission critical category. All
of the Company's major software applications and hardware systems
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are purchased from major vendors and the Company performs little or no
customizations to those applications and systems. The Company's major
software providers have attested to Year 2000 compliance. The Company has
reviewed other equipment for embedded technologies which may be Year 2000
susceptible and has already upgraded or developed plans to upgrade all
mission critical systems. The Company has spent less than $50,000 to date
on hardware and software upgrades to ensure Year 2000 compliance and it
anticipates that further upgrades will cost less than $100,000, most of
which will be spent acquiring a Year 2000 compliant telephone system. The
funds for these upgrades will come from current cash or new capital lease
lines. The Company expects to be fully Year 2000 compliant by June 1999. A
contingency plan will also be developed by that date.
In addition to risks associated with the Company's own computer systems and
equipment, the Company has relationships with, as is to a varying degrees
dependent upon, a large number of third parties, that do not share
information systems with the Company (external agents), who provide
information, services and goods. These external agents include financial
institutions, suppliers, vendors, research partners and governmental
agencies. The Company has instituted programs, including internal records
review and use of external questionnaires, to identify third parties,
assess their level of Year 2000 compliance, update contracts and address
potential non-compliance issues. To date, the Company is not aware of any
external agent with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity, or capital resources. However,
the Company has no means of ensuring that external agents will be Year2000
ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
Based upon its efforts to date, the Company believes that the vast majority
of both its IT and its non-IT systems, including all critical and important
systems, will remain up and running after January 1, 2000.Accordingly, the
Company does not currently anticipate that internal systems failures will
result in any material adverse effect to its operations or financial
condition. During 1999, the Company will also continue and expand its
efforts to ensure that major third-party businesses and public and private
providers of infrastructure services will also be prepared for the year
2000,and to develop contingency plans to address any failures on their part
to becomeY2K compliant. At this time, the Company believes that the most
likely "worst-case" scenario involves potential disruptions in areas in
which the Company's operations must rely on such third parties whose
systems may not work properly after January 1, 2000. While such failures
could affect important operations of the Company, either directly or
indirectly, in a significant manner, the Company cannot at present estimate
either the likelihood or the potential cost of such failures.
RISK FACTORS
Any of the following risk factors could materially adversely affect our
business, operating results and financial condition.
THE PROPOSED ACQUISITION OF THE COMPANY BY PURDUE PHARMA L.P. IS SUBJECT
TO A NUMBER OF CONDITIONS, AND THERE IS NO ASSURANCE THAT THE
TRANSACTION WILL BE COMPLETED.
The closing of the sale of CoCensys' common stock to Purdue Pharma L.P.
is subject to conditions not completely within the control of CoCensys,
as described in the Merger Agreement. Among other conditions, we cannot
predict whether the required percentage of the outstanding shares of
CoCensys common stock will be tendered in the tender offer that has been
commenced pursuant to the Merger Agreement.
OUR DRUG CANDIDATES ARE IN AN EARLY STAGE OF DEVELOPMENT USING UNPROVEN
TECHNOLOGY, AND THERE IS A SIGNIFICANT RISK THAT THEY MAY NEVER BECOME
COMMERCIAL PRODUCTS.
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We have no products that have received regulatory approval for commercial
sale. All of our drug candidates are in the early stages of development,
and our technology is unproven. The physiology of brain disorders is highly
complex, and the causes of these disorders are not fully known. We will
have to conduct significant research and pre-clinical (animal) and clinical
(human) tests that must demonstrate that our products are safe and
effective before we can file applications for approval with the United
States Food and Drug Administration and foreign regulatory authorities. Any
of our products may fail in the testing phase or may fail to attain market
acceptance. Competitors may develop superior products. If research and
testing is not successful, our products are not commercially viable or we
cannot compete effectively, our business, financial condition and results
of operations will be materially adversely affected, and could force us to
cease operations.
THE OUTCOME OF CLINICAL TRIALS IS HIGHLY UNCERTAIN; IF ANY OF OUR DRUG
CANDIDATES EXPERIENCE CLINICAL FAILURES, OUR BUSINESS COULD BE MATERIALLY
ADVERSELY AFFECTED.
Clinical trials, including pre-clinical testing, are lengthy, expensive and
uncertain. Failure can occur at any stage. We have no products that have
successfully completed all necessary clinical testing. Three of our drug
candidates have undergone some clinical testing, and three currently are in
pre-clinical testing. We do not know whether the FDA will allow us to begin
human testing of our drug candidates that have not been tested in humans or
to continue human testing of those candidates that have undergone some
human testing. We cannot rely on interim results of trials to predict their
final results, nor can we count on acceptable results at early stages of
testing to be repeated at later stages. Any of our drug candidates could
have undesirable or unintended side effects or other problems that may
prevent or limit future testing, approval or use of the product.
We have experienced safety and efficacy problems with drug candidates. In a
clinical trial of licostinel, our drug candidate to treat stroke, crystals
of licostinel occurred in the urine of some subjects, a potential
dose-limiting side effect. Although the crystal formation occurred only in
subjects with at least four times the blood plasma level of licostinel that
was necessary for the drug to be effective in animals, our development
partner, Novartis Pharma A.G., ceased its participation in the development
of licostinel. In addition, in October 1998 we announced that ganaxolone,
our drug candidate to treat migraine and epilepsy, was not effective in
providing relief to patients suffering migraine headaches. The results of a
clinical trial in which 325 migraine patients received either ganaxolone or
a placebo drug did not show a statistically significant difference in
migraine headache relief between those patients receiving ganaxolone and
those patients receiving the placebo.
We cannot assure you that any of our clinical trials will be completed
successfully or at all, or that they will result in marketable products.
Any significant delay or failure in the clinical development of our
products will materially adversely affect our business, financial condition
and results of operations.
IF WE DO NOT SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE MAY NEVER ACHIEVE
PROFITABILITY.
Since we started business in 1989, we have spent over $182 million
researching and developing our drug candidates. We have raised this money
by selling stock in CoCensys to private investors and the public, licensing
drugs and technologies to other companies and selling assets that we have
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developed at CoCensys. We have never had operating revenues and have never
commercially introduced a product. Through June 30, 1999, we have incurred
a cumulative deficit of approximately $120.8 million.
We expect to continue to incur substantial and increasing losses over the
next several years as we continue our research and development programs.
Our ability to achieve and sustain profitable operations in the long term
will depend on our ability to, among other things:
- establish collaborative relationships;
- complete our product development;
- obtain regulatory approvals; and
- achieve market acceptance for our products.
We need significant additional funds and may have to sell additional stock
or relinquish rights to some of our drug candidates and technology to
obtain funding; if we do not obtain funding, we may be unable to continue
our business.
Drug development is capital intensive and requires significant funding
commitments. We will need a substantial amount of funds to continue our
operations both in the near term and over the next several years. If we do
not raise additional funds by the end of 1999, we will be forced to curtail
our operations. Our cash needs beyond 1999 will vary depending on a number
of factors, including the following:
- the size and progress of our research and development programs;
- the results of our animal and human testing of our drugs;
- the time and costs of obtaining regulatory approvals for our drugs
(if approvals can be achieved);
- how good our drugs are compared to other drugs on the market that
treat the same disorders;
- the time, costs and success of establishing sales and marketing
capabilities; and
- the time, costs and success of establishing manufacturing
capabilities.
We do not know if we will be able to raise funds on terms that are
acceptable to us. If we sell additional stock, stockholders may experience
substantial dilution. If we raise cash through licensing additional drugs
and technologies to collaboration partners, we will be required to
relinquish rights to some of our drugs and technologies.
If we cannot raise enough cash to fund our operations, we may be forced to
delay, reduce the scope of or eliminate one or more of our research or
development programs. We may have to cease all operations if we are not
successful in obtaining funds.
We depend on third parties to fund our drug development; if funds from
those third parties are not available to us in the future, we may be forced
to cease operations.
In order to fund the development, clinical testing, manufacturing and
commercialization of our products, we have entered into various
collaborations with corporate partners, licensors, licensees
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and others. Currently, we are a party to a collaboration agreement with
Warner-Lambert Company for research and development of subtype-selective
NMDA receptor antagonists and with Wyeth-Ayerst Laboratories, a division
of American Home Products Corporation, for the development of epalons to
treat anxiety. Under each agreement, we depend on the collaboration partner
to provide the funding to develop drug candidates for potential approval
and commercialization.
WE MAY BE UNABLE TO FULFILL OUR OBLIGATIONS UNDER THE COLLABORATION
AGREEMENTS.
We do not know if we will be able to fulfill our research and development
obligations under each collaboration agreement. If we cannot fulfill our
obligations, we may be required to terminate early one or both of the
agreements and forfeit many of our rights under the agreements. In
particular, our collaboration agreement with Wyeth-Ayerst provides that if
the lead compound under development to treat anxiety fails to meet certain
criteria, and if at that time we have not yet produced a back-up compound
that meets another set of criteria, Wyeth-Ayerst can demand repayment of a
portion of the funds paid to us under our collaboration agreement.
Currently, the amount that we may be required to pay back could be as much
as $3.0 million, in cash or common stock. Although we hope to fulfill our
obligations under the collaboration agreement so that Wyeth-Ayerst will not
be able to demand repayment, we cannot assure we will be able to do so.
EITHER OF OUR COLLABORATION PARTNERS MAY CANCEL ITS COLLABORATION AGREEMENT
WITH US AT ANY TIME.
Each of our collaboration agreements allows either CoCensys or our
collaboration partner to voluntarily terminate its participation in the
collaboration at any time. If either of our current collaboration partners
terminates its agreement with us, that partner would lose its right to
further develop or sell drugs under that collaboration; however, that
partner also no longer would be required to fund development of those
drugs. If either Warner-Lambert or Wyeth-Ayerst cancels its agreement with
us, we would have to find a new collaboration partner to pay for further
development of our drug candidates. We cannot assure you that we would be
able to do so. Collaboration partners have, in the past, terminated their
agreements with us. In 1994, we entered into a development agreement with
Novartis Pharma A.G. to develop licostinel to treat stroke patients. In
1997, Novartis terminated its participation in the development agreement
based on side effects seen in human trials of licostinel. Also, in 1996, we
entered into an agreement with G.D. Searle & Co. to develop epalons to
treat insomnia. In July 1998, Searle terminated its participation in that
agreement, stating that the program no longer met its needs in light of its
entire product pipeline. Since termination of those two agreements, we have
not yet found new collaboration partners to develop those drugs, and we do
not have the money to complete development of those drugs. We do not know
if we will be able to find new collaboration partners for those drugs.
WE MAY BE UNABLE TO ENTER INTO COLLABORATION AGREEMENTS IN THE FUTURE.
We plan to continue to enter into collaboration agreements with
pharmaceutical companies to develop, market and sell our drug candidates.
We do not know if we will be able to find additional partners interested in
developing our drugs. Also, even if we find potential partners interested
in our drugs, we do not know if we will be able to enter into collaboration
agreements with these partners on terms and conditions that we find
acceptable. Even if we do enter into additional collaboration agreements,
we do not know if the collaborations will successfully develop drugs for
marketing and
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sale. If we are unable to secure collaboration partners, we will not be
able to develop our drug candidates.
IF WE DO NOT OBTAIN FDA APPROVAL FOR OUR PRODUCT CANDIDATES, WE WILL NOT BE
ABLE TO SELL PRODUCTS AND GENERATE REVENUES.
Our drug candidates are subject to extensive and rigorous regulation by the
FDA and state and local bodies in the United States and by foreign
regulatory authorities. These regulations cover, among other things,
product development, testing, manufacturing, labeling, sales, advertising
and promotion. The process of obtaining FDA and other required regulatory
approvals is long, expensive and uncertain. In order to market and sell our
drugs in the United States and other countries, we must successfully
complete rigorous testing in animals and humans to prove that the drugs are
safe for human use and are effective in treating one or more specific brain
disorders. We must conduct these tests in a large number of people,
including both healthy volunteers and people who suffer from the disorder
for which the drug is intended. All of our testing must be conducted
strictly in accordance with standards set up by the FDA and foreign
regulators. If we successfully complete those tests for one of our drugs,
we then must go through an extensive regulatory approval process with the
FDA, and with foreign regulators, before we can begin marketing and selling
the drug.
Even if our drugs are approved for marketing and sale, the FDA and foreign
regulators may place limitations on the marketing and sale of our drugs or
require that we conduct additional testing on any or all of our drugs after
the drugs are approved for marketing and sale. In addition, each drug, the
manufacturer of that drug and the manufacturing facilities in which the
drug is made are subject to continual review and periodic inspections. The
FDA and regulatory agencies in other countries have the right to withdraw
approval for a drug later if, for example, patients taking our drug
experience serious side effects or we have problems in manufacturing the
drug.
We do not know if we will successfully complete the required testing with
any of our drug candidates. Any of our drugs may have unacceptable side
effects or may not be effective in treating the targeted brain disorder. We
may have difficulty recruiting healthy or sick volunteers for our trials.
Either CoCensys or the FDA can halt a trial at any time if either of us
believes that the participants in the trial are being exposed to
unacceptable health risks. Even if we do successfully complete the testing
for one or more of our drugs and prove that our drug is safe for human use
and is effective in treating one or more specific brain disorders, we do
not know if the FDA or any other country's regulatory agency will approve
the drug for marketing and sale in that country. We cannot be sure that our
drug candidates will receive FDA approval in a timely manner, if at all.
Regulatory agencies may limit the uses, or indications, for which any of
our products is approved. Even if approvals are obtained, the marketing and
manufacturing of drug products are subject to continuing FDA and other
regulatory requirements, such as requirements to comply with good
manufacturing practices. The failure to comply with such requirements could
result in enforcement action, which could adversely affect us and our
business. Later discovery of problems with a product, manufacturer or
facility may result in additional restrictions on the product or
manufacturer, including withdrawal of the product from the market. The
government may impose new regulations which could further delay or preclude
regulatory approval of our drug candidates. We cannot predict the impact of
adverse governmental regulation which might arise from future legislative
or
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administrative action. Also, we conduct testing on our drugs both in the
United States and in other countries (principally European countries). The
FDA in the United States and regulatory agencies in other countries may be
unwilling to accept the results from trials not conducted in that agency's
"home" country.
FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY OR TO AVOID
INFRINGING THE RIGHTS OF OTHERS COULD IMPAIR OUR COMPETITIVE POSITION.
Our success depends in part on our ability to protect our technology from
unauthorized use by obtaining patents in the United States and other
countries and maintaining our trade secrets. Also, our drug candidates must
not infringe on the patent and other proprietary rights of others in the
United States and other countries where we may market and sell them. We
work hard to obtain appropriate patents and to maintain our trade secrets;
however, patents can be highly uncertain and involve complex legal and
factual questions. We do not know if our patent protection and trade secret
protection will be sufficient to allow CoCensys and our development
partners to develop, market and sell our drug candidates.
We file and prosecute patent applications on our own behalf and in
connection with technology that we have licensed from third parties. We
have been issued 23 patents in the United States for our technologies, with
expiration dates ranging from June 9, 2009 to February 11, 2017, and
another 21 filed patents are pending. We have also filed for patent
protection in selected foreign countries. We will continue to file and
prosecute patent applications in the United States and in other countries
to protect our drug candidates, but we do not know if we will be issued
additional patents for our technologies, either in the United States or in
other countries. We also do not know if we will invent any new products or
processes for which we can receive patent protection in the future.
The United States Patent and Trademark Office and similar agencies in other
countries have substantial backlogs of patent applications waiting for
consideration. In the United States, patent applications remain secret
until the patent is issued; in other countries, patent applications remain
secret for at least six months after filing. Therefore, we do not know
whether any of our competitors has filed patents that may interfere with
our ability to gain patent protection for our discoveries. We do not know
whether our competitors may have invented some of our technology prior to
the time that we invented the technology. Generally, only the person who
first invents technology is entitled to a patent for that technology. Even
if we are the first to invent certain technology and we have filed a patent
application, we do not know when that application will be considered by the
United States Patent and Trademark Office or any agency in other countries
where we may have filed a patent application for the technology.
Patents that have been issued to us are always subject to being challenged,
invalidated or circumvented; we do not know if any of our patents or
patents in which we have rights will provide adequate protection for
CoCensys. Also, we may have to participate in litigation or interference
proceedings to determine whether one or more of our patents is valid. Even
if we win the litigation or interference proceeding, we may be required to
spend substantial amounts of money defending the validity of our patents.
We do not know if we will have sufficient money to defend all of our
patents if they are challenged.
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Our success will also depend, in part, on our not infringing patents issued
to others. We do not know if any patents held or patent applications filed
by other people or companies will force us to alter our drug candidates or
processes, stop development of one or more of our drug candidates or obtain
licenses, if possible, from those other people or companies.
A number of pharmaceutical companies, biotechnology companies, universities
and research institutions have filed patent applications or received
patents that may be competitive with the our patents and patent
applications. We do not know the effect that those patents and patent
applications may have on our ability to continue to develop and,
eventually, market and sell our drug products. If we attempt to obtain
licenses to use patents held by other people, we do not know if we will be
granted licenses or whether the terms of those licenses, if granted, will
be fair and acceptable to CoCensys.
If we infringe another person's patent, or we fail to obtain an appropriate
license to use any other person's technology that is required to develop,
market and sell our drug products, we may have to participate in
interference proceedings or litigation, which could result in substantial
costs, fines and penalties assessed against CoCensys and we may be forced
to cease all use of the other person's technology. In fact, we are aware of
a patent that has issued that contains claims that may, if valid, block us
from selling certain compounds for one particular indication. Although we
are not currently pursing that indication for those compounds, if we do
decide to pursue that indication, we will have to either institute an
interference proceeding to determine the validity of the other patent or
attempt to license rights to the patent from the holder. We do not know if
we will be successful if we decide to institute an interference proceeding.
Also, we do not know if the patent holder would be willing to license us
rights to the patent, whether or not on terms acceptable to CoCensys.
We have developed a substantial amount of information constituting our
trade secrets. We rely on confidentiality agreements with our employees,
consultants and certain contractors to protect these trade secrets. We do
not know if the other parties to these agreements will abide by the
agreements or breach them. If any agreement is breached, we do not know
whether we will be able to adequately protect CoCensys from damage caused
by our trade secrets being disclosed to the public or to a competitor.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER FINANCIAL
RESOURCES AND EXPERTISE; IF WE CANNOT COMPETE SUCCESSFULLY WITH THESE
COMPANIES, THE VALUE OF OUR COMPANY AND OUR STOCK MAY BE GREATLY REDUCED.
We are engaged in a highly competitive, rapidly changing field. Existing
products and therapies, as well as those under development by other
companies, will compete directly with products that we are seeking to
develop and market. Competition from fully integrated pharmaceutical
companies, including larger biotechnology companies and our collaboration
partners, is intense and is expected to increase. Most of these companies
have significantly greater financial resources and expertise than we do in
research and development, manufacturing, pre-clinical and clinical testing,
obtaining regulatory approvals, marketing and distribution. Many of our
competitors also have significant products to treat neurological and/or
psychiatric disorders approved or in development and operate large,
well-funded research and development programs. Academic institutions,
governmental agencies and other public and private research organizations
also conduct research, seek patent
22
<PAGE>
protection and establish collaborative arrangements for product and
clinical development and marketing. Further, we face competition based on
product efficacy, safety, the timing and scope of regulatory approvals,
availability of supply, marketing and sales capability, reimbursement
coverage, price and patent position. We do not know whether our
competitors will be able to develop more effective or more affordable
products, or achieve earlier patent protection or product
commercialization than us. If we are unable to compete successfully, our
business, financial condition and results of operations will be materially
adversely affected.
IF OUR PRODUCTS ARE NOT COMMERCIALLY SUCCESSFUL OR REIMBURSED BY
THIRD-PARTY PAYORS, WE WILL BE UNABLE TO GENERATE SUFFICIENT REVENUES TO
SUSTAIN OUR BUSINESS.
Even if one or more of our products prove safe and effective, we do not
know if the products will be successful commercially. For example, our
products may be too difficult or expensive to make, or our products may not
be acceptable to patients, health care providers and third-party payors. In
both the United States any many foreign countries, sales of our products,
if any, will depend in part on the availability of reimbursement from
third-party payors, such as government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price and cost-effectiveness of medical
products and services. We do not know whether our drug products will be
considered cost effective or that adequate third-party reimbursement will
be available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product development. In certain
foreign countries, our products may be subject to governmentally mandated
prices. If governments and third-party payors do not provide adequate
reimbursement for our potential drug products or if foreign governments
force unreasonably low pricing for our drugs, our business, financial
condition and results of operations may be materially adversely affected.
A PRODUCT LIABILITY CLAIM AGAINST US COULD CAUSE US TO INCUR SIGNIFICANT
LOSSES.
Our business exposes us to potential product liability risks if any of our
compounds or future products cause illness, injury or death. Although we
currently have liability insurance covering our clinical trials, our
coverage may not be sufficient to cover all potential claims. We do not
know if we will be able to obtain and maintain such insurance for all of
our clinical trials and future products. We will need to increase our
insurance coverage in the future if we begin to market and sell any of our
drug products under development. However, we do not know if we will be able
to obtain or maintain product liability insurance in the future on
acceptable terms or with adequate coverage against potential liabilities. A
liability claim, regardless of merit or eventual outcome, could cause us to
incur significant losses and materially adversely affect our business,
financial condition and results of operations.
OUR STOCK PRICE IS VERY VOLATILE, AND EXTREME PRICE FLUCTUATIONS COULD
MATERIALLY ADVERSELY AFFECT THE VALUE OF ANY INVESTMENT IN COCENSYS COMMON
STOCK.
The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance
of particular companies. In addition, the market prices of the common stock
of many publicly traded biopharmaceutical companies, including ours,
23
<PAGE>
have in the past been, and can in the future be expected to be, especially
volatile. Our stock price may fluctuate greatly as a result of a number of
factors, including:
- announcements of technological innovations or new products by us or
by our competitors;
- developments or disputes concerning patents or proprietary rights;
- publicity regarding actual or potential medical results relating to
drug products that we or our competitors are developing;
- regulatory developments in both the United States and foreign
countries;
- public concern as to the safety of biotechnology products; and
- economic and other external factors, as well as period-to-period
fluctuations in our financial results.
THE SALE OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK MAY FURTHER
DEPRESS OUR STOCK PRICE, WHICH COULD MATERIALLY ADVERSELY AFFECT THE VALUE
OF ANY INVESTMENT IN COCENSYS COMMON STOCK.
The sale of a large number of shares of our common stock in the public
market could depress the market price of our common stock. Substantially
all of the outstanding shares of our common stock may be sold at any time
in the public markets. Approximately 775,000 freely tradable additional
shares may be issued on exercise of vested options to purchase CoCensys
stock. Current and former employees, consultants, officers and directors of
CoCensys hold these options.
If the prosposed merger with Purdue Pharma is not consummated, we may be
required to issue millions of additional shares of CoCensys common stock
upon conversion of the Series E convertible preferred stock. As of
August 13, 1999, 1,159 shares of the preferred stock remained issued and
outstanding. Each share of the preferred stock is convertible into
shares of CoCensys common stock at discount to the current market price
of our common stock. If converted on August 9, 1999, based on the
then-applicable conversion price of $0.49 per share, the remaining
preferred stock, including accrued dividends, would have been
convertible into approximately 2.6 million additional shares of CoCensys
common stock. The number of shares of common stock that may be issued
could prove to be significantly greater if the market price of our
common stock declines. Stockholders may experience substantial dilution
in their investment from issuance of additional common stock on
conversion of the preferred stock.
OUR DELISTING FROM THE NASDAQ NATIONAL MARKET MAY MATERIALLY ADVERSELY
AFFECT THE LIQUIDITY OF OUR COMMON STOCK AND THE VALUE OF COCENSYS COMMON
STOCK.
Effective with the close of business on July 13, 1999, the Nasdaq Stock
Market delisted the Company's common stock from the Nasdaq National
Market, citing a stock price below $1.00 per share and an insufficient
public float among the primary reasons for the delisting. The Company's
common stock is now traded on the OTC Bulletin Board under the symbol
COCN. The liquidity and value of the Company's common stock has been
adversely impacted by the delisting of the common stock from the Nasdaq
National Market, and the liquidity and value would likely be further
adversely impacted by the failure of the Company to meet the
requirements for inclusion on the OTC Bulletin Board. We cannot predict
whether the Company will continue to meet all listing requirements for
the OTC Bulletin Board in the future.
24
<PAGE>
COCENSYS, INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting on Stockholders on June 9, 1999. The
stockholders elected the Board's nominees as directors by the votes
indicated:
<TABLE>
<CAPTION>
Nominee Votes in Favor Votes Withheld
------- -------------- --------------
<S> <C> <C>
Blair 3,350,584 77,635
Mendelson 3,350,590 77,629
Weber 3,349,852 78,367
</TABLE>
The selection of Ernst & Young, LLP as the Company's independent auditors
was ratified with 3,396,227 votes in favor, 18,381 against and 13,610
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
(i) The Company filed a current report on Form 8-K, dated April 8, 1999,
reporting that Nasdaq had halted trading of the Company's common stock on
the Nasdaq National Market pending receipt and review of certain
information.
(ii)The Company filed a current report on Form 8-K, dated April 15, 1999,
reporting that the Company announced a one share for eight shares reverse
split of its common stock effective April 15, 1999.
(iii) The Company filed a current report on Form 8-K, dated May 18, 1999,
reporting that it had sold it interest in Cytovia, Inc. for $3.3 million
and had used the proceeds to redeem a portion of its Series E Convertible
Preferred Stock.
(iv) The Company filed a current report on Form 8-K, dated July 13, 1999,
reporting that its common stock had been delisted from the Nasdaq National
Market effective with the close of business on that date.
(v) The Company filed a current report on Form 8-K, dated August 10, 1999,
reporting that it had entered into an agreement to be purchased by Purdue
Pharma LLP.
25
<PAGE>
COCENSYS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
CoCensys, Inc.
Date: August 13, 1999 By: /s/ F. Richard Nichol, Ph.D.
---------------------- -------------------------------------
F. Richard Nichol, Ph.D.
Chairman, President and
Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 13, 1999 By: /s/ Thomas B. Miller
---------------------- -------------------------------------
Thomas B. Miller
Senior Director of Finance and Controller
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,000
<SECURITIES> 4,616
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,937
<PP&E> 6,175
<DEPRECIATION> (4,742)
<TOTAL-ASSETS> 7,445
<CURRENT-LIABILITIES> 7,651
<BONDS> 0
0
11,472
<COMMON> 109,022
<OTHER-SE> (120,886)
<TOTAL-LIABILITY-AND-EQUITY> 7,445
<SALES> 0
<TOTAL-REVENUES> 1,377
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> (3,940)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,940)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,940)
<EPS-BASIC> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
