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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20954
COCENSYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0538836
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NO.)
201 TECHNOLOGY DRIVE, IRVINE, CA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(949) 753-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
PAR VALUE $0.001
PER SHARE
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 and 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the closing price of the Common
Stock reported on the Nasdaq National Market on March 1, 1999, was $8,865,694.
The number of shares of Common Stock outstanding as of March 1, 1999,
was 33,508,618.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement, to be filed not
later than 120 days after December 31, 1998 in connection with the registrant's
1999 Annual Meeting of Stockholders, are incorporated by reference into Part III
of this Form 10-K.
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PART I
ITEM 1. BUSINESS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
SOME OF THE STATEMENTS IN THIS 10-K ARE FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER
FACTORS THAT MAY CAUSE OUR RESULTS, LEVEL OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVEL OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, AMONG OTHERS, THOSE
DISCUSSED BELOW UNDER "BUSINESS RISKS."
IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "COULD," "EXPECTS," "PLANS,"
"ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," OR
"CONTINUE" OR THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE TERMINOLOGY.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVEL OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE DO NOT ASSUME
RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE FORWARD-LOOKING
STATEMENTS. WE DO NOT INTEND TO UPDATE THIS 10-K AFTER IT IS FILED SO THAT
THE FORWARD-LOOKING STATEMENTS CONFORM TO ACTUAL RESULTS.
OVERVIEW
CoCensys, Inc. is a biopharmaceutical company dedicated to the
discovery and development of small molecule drugs to treat neurological and
psychiatric disorders. In addition, we provide product development expertise
to our collaboration partners and external clients.
Our business strategy features three business drivers: our
technology; our ability to provide product development services to our
partners; and our ability to provide product development services to a niche,
under served segment of the contract research organization market.
CoCensys' technology is focused on the exploration of novel
receptors and their ligands and inhibitors through three technology
platforms: specific GABAA receptor modulators named epalons; glutamate
receptor antagonists; and sodium channel blockers. We are working to build a
portfolio of products for disorders of the central nervous system, both
through discovery and development of products utilizing the technical
expertise and creativity of our scientists and through the in-licensing of
new technology and product candidates.
We conduct discovery and development of our products through
internal resources and by licensing our technologies to collaboration
partners who fund further research and development of our products. In
addition, as we negotiate potential collaboration agreements for our
technologies, we also negotiate for the right to conduct clinical trials in
North America on products licensed to our collaboration partners, with
clinical development costs paid for by the partners. We believe this may
allow CoCensys to participate more fully in the future development of our
compounds and generate revenue.
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Along with providing services to our partners, we are offering our
services to selected pharmaceutical and biotechnology companies that have
technologies poised for development and are seeking to augment their own
internal development capabilities. We believe this may allow us to further
utilize our development resources and generate additional revenue.
BACKGROUND ON COCENSYS TECHNOLOGIES
In the brain, chemical messengers called neurotransmitters carry
signals between nerve cells (neurons). The signals, which are received by
cell surface receptors, can be either excitatory or inhibitory. Excitatory
signals increase the electrical firing of neurons receiving the signals,
while inhibitory signals decrease firing. The proper functioning of the brain
hinges on a delicate balance between excitatory and inhibitory signals.
Each neurotransmitter has a specific receptor, and we are working to
design products that are highly selective for specific receptor types. Many
of the current central nervous system ("CNS") drugs targeting the receptor
for a particular neurotransmitter also affect other receptors distributed
throughout the CNS or throughout the body. This lack of receptor specificity
produces unwanted CNS side effects such as sedation, anxiety, delirium,
hallucinations, impaired memory and learning and alcohol potentiation
(increased alcohol toxicity), along with the potential for cardiovascular
side effects.
TECHNOLOGY AND PRODUCT DEVELOPMENT
As described below, our product discovery and development programs
are focused on three technology platforms: specific GABAA receptor modulators
named epalons; glutamate receptor antagonists; and sodium channel blockers.
In March 1998, we transferred rights to our technology platform relating to
apoptosis (programmed cell death) to Cytovia, Inc. in exchange for equity
ownership in and royalties and certain future development rights from
Cytovia. The table on the next page sets forth the status of each of our
technologies.
GABA RECEPTOR MODULATORS OR EPALONS
Our proprietary epalon compounds are based on the discovery by
CoCensys' founding scientists of a novel neuroreceptor site located on the
type A of the gamma-amino butyric acid ("GABAA") receptor complex, and the
molecules, or ligands, that specifically interact with that receptor site.
GABA is the predominant inhibitory neurotransmitter in the brain. Numerous
brain activities are affected by the degree to which GABA opens the chloride
channels that allow the calming of neurons. A decrease in GABA activity
allows neurons to remain excited for longer periods, which can lead to
anxiety and, at the extreme, convulsions. A significant increase in levels of
GABA activity can result in sedation and sleep. GABA binds to GABAA receptor
complexes to calm excited neurons. When GABA binds with its receptor, it
opens a chloride channel in the membrane of the stimulated neuron, admitting
chloride ions that calm the excited neuron. Augmentation of the functions of
the GABAA receptor-gated chloride channel may be beneficial in the treatment
of disease states such as epilepsy, migraine, anxiety and insomnia.
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COCENSYS PRODUCTS IN DEVELOPMENT
<TABLE>
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<S> <C> <C> <C>
PRODUCTS INDICATIONS DEVELOPMENT STAGE COMMERCIALIZATION RIGHTS
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GABAA RECEPTOR MODULATORS
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Ganaxolone Epilepsy, including Completed a series of Phase II CoCensys
(CCD 1042) complex partial seizures trials for infantile spasms,
and infantile spasms; complex partial seizures in adults
migraine prophylaxis and acute migraine; initiated
Phase II trial for catamenial
epilepsy and investigating
possible migraine prophylaxis
indication
CCD 3693 and back-up Insomnia Completed a series of Phase I CoCensys
compounds safety trials
Co 2-6749 and back- Anxiety disorders Pre-clinical development CoCensys/
Up compounds Wyeth-Ayerst
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GLUTAMATE
RECEPTOR
ANTAGONISTS
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Licostinel Stroke; tinnitus Completed a series of Phase I CoCensys
(ACEA 1021) safety trials in stroke
SSNRAs Parkinson's disease, Pre-clinical development CoCensys/
epilepsy, chronic pain and Warner-Lambert
cerebral ischemia
Glutamate Receptor Ophthalmic disorders Research with Senju Pharmaceuticals CoCensys/
Antagonists Warner-Lambert
AMPA Receptor Modulators Neurodegenerative Research CoCensys
disorders; sexual
dysfunction
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SODIUM CHANNEL BLOCKERS
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Co 102862 Neuropathic pain and Pre-clinical development CoCensys
epilepsy
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APOPTOSIS INHIBITOR AND
SCREENING TECHNOLOGY
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Apoptosis Inhibitors; Degenerative disorders; Research Cytovia, a spin-off from
Apoptosis Screening Cells drug screening CoCensys
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</TABLE>
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Our founders were among the first to demonstrate that an endogenous
(naturally occurring) class of related ligands (molecules that interact
specifically with receptors), called epalons, modulates the activity of GABA
in opening the chloride channel at the GABAA receptor complex. Studies
indicate that epalons themselves have limited activity on the chloride
channel. However, epalons modulate the GABAA receptor by enhancing the
ability of GABA to open the chloride channel. Thus, epalons work primarily
when GABA is present.
We have synthesized over one thousand analogs of endogenous epalons.
We have selected several development candidates from this group of synthetic
epalons. CoCensys' epalon development programs target epilepsy, migraine
prophylaxis, insomnia and anxiety. We are considering additional indications
for epalons, such as anesthesia.
GANAXOLONE (CCD 1042). We are developing ganaxolone to treat certain
types of epilepsy, including complex partial seizures and infantile spasms,
and as a potential drug for migraine prophylaxis. In November 1993, we filed
an investigational new drug application ("IND") with the United States Food
and Drug Administration for the treatment of epilepsy. We completed Phase I
clinical trials of ganaxolone in 210 healthy volunteers, providing
preliminary indications of the drug's safety, tolerability and
pharmacokinetics; no significant adverse effects were observed. We commenced
Phase II trials at the end of 1994 with pediatric epilepsy patients and at
the end of 1996 for adult epilepsy patients. Further, we filed an IND for
migraine in January 1997 and completed Phase II trials in migraine patients
in 1997 using a liquid formulation and 1998 using a tablet formulation.
GANAXOLONE FOR EPILEPSY. Epilepsy is a chronic brain disorder which
affects approximately one percent of the world population. Many drugs
currently available to treat epilepsy are administered in high doses and have
the potential for significant toxicity including teratogenicity. In addition,
these drugs have nonspecific interactions with receptors throughout the
brain, resulting in significant side effects such as adverse impacts on
learning and memory. Animal studies conducted by CoCensys, which included
side-by-side comparisons with existing anti-epileptic drugs, suggest that
ganaxolone has a broad profile of anti-seizure activity and a favorable
side-effect profile. Based upon these studies, we believe that ganaxolone may
have therapeutic potential in a variety of seizure types.
We completed our first Phase II clinical trial in France in
pediatric patients with epilepsy refractory to current treatments. In
November 1996, we announced that the study showed a clinically meaningful
response in this difficult to treat patient population. In 1997, we
replicated those results in similar Phase II pediatric trials in France and
the United States.
In 1997, we also announced positive results from our Phase II U.S.
trial in adult epilepsy patients, which commenced at the end of 1996. The
trial included 52 epilepsy patients, ages 18 to 65, who had experienced such
debilitating seizures that they were candidates for possible surgical
treatment. Following their pre-surgical evaluations, while they were not
taking any other anti-epileptic medications, the patients were given oral
doses of either ganaxolone or a placebo for up to eight days or until a
predefined seizure frequency or type caused them to drop out of the study.
The patients who received placebo were twice as likely to experience an
unacceptable frequency or severity of seizures as those taking ganaxolone.
There were two serious adverse events reported. Both of the events appeared
to be related to withdrawal from the subjects' original drug regimen, and one
of the events occurred in a patient who received placebo.
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Currently, we have initiated a Phase II trial for female patients
who suffer from seizures around the time of their menstrual cycle, known as
"catamenial epilepsy." In addition, we are seeking a collaboration partner to
continue development of ganaxolone for epilepsy. Please see "Business Risks"
below for a discussion of risks associated with our ability to secure a
collaboration partner and continue the development of ganaxolone, including
without limitation the risk captioned "We depend on third parties to fund our
drug development."
GANAXOLONE FOR MIGRAINE PROPHYLAXIS. Migraine, a severe and
frequently debilitating headache, is the most common neurological disorder.
It is estimated that approximately 23 million people in the United States
suffer some degree of recurrent migraine headaches. The underlying cause of
migraine is poorly understood, but the pain has long been believed to arise
from the dilation of blood vessels in a layer of the brain lining. Research
has suggested that the local inflammation caused by substances released by
nerve endings attached to those blood vessels may exacerbate the pain. Based
on pre-clinical studies conducted by researchers at Massachusetts General
Hospital, a teaching hospital affiliated with the Harvard Medical School,
that suggested the potential utility of ganaxolone to treat migraine and
using clinical data generated on ganaxolone through the epilepsy program, we
tested ganaxolone in two Phase II trials for migraine sufferers.
In the first trial, 252 pre-menopausal women were given oral doses
of placebo or one of four dose levels of ganaxolone. Preliminary results
released in November 1997 showed that, although there was no significant
difference among the treated and placebo groups overall, there was a
substantial increase in response as a function of plasma drug level at two
and four hours after the patients were dosed. In the trial, 14 of the 23
patients who achieved plasma drug levels of 80 ng/mL or more achieved pain
relief in two hours, while an additional six patients (for a total of 20 out
of 23) achieved pain relief in four hours. Importantly, no serious adverse
events or cardiovascular side effects were reported in the trial.
In the second trial, 325 female and male migraine patients were
dosed with a tablet formulation of either ganaxolone or a placebo. Our
primary endpoints were pain relief at two and four hours post dosing. While
the patients receiving ganaxolone reported pain relief at a rate in excess of
those receiving placebo, the difference was not statistically significant.
However, we did achieve statistically significant pain relief at two hours in
a subset of 45 female patients who were dosed with ganaxolone or placebo
within five days following start of menses.
Following these results, and based on our research regarding
similarities between ganaxolone and another drug approved for migraine
prophylaxis (divalproex sodium), we are investigating use of ganaxolone as a
prophylactic treatment for migraine. Further development of ganaxolone for
migraine prophylaxis will be determined in conjunction with any collaboration
agreement that we enter into for development of ganaxolone.
CO 2-6749 FOR ANXIETY. The market for drugs to treat anxiety is
currently served by a class of drugs called benzodiazepines, such as
Valium(R) and Xanax(R), and to a lesser extent, by drugs such as BuSpar(R).
Benzodiazepines cause several serious side effects, including sedation,
potentiation of alcohol toxicity, cognitive impairment and abuse potential.
BuSpar, while exhibiting fewer side effects than benzodiazepines, requires up
to several days of administration before producing a therapeutic effect.
Because of its highly specific and natural mode of action, we believe that
our class of anxiolytic epalons may prove to have a more favorable ratio
between efficacy and side effects in treating anxiety disorders than existing
drug therapies.
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In May 1997, CoCensys licensed to American Home Products
Corporation, through its Wyeth-Ayerst Laboratories Division, our epalon
compound Co 2-6749, along with its back-up compounds, for development as
anxiolytics. The program currently is in the pre-clinical development stage.
Under our agreement, Wyeth-Ayerst is required to fund the
development of Co 2-6749. In addition, Wyeth-Ayerst is obligated to support
CoCensys' research for up to three years at $3 million per year to identify
additional compounds that may have better efficacy or side-effect profiles
than Co 2-6749, generally referred to as "back-up" compounds. If Co 2-6749
fails to meet certain criteria, then Wyeth-Ayerst may choose to develop a
back-up compound in place of Co 2-6749. Also, if Co 2-6749 fails to meet its
criteria, and if the back-up program fails to produce a back-up compound that
meets other pre-defined criteria, Wyeth-Ayerst has the right to terminate the
back-up program and require CoCensys to reimburse to Wyeth-Ayerst a portion
of the funds paid by Wyeth-Ayerst to CoCensys to fund the back-up program. As
of December 31, 1998, the portion of funds that may be subject to repayment
is $2.6 million.
Wyeth-Ayerst is obligated to pay to CoCensys certain nonrefundable
milestone payments under the Wyeth-Ayerst Agreement upon the achievement of
key development events and the outcome of product labeling. CoCensys has the
right to co-promote in the United States Co 2-6749 or a replacement compound
and share any profits proportionally. Wyeth-Ayerst has the exclusive right to
develop, register and market the compound in the rest of the world, subject
to specified royalty payments.
CCD 3693 FOR INSOMNIA. Currently the prescription market for the
treatment of insomnia is largely served by Ambien(R), marketed by G.D. Searle
& Co., which works on a specific sub-type of the benzodiazepine receptor.
Ambien is a "Schedule 4" drug, meaning it may have limited potential to cause
physical or psychological dependence. Current hypnotic drugs may affect
short-term memory, cause rebound insomnia and have "day after" effects.
CoCensys believes that, because CCD 3693 has a different mechanism of action,
it may have a better side-effect profile.
In 1996, we entered into a collaboration agreement with Searle to
develop CCD 3693 for the treatment of insomnia. Searle initiated Phase I
clinical studies in Europe in 1997 while we worked on an active back-up
program to identify additional compounds for the target indication. In July
1998, we received notification from Searle that it decided not to participate
further in the collaboration, stating that the program no longer met its
needs in light of its entire product pipeline. We retained all rights to the
compounds in the program, including CCD 3693, and we are continuing to
explore the potential use of epalons to treat insomnia.
GLUTAMATE RECEPTOR ANTAGONISTS
Our proprietary glutamate receptor antagonist program includes three
classes of compounds. To date, two programs are targeted at the
N-methyl-D-aspartate ("NMDA") receptor complex and a third focuses on the
(alpha)-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid ("AMPA") receptor.
Glutamate is the most abundant excitatory amino acid in the central
nervous system and is the principal excitatory neurotransmitter in the brain.
Glutamate triggers three major receptor complexes in the brain: NMDA, AMPA
and Kainate. Glutamate's effect on these receptors enables brain cells to
direct cognition, memory, movement and sensation. However, glutamate can
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over stimulate neurons, which can lead to neuronal death. When over
stimulated neurons die, they release more glutamate, triggering a spreading
cascade of glutamate over stimulation in other neurons that may continue for
hours or even days, thereby producing significant brain damage in stroke
patients or a worsening condition in individuals with neurodegenerative
disorders such as schizophrenia, epilepsy and Alzheimer's disease.
The NMDA receptor has binding sites for a number of different
agents, including glutamate and glycine. When both of these neurotransmitters
bind to the NMDA receptor complex, a calcium ion channel is opened that
permits calcium ions to enter and stimulate the neuron. A number of compounds
that block the effect of glutamate on the NMDA receptor have been tested by
others in animal models of stroke and head trauma and have been found to be
effective in preventing the ischemic cascade, thereby limiting brain damage.
Some of these drugs block the influx of calcium ions to the neuron by binding
to the phencyclidine ("PCP") binding site located on the interior of the ion
channel associated with the NMDA receptor. While this leads to effective
nerve cell protection, it also produces the psychotic side effects, such as
hallucination and agitation, associated with the drug PCP.
Like the NMDA receptor/ion channel complex, the AMPA receptor
responds to glutamate binding by opening an ion channel. Long-lasting
over-activation of AMPA receptors by glutamate, which is believed to occur in
chronic neurodegenerative diseases and in global brain ischemia (e.g., after
cardiac arrest), is thought to result in a slow over-stimulation of the
neurons by calcium, resulting in slowly progressing nerve cell degeneration.
Research indicates that glycine acts as a modulator or
co-transmitter with glutamate on the NMDA receptor, so blocking its action
would lessen the effects of glutamate on neurons. CoCensys has synthesized a
series of proprietary compounds that are potent antagonists of the glycine
receptor on the NMDA receptor complex.
LICOSTINEL (ACEA 1021) FOR STROKE. Cerebral ischemia is oxygen
deprivation to the brain that may occur when blood flow is interrupted by
stroke. There are approximately 700,000 strokes per year in the United
States. It is estimated that costs associated with strokes exceed $25 billion
annually in healthcare expenses and lost productivity in the United States.
The drug market for this indication is under served, with few effective
therapies for treating stroke.
We are developing our lead glycine antagonist, licostinel, to treat
stroke patients. In 1994, we began a development collaboration for licostinel
with Novartis Pharma A.G. (successor to Ciba-Geigy Ltd.) and filed an IND for
cerebral ischemia resulting from stroke. We completed short-term infusion
Phase I studies in healthy volunteers and in stroke patients in 1995 and
1996, respectively. Results of these studies showed no evidence of serious
side effects, including PCP-like psychosis, agitation or adverse
cardiovascular effects. In 1997, we reported that preliminary results from
additional safety trials involving long-term infusion showed crystals of
licostinel in the urine of some subjects, a potentially dose-limiting side
effect. However, the crystal formation occurred only in subjects with ten
times the blood plasma level of licostinel that was therapeutically effective
in animals. Influenced by the results of the later trials, Novartis ceased
further participation in the development efforts in April 1997.
Currently, we are completing an additional Phase I safety trial on
licostinel as we seek a new partner for further development of the licostinel
program. Please see "Business Risks" below for a discussion of risks
associated with our ability to secure a collaboration partner and continue
the development of the licostinel program, including without limitation the
risk captioned "We
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depend on third parties to fund our drug development." In addition, we are
investigating possible use of licostinel to treat patients who suffer from
tinnitus, or ringing in the ears, based on the existence of NMDA receptors in
the inner ear. Often, tinnitus is the result of sound-induced hearing damage.
Tinnitus is a significant health problem; it is estimated that in the United
States 50 million adults suffer from tinnitus to some degree. Approximately
12 million of those adults suffer from tinnitus severe enough to seek medical
help.
SUBTYPE-SELECTIVE NMDA RECEPTOR ANTAGONISTS ("SSNRAs") are compounds
that selectively block only one of the NMDA receptor subtypes. Gene cloning
studies have identified at least four different NMDA receptor subtypes, each
of which has a distinct anatomical distribution in the brain. CoCensys has
discovered several novel classes of drugs that selectively target one subtype
without producing an effect on other subtypes. In animal models, our SSNRAs
appear to be free of side effects seen with other NMDA antagonists that block
all four subtypes.
SSNRAs effectively cross the blood-brain barrier and have exhibited
efficacy in animal models of cerebral ischemia, Parkinson's Disease, epilepsy
and chronic pain. Some SSNRAs have been shown to have IN VIVO efficacy after
oral administration in an animal model of Parkinson's disease, suggesting
oral bioavailability in this class of compounds. CoCensys believes SSNRAs are
potential drug candidates for a variety of neurological and psychiatric
diseases, including cerebral ischemia, Parkinson's disease, epilepsy and
chronic pain.
We have been working with our collaboration partner, Warner-Lambert
Company, since 1995 to identify and develop SSNRA product candidates for a
broad range of CNS diseases. Our initial agreement with Warner-Lambert,
through its Parke-Davis division, provided for a two-year research and
development program; we revised and extended that agreement for an additional
two years in October 1997 (the "Warner Collaboration Agreement"). The program
currently is in the pre-clinical development stage.
Under the 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 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 is also obligated to pay for all costs to promote any product
developed under the 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 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 will make
nonrefundable milestone payments to CoCensys.
Either party may terminate its participation in the Warner
Collaboration Agreement voluntarily. In the event of a termination by either
party during the research period, the terminating party would forfeit all
rights and obligations to co-develop and co-promote any compounds arising
thereunder, subject to a specified royalty payment to the terminating party,
and would be precluded from conducting additional research in the SSNRA field
for a fixed period of time. After the research period, each party may
terminate on a product-by-product basis. In the event of such termination,
the party electing to terminate would forfeit all rights and obligations to
co-develop and co-promote such product, subject to a specified royalty
payment to the terminating party. We cannot assure you that we will have the
substantial resources needed to fulfill our research,
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development and commercialization obligations under the Warner Collaboration
Agreement. If CoCensys is unable to fulfill such obligations, we may be
required to terminate early under the Collaboration Agreement and forfeit our
rights thereunder; in such case, we would be entitled to royalties on future
product sales. Please see "Business Risks" below for a discussion of risks
associated with our ability to fulfill our obligations under the Warner
Collaboration Agreement.
AMPA RECEPTOR ANTAGONISTS prevent glutamate from activating the AMPA
receptor and are believed to prevent or slow calcium entry into neurons.
Calcium entry into neurons through AMPA receptors is believed to play a role
in nerve cell destruction in chronic neurodegenerative diseases. AMPA
receptor antagonists have shown neuroprotective efficacy in animal models of
global cerebral ischemia (such as may occur following cardiac arrest or near
drowning), epilepsy and pain. They also are believed to have potential as
therapeutic agents in chronic neurodegenerative diseases.
CoCensys scientists have discovered several different chemical
classes of novel AMPA receptor antagonists and AMPA receptor modulators. We
are working to develop compounds through this program that may prove useful
in the treatment of diseases such as epilepsy, schizophrenia, amyotrophic
lateral sclerosis (ALS or Lou Gehrig's disease) and other neurodegenerative
disorders. In addition, AMPA receptor modulators may have utility in certain
forms of sexual dysfunction.
In October 1997, as part of the extension of our collaboration
agreement with Warner-Lambert for development of SSNRAs, the companies agreed
to expand the collaboration to allow the companies to analyze and consider
for collaborative development each company's AMPA receptor modulator
technologies. In January 1998, the companies agreed to narrow the focus of
our collaboration agreement to its original scope of only the SSNRAs in
exchange for payment by CoCensys to Warner-Lambert of $1 million, which
amount is payable in common stock or cash, at the election of Warner-Lambert,
at the end of 1999. Our AMPA receptor antagonist and modulator technologies
remain available for partnership.
OTHER USES. Recently we announced that we entered into research
agreements with Senju Pharmaceutical Co., Ltd. and Warner-Lambert to explore
potential ophthalmic indications of glutamate receptor antagonists. One
agreement, between CoCensys and Senju, will look at our glycine antagonists
and AMPA receptor antagonists; the other agreement, among CoCensys, Senju and
Warner-Lambert, will explore the SSNRAs under development by CoCensys and
Warner-Lambert.
SODIUM CHANNEL BLOCKERS
Voltage-gated sodium channels ("VGSCs") are essential for the
initiation and propagation of nerve impulses and therefore play a fundamental
role in the normal function of the nervous system. Under conditions of
abnormal neuronal firing, such as during an epileptic seizure or during
spontaneous discharge from an injured sensory nerve fiber, VGSCs determine
the threshold for neuronal activation and modulate the frequency and duration
of repetitive neuronal firing. Drugs that selectively block the inactivated
state of VGSCs (such as Lamictal(R) and Tegretol(R)) have therefore proven
clinically effective in the treatment of epilepsy and neuropathic pain
(including pain resulting from inflammation or damage to peripheral nerve
endings).
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In 1997, we licensed from The University of Saskatchewan, through
its technology transfer company, University of Saskatchewan Technologies,
Inc., rights to a class of novel, small molecule compounds that block the
VGSCs. The compounds licensed include Co 102862, a structurally-novel VGSC
blocker that is selective for the inactivated state of VGSCs. Co 102862
currently is undergoing pre-clinical development at CoCensys for the
treatment of neuropathic pain and epilepsy. In several pre-clinical animal
models, Co 102862 demonstrates an anticonvulsant and side-effect profile
superior to that of Lamictal(R) and Tegretol(R) and potent activity in
neuropathic pain models. Also, both Lamictal(R) and Tegretol(R) paradoxically
lower seizure threshold at high doses; however, Co 102862 does not.
Therefore, we believe that Co 102862 may have an advantage as a treatment for
neuropathic pain because effective doses for that indication are often
greater than those that are used in epilepsy.
Currently, we are preparing an IND for Co 102862. We also are in
negotiations regarding a potential collaboration to further develop Co
102862. Please see "Business Risks" below for a discussion of risks
associated with our ability to secure a collaboration partner and continue
the development of Co 102862, including without limitation the risk captioned
"We depend on third parties to fund our drug development."
APOPTOSIS INHIBITORS AND SCREENING CELLS
Cell death can be a natural physiological process that occurs during
embryonic development as well as during remodeling of certain adult tissues.
This natural death of cells, called apoptosis or programmed cell death,
occurs by a discrete series of molecular events. Apoptosis also can be
triggered inappropriately in many diseases (including stroke, heart disease
and certain neurodegenerative disorders). This pathological form of apoptosis
is thought to play an important role in the loss of cells that occurs in
these diseases.
CoCensys discovered novel small molecules that may inhibit
apoptosis. In addition, we discovered certain compounds that permeate living
cells and fluoresce when apoptosis is triggered. Although promising for use
in a variety of disorders, we determined that the technology was outside of
our focus on development of therapeutics for disorders of the central nervous
system. Accordingly, in January 1998, we announced the formation of Cytovia,
Inc., as a technology spin-off to commercialize the apoptosis inhibitor and
screening cell technology; we completed transfer of technology in March 1998.
Cytovia is led by Eckard Weber, M.D., former head of research and
discovery for CoCensys and a current member of CoCensys' Board of Directors;
in addition, eleven other CoCensys employees joined Cytovia. CoCensys
retained an equity stake in Cytovia and a seat on Cytovia's Board of
Directors (currently held by our President and Chief Executive Officer, F.
Richard Nichol, Ph.D.). In addition, we retained the right to enter into
contracts on favorable terms with Cytovia to screen our neuroscience-related
therapeutic compounds and retained a right of first refusal for four years to
develop for central nervous systems disorders any compound discovered by
Cytovia. In addition to his continuing duties as a CoCensys Board member, Dr.
Weber also has continued as a leader and advisor to CoCensys on selected
scientific development projects.
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PRODUCT DEVELOPMENT SERVICES
As discussed above, our business strategy features three business
drivers: our technology (as discussed in the prior section); our ability to
provide product development services to our partners; and our ability to
provide product development services to a niche, under served segment of the
contract research organization market.
As part of our discussions with potential partners for our
technology, we are negotiating for the right to conduct clinical trials on
licensed compounds in North America, with costs paid for by the partner. As a
result, in addition to getting the typical up-front licensing fees, milestone
payments and royalties from a partner, we could generate revenue by
performing product development services. In addition, we hope to form
strategic business alliances with selected pharmaceutical or biotechnology
companies that have technologies poised for development and are seeking to
augment their own internal development capabilities.
Our ability to provide product development services is based on the
experienced, skilled product development team that we have assembled at
CoCensys, which is capable of providing "full service" product development
support to our partners. The team members have significant product
development experience with pharmaceutical companies, biotechnology companies
and clinical research organizations. We can provide solutions in the areas of
expertise listed in following table:
Representative Sample of
Area of Expertise Services Available
- -------------------------- -----------------------------------------------
Pharmaceutical Sciences Preformulation studies, formulation,
process and analytical method development,
stability studies, managing clinical supplies,
planning and supervising manufacture of NDA
stability, Phase III clinical and commercial
validation supplies
Pre-Clinical Safety Includes drug disposition, toxicology and
analytical chemistry; resources include HPLC,
gas chromatography and LCMS/MS for
pharmacokinetics
Project Management Planning, tracking, financial and time reporting
and critical path management
Clinical Development Study, protocol and CRF design and development,
site selection, contract management, study
monitoring, data review and coding, final
reports, annual reports and Investigator
Brochures
Clinical Informatics CRF design and development, data
collection, review, coding and management,
statistical programming and analysis, technical
writing, validated Oracle Clinical(R) database,
Tele-form(R) by Cardiff and ARISlite(TM) by
Clinarium
Regulatory Affairs Includes global regulatory experience;
all FDA interactions, including meetings,
submissions and inspections, established audit
procedures, quality assurance and SOPs, expertise
in GMP, GLP and GCP compliance
Our research and development efforts at CoCensys have focused on
central nervous system disorders; however, CoCensys' professional staff has
extensive experience in successfully
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developing and registering a variety of medical products in many therapeutic
areas at their prior companies. These areas include cardiovascular,
broncho-pulmonary, hematology, infectious diseases, gastroenterology,
endocrinology, women's health, dermatology, anti-inflammatory,
transplantation, ophthalmology, allergy and immunology, oncology, hair
growth, neuro-muscular rehabilitation, nephrology, male fertility, urology,
nutritional supplements and medical foods, and medical devices.
We currently are in discussions with a number of companies and
organizations regarding potential product development services contracts.
Please see "Business Risks" below for a discussion of risks associated with
our efforts to enter into product development service contracts, including
without limitation the risk captioned "We may not be able to attract and
retain key employees."
SALES AND MARKETING
In 1994, we established a Pharmaceutical Sales and Marketing
Division to co-promote other companies' commercialized drugs as part of our
strategy to generate non-equity funding. This Division focused on the
neurological and psychiatric markets, in part to establish a presence in
CoCensys' target markets in advance of CoCensys receiving FDA approval for
marketing of any of our compounds. In October 1997, in an effort to better
focus our resources and energies on our core competency of discovering and
developing therapies for brain and central nervous system disorders, we sold
the Division to Watson Pharmaceuticals, Inc.
In the future, CoCensys has the potential opportunity, through
collaborative relationships with Watson, to leverage the sales force and
Watson's manufacturing capacity as CoCensys products come to market. We
currently do not employ any sales personnel. Please see "Business Risks"
below for a discussion of risks associated with our lack of sale force,
including without limitation the risk captioned "We do not have a sales force
to sell future products."
MANUFACTURING
We currently rely on third-party manufacturers to produce our
compounds for pre-clinical studies and clinical trials. We expect to continue
in the foreseeable future to rely on such third-party manufacturers for
adequate supply of products needed for subsequent clinical trials and,
ultimately, for commercial distribution. However, there can be no assurance
that we will be successful in arranging for adequate supplies of our products
on acceptable terms, or at all.
We believe that all of our compounds will be produced using
traditional pharmaceutical synthesis. We also believe that there is currently
adequate worldwide capacity for the production of our compounds and that
CoCensys will be able to establish commercially reasonable arrangements for
the long-term supply of our products for clinical trial purposes and for
commercialization, if such compounds receive required regulatory approvals.
Generally, the equipment required for the manufacture of our compounds is
commercially available and is widely used in pharmaceutical industry
operations.
Please see "Business Risks" below for a discussion of risks
associated with our ability to manufacture our compounds, including without
limitation the risk captioned "We do not have manufacturing experience."
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PATENTS, PROPRIETARY RIGHTS AND LICENSES
Our success will depend in part on our ability to obtain patents,
maintain trade secrets and operate without infringing on the proprietary
rights of others, both in the United States and in other countries. Our
policy is to file patent applications to protect technology, inventions and
improvements that are important to the development of our business. We also
rely upon trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain our competitive position.
CoCensys files and prosecutes patent applications both on our own
behalf and in connection with technology licensed from others. CoCensys has
23 issued patents with expiration dates ranging from June 9, 2009 to February
11, 2017; in addition, another 21 filed patents are pending. CoCensys has
made related patent filings in selected foreign countries, and intends to
file additional domestic and foreign applications as appropriate. Our patent
applications include claims for processes, methods and therapeutic uses, as
well as composition of matter claims for compounds which we believe are not
naturally occurring or previously known. There can be no assurance that we
will develop additional products or processes that are patentable, that
patents will issue from any more of these applications, or that claims
allowed will be sufficient to protect our technology.
Certain of the pending, issued and allowed patents are owned by the
University of Southern California and the Rockefeller University, the
University of California, or the University of Oregon and have been
exclusively licensed to CoCensys. In December 1996 (as amended December
1997), CoCensys received an exclusive license to a patent application filed
by Massachusetts General Hospital for the use of GABAA receptor modulators,
including neuroactive steroids (epalons), to treat migraine. In June 1997,
CoCensys licensed from The University of Saskatchewan, through its technology
transfer company, University of Saskatchewan Technologies, Inc., rights to a
class of novel, small molecule sodium channel blockers which we are
developing to treat chronic pain and epilepsy.
We are aware of a patent application containing claims which, if
covered by a valid, issued patent, could block the use of our glutamate
receptor antagonists as adjunct therapy in an indication for which we are
currently conducting research. We also are aware of a patent that has issued
that contains claims which may, if valid, block us from selling certain
compounds for one particular indication not currently being pursued by
CoCensys. If we proceed with an interference or interferences, there can be
no assurance that we will be successful. There can be no assurance that our
patents, if issued, would be held valid and infringed by a court of competent
jurisdiction. An adverse outcome with regard to a third-party claim could
subject us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease using such
technology.
Please see "Business Risks" below for a discussion of risks
associated with our intellectual property, including without limitation the
risk captioned "Our patents and other intellectual property may not provide
sufficient protection."
GOVERNMENT REGULATION
Our research, pre-clinical development and clinical trials, as well
as the manufacturing and marketing of our potential products, are subject to
extensive regulation by governmental authorities in the United States and
other countries. We currently are conducting clinical trials in the United
States and Europe. Clinical trials and the marketing and manufacturing of our
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potential products will be subject to the rigorous testing and approval
processes of the FDA and the independent processes of foreign regulatory
authorities. The process of obtaining FDA and other required regulatory
approvals is lengthy and expensive. We have received approvals in the past to
conduct clinical trials for certain of our potential products and to
manufacture the products for such trials; however, we will need to maintain
those approvals and achieve further approvals in the future to continue to
manufacture and test our potential products.
Ganaxolone has been granted "orphan drug" designation by the FDA for
the treatment of infantile spasms. Under the Orphan Drug Act, the FDA has the
right to designate a product as an orphan drug if it addresses a "rare
disease or condition" affecting populations of fewer than 200,000 individuals
in the United States. The FDA can also designate a potential product as an
orphan drug if, despite the fact that the drug treats victims of a disease
numbering more than 200,000, the sponsor establishes that it does not
realistically anticipate product sales will be sufficient to recover costs.
If a product is designated an orphan drug, then the sponsor is entitled to
receive certain incentives to undertake the development and marketing of the
product. In addition, the sponsor that obtains the first marketing approval
for a designated orphan drug for a given rare disease is eligible to receive
marketing exclusivity for a period of seven years. Where appropriate, we may
apply for orphan drug designation for other indications and/or other drug
products.
To market our products abroad, we also must satisfy foreign
regulatory requirements, implemented by foreign health authorities, governing
human clinical trials and marketing approval. In the European Union ("EU"),
manufacturers of biotechnology products and certain high technology products
must submit an application to the European Medicines Evaluation Agency
("EMEA"). Approval by the EMEA will give the manufacturer access to the
markets of all EU member states. Manufacturers of medicinal products other
than those handled by the EMEA must utilize a "mutual recognition" procedure.
Under this procedure, an application is made first to the medicines agency of
any one member state, after which the approval gained in that state is used
as the basis for a request to the other member states to recognize the first
approval and grant a parallel authorization on the strength of that initial
approval. Approvals in the other member states are to follow as a matter of
course, unless there is an objection on the grounds of a safety or efficacy
problem. In the event that such an objection is made, the issue is submitted
to the EU's Committee on Proprietary Medicinal Products for resolution. The
foreign regulatory approval process includes all of the risks associated with
FDA approval set forth above. There is no assurance that the EMEA or the
national regulatory agency in any member state will accept the data developed
by us for any of our drug products and grant a marketing authorization.
Please see "Business Risks" below for a discussion of risks associated
with government regulation applicable to CoCensys, including without limitation
the risk captioned "We must comply with extensive governmental regulations."
COMPETITION
Competition for therapeutic products that address brain disorders is
intense and expected to increase. Our most significant competitors are fully
integrated pharmaceutical companies and more established biotechnology
companies. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical
companies. In addition, we face competition from academic institutions,
governmental agencies and other public and private research organizations that
conduct research, seek patent protection and establish
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collaborative arrangements for product and clinical development and
marketing. Furthermore, these companies and institutions compete with us in
recruiting and retaining highly qualified scientific and management personnel.
Many of our competitors have substantially greater financial,
technical and human resources and have significant products approved or in
development. In addition, many of these competitors have significantly
greater experience in undertaking pre-clinical testing and human clinical
trials of new pharmaceutical products and obtaining FDA approval for
products. Furthermore, if we are permitted to commence commercial sales of
products, we will also be competing with respect to manufacturing efficiency
and marketing capabilities.
Any product that we succeed in developing and for which we gain
regulatory approval must then compete for market acceptance and market share.
For certain of our potential products, an important competitive factor will
be the timing of market introduction. Accordingly, we expect that important
competitive factors will be the relative speed with which companies can
develop products, complete the clinical testing and approval processes and
supply commercial quantities of the product to the market. With respect to
clinical testing, competition may delay progress by limiting the number of
clinical investigators and patients available to test our potential products.
In addition to the above factors, competition is 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.
HUMAN RESOURCES
As of March 1, 1999, we had 91 full-time employees, of which 64 are
directly involved in research and development programs and 27 provide general
and administrative support. Our staff includes 28 employees with doctoral
degrees, including four medical doctors. We believe our employee relations
are good.
BUSINESS RISKS
ANY OF THE FOLLOWING RISK FACTORS COULD MATERIALLY ADVERSELY AFFECT
OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND THERE IS A HIGH RISK OF
FAILURE.
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 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. Third parties may have
proprietary rights that preclude us from marketing our 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.
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THE OUTCOME OF CLINICAL DEVELOPMENT IS HIGHLY UNCERTAIN.
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.
WE HAVE NEVER BEEN PROFITABLE, AND WE EXPECT TO CONTINUE TO GENERATE
SIGNIFICANT LOSSES.
Since we started business in 1989, we have spent over $174 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
developed at CoCensys. We have never been profitable and, through December
31, 1998, we have incurred a cumulative deficit of approximately $116 million.
We expect to continue to incur substantial and increasing losses
over the next several years as we continue our research and development
programs. To achieve and sustain profitable operations in the long term, we
must successfully develop, obtain regulatory approval for, manufacture,
introduce, market and sell drugs from our technologies. Failure to do so will
materially adversely affect our business, financial conditions and results of
operations.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS.
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
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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, you 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.
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 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 have the substantial resources needed
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 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.
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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 potential 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 sale. If we are unable to secure collaboration
partners, we will not be able to develop our drug candidates.
WE MUST COMPLY WITH EXTENSIVE GOVERNMENTAL REGULATIONS.
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
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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 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.
OUR PATENTS AND OTHER INTELLECTUAL PROPERTY MAY NOT PROVIDE SUFFICIENT
PROTECTION.
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,
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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.
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.
21
<PAGE>
WE FACE SIGNIFICANT COMPETITION.
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 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.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY EMPLOYEES.
We are highly dependent on the key members of our scientific and
management staff. If we lost the services of one or more key people, we may
experience significant delays in our development programs. In addition, we
rely on consultants and advisors to assist us in conducting our operations
and formulating our research and development strategy. Attracting and
retaining qualified personnel, consultants and advisors is critical to our
success. We compete with pharmaceutical companies, biotechnology companies,
universities and other entities and institutions in recruiting and retaining
highly qualified scientific and management personnel. We do not know if we
will be able to attract and retain qualified personnel on acceptable terms or
at all.
WE DO NOT HAVE MANUFACTURING EXPERIENCE.
We do not have any manufacturing facilities. We rely solely on
contract manufactures to produce supplies of our compounds and, at this time,
we likely will be forced to rely on contract manufactures to produce
commercial supplies of any of our drug candidates that are approved for
marketing and sale. We do not know whether our drugs can be manufactured in
commercial quantities at an acceptable cost.
In addition, we must rely on contractors for packaging, labeling and
distribution of our drug products. We do not know if we will be able to enter
into agreements for these services on terms acceptable and fair to us. We do
not know if our contractors will perform all of their obligations on time and
in an acceptable manner. Delays or defaults by our contractors could delay or
jeopardize our efforts to develop, market and sell our drug products.
Moreover, our contract manufacturers must adhere to current good
manufacturing practice regulations enforced by the FDA through its facilities
inspection program. We do not know if the facilities that we use will pass
FDA inspections. Failure to pass inspections could delay or jeopardize our
ability
22
<PAGE>
to market and sell any future products and materially adversely affect our
business, financial condition and results of operations.
WE DO NOT HAVE A SALES FORCE TO SELL FUTURE PRODUCTS.
We sold our Pharmaceutical Sales and Marketing Division to Watson
Pharmaceuticals in 1997. To market products in the future, we must develop or
acquire, and thereafter maintain and expand, a new sales and marketing
organization with technical expertise and supporting distribution capability.
We do not know if we will be successful developing or acquiring and,
thereafter, maintaining and expanding an appropriate sales and marketing
organization. Any failure on our part may have a material adverse effect on
our business, financial conditions and results of operations.
WE DO NOT KNOW IF OUR PRODUCTS WILL BE COMMERCIALLY SUCCESSFUL OR REIMBURSED
BY THIRD-PARTY PAYORS.
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.
WE ARE SUBJECT TO SUBSTANTIAL PRODUCT LIABILITY RISKS.
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 materially adversely
affect our business, financial condition and results of operations.
OUR STOCK PRICE IS VERY VOLATILE.
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, have in the past been, and can in the future be expected to
be,
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<PAGE>
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.
The sale of a large number of shares of our common stock in the
public 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 5.2 million 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.
We may be required to issue millions of additional shares of
CoCensys common stock upon conversion of Series E Convertible Preferred
Stock. As of March 1, 1999, 5,135 shares of our Series E Convertible
Preferred Stock remained issued and outstanding. Each share of the Series E
Convertible Preferred Stock is convertible into shares of CoCensys common
stock at discount to the current market price of our common stock. If
converted on March 1, 1999, based on the then-applicable conversion price of
$0.197 per share, the remaining Series E Convertible Preferred Stock would
have been convertible into approximately 27.5 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. CoCensys stockholders could experience substantial
dilution from issuance of additional common stock on conversion of the Series
E Convertible Preferred Stock.
In addition, we may be required to issue millions of additional
shares of CoCensys common stock on fulfillment of our obligation to
Warner-Lambert Company. Under our collaboration agreement with
Warner-Lambert, we owe Warner-Lambert $1 million on December 31, 1999. The $1
million is payable in common stock or cash, at the election of
Warner-Lambert. If the amount had been paid on March 1, 1999, and
Warner-Lambert elected to receive the payment in stock, we would have had to
issue to Warner-Lambert approximately 3.2 million shares of 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.
CoCensys stockholders could experience substantial dilution from issuance of
additional common stock in satisfaction of our obligation to Warner-Lambert.
24
<PAGE>
FAILURE TO MAINTAIN OUR LISTING ON THE NASDAQ NATIONAL MARKET MAY ADVERSELY
AFFECT THE LIQUIDITY OF OUR COMMON STOCK AND OUR FINANCIAL CONDITION.
Our common stock is traded on the Nasdaq National Market under the
symbol "COCN." In order to maintain our listing on the Nasdaq National
Market, we must meet a number of listing requirements established by Nasdaq.
Currently, we meet all Nasdaq National Market requirements other than the
minimum bid price. Generally, we must maintain a minimum bid price of $1.00
per share; however, our bid price is significantly below $1.00 per share and
has been below $1.00 per share since October 1998.
On December 1, 1998, Nasdaq informed us that our common stock would
be delisted on March 1, 1999 if we failed to have a closing bid price of at
least $1.00 per share for ten consecutive days on or before February 28,
1999. We have been unable to achieve that closing bid price; however, we have
applied for a hearing before Nasdaq to discuss our delisting. That hearing is
scheduled for April 29, 1999. While the hearing is pending, Nasdaq has said
that it will not take further action to delist our common stock from the
Nasdaq National Market as a result of our stock price.
On January 27, 1999, CoCensys stockholders approved a reverse split
of our common stock, subject to the Board of Director's right not to
implement the reverse split, in the alternative ratios of one share for six
shares, one for seven, or one for eight. CoCensys will consider implementing
the reverse stock split as necessary to increase the per share price of
CoCensys common stock in an effort to avoid delisting.
If we cannot maintain continued listing of our common stock on the
Nasdaq National Market or the Nasdaq SmallCap Market, our common stock could
trade on the OTC Bulletin Board or in the over-the-counter market in what is
commonly referred to as the "pink sheets." If this occurs, a stockholder will
find it more difficult to dispose of the securities or to obtain accurate
quotations as to the price of the securities. In addition, our common stock
could become subject to the "penny stock" regulations of the SEC, which
impose additional restrictions on broker-dealers who trade in such stock and
could severely limit the liquidity of our common stock. If we do not maintain
our listing on the Nasdaq National Market or Nasdaq SmallCap, we may be
required to redeem our Series E Convertible Preferred Stock. Redemption of
the Series E Convertible Preferred Stock would significantly deplete our cash
reserves and materially adversely affect our operations and financial
condition.
WE GENERATE HAZARDOUS MATERIALS IN OUR BUSINESS AND OPERATIONS.
Our research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. If an accident occurs, we could be
held liable for any damages that result and any such liability could exceed
our resources. Also, we may incur substantial costs to comply with
environmental regulations if we ever decide to develop manufacturing capacity.
25
<PAGE>
ITEM 2. PROPERTIES
Our administrative offices and research facilities are currently
housed in two adjacent buildings occupying approximately 54,700 square feet
of leased space in Irvine, California. The lease on these facilities expires
in 2002, subject to our earlier right to terminate, and contains provisions
for one five-year renewal option.
ITEM 3. LEGAL PROCEEDINGS
We know of no pending or threatened material litigation or
proceedings involving CoCensys.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a
vote of the stockholders. Subsequent to year end, CoCensys held a Special
Meeting of Stockholders. At the Special Meeting, which was held on January
27, 1999, a total of 19,363,818 shares were voted in person or by proxy,
representing 71% of the December 11, 1998 record date total of 27,280,949
shares eligible to vote. The stockholders approved the following resolutions
(votes not listed include broker non-votes and other non-votes):
Proposal 1: To approve the issuance by the Company from time to time of
shares of its Common Stock on conversion of shares of the Company's
Series E Convertible Preferred Stock and exercise of warrants issued in
connection with such Series E Convertible Preferred Stock.
Shares for: 6,441,294 Shares against: 1,442,242 Abstentions: 54,499
Proposal 2-A: To amend the Amended and Restated Certificate of
Incorporation, as amended, to effect a one for six reverse stock split,
subject to the right of the Board of Directors to abandon the amendment
prior to filing it with the Delaware Secretary of State.
Shares for: 18,394,774 Shares against: 869,809 Abstentions: 42,925
Proposal 2-B: To amend the Amended and Restated Certificate of
Incorporation, as amended, to effect a one for seven reverse stock
split, subject to the right of the Board of Directors to abandon the
amendment prior to filing it with the Delaware Secretary of State.
Shares for: 18,394,774 Shares against: 869,809 Abstentions: 42,925
Proposal 2-C: To amend the Amended and Restated Certificate of
Incorporation, as amended, to effect a one for eight reverse stock
split, subject to the right of the Board of Directors to abandon the
amendment prior to filing it with the Delaware Secretary of State.
Shares for: 18,394,774 Shares against: 869,809 Abstentions: 42,925
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
a) MARKET INFORMATION
The Company's Common Stock, par value $ .001 per share, trades on the
Nasdaq National Market under the symbol "COCN." The following table presents
quarterly information on the price range of the Company's Common Stock. This
information indicates the high and low sale prices reported by the Nasdaq
National Market. These prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1997
First quarter $ 7.88 $ 4.50
Second quarter $ 5.88 $ 2.69
Third quarter $ 6.25 $ 2.88
Fourth quarter $ 6.06 $ 2.94
1998
First quarter $ 4.50 $ 2.88
Second quarter $ 3.63 $ 2.06
Third quarter $ 2.69 $ 0.88
Fourth quarter $ 2.25 $ 0.25
</TABLE>
b) HOLDERS
As of March 17, 1999 there were 400 holders of record of the Company's
Common Stock.
c) DIVIDENDS
The Company has not paid any dividends on its Common Stock since its
inception and does not intend to pay any dividends on its Common Stock in the
foreseeable future.
d) RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the terms of the Series E Convertible Preferred Stock
issued in June 1998, on November 4, 1998, the Company issued additional warrants
to the original investors to purchase 100,000 shares of common stock. The
warrants are exercisable into Common Stock at $0.63 per share and expire in
November 2002. The issuance was exempt from registration under section 4(2) of
the Securities Act of 1933, as amended, as a transaction not involving any
public offering.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data. Certain
reclassifications have been made to prior year data to conform to the 1998
presentation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Co-promotion revenues $ 540 $ 3,264 $ 9,085 $ 10,414 $ 7,402
Co-development revenues 2,046 8,650 6,073 1,970 -
----------- ----------- ----------- ---------- ----------
Total revenues 2,586 11,914 15,158 12,384 7,402
Operating expenses:
Research and development 15,745 23,308 20,949 17,662 11,569
Marketing, general and administrative 3,894 9,975 13,862 13,383 7,673
Acquired research and development - - - 14,879
----------- ------------------------- ---------- ----------
Total operating expenses 19,639 33,283 34,811 31,045 34,121
----------- ----------- ----------- ---------- ----------
Operating loss (17,053) (21,369) (19,653) (18,661) (26,719)
----------- ----------- ----------- ---------- ----------
Gain on disposition of sales force (1) 1,000 4,728 - - -
Interest income 908 898 1,304 717 373
Interest expense (81) (78) (139) (178) (240)
----------- ----------- ----------- ---------- ----------
Net loss (15,226) (15,821) (18,488) (18,122) (26,586)
Dividends on preferred stock 1,942 - - - -
----------- ----------- ----------- ---------- ----------
Net loss attributable to
common shareholders $ (17,168) $ (15,821) $ (18,488) $ (18,122) $ (26,586)
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Basic and diluted loss per share (2) $ (0.70) $ (0.70) $ (0.85) $ (1.05) $ (2.33)
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Shares used in computing basic
and diluted loss per share 24,524 22,574 21,783 17,288 11,406
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ---------- ----------
(In thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and
investments $ 12,195 $ 12,960 $ 17,999 $ 13,449 $ 8,924
Working capital 5,315 8,374 14,434 6,753 3,766
Total assets 15,099 16,916 22,051 18,201 15,216
Long-term obligations 392 1,101 324 406 696
Accumulated deficit (116,151) (98,983) (83,162) (64,674) (46,552)
Total stockholders' equity 7,506 10,831 16,947 10,644 8,547
</TABLE>
(1)In October 1997, the Company sold its sales and marketing force as discussed
in Note 4 to the Financial Statements.
(2)The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standard No. 128, "Earnings per
Share" ("SFAS No. 128"). For further discussion of earnings per share and the
impact of SFAS No. 128, see the Notes to Financial Statements.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
CERTAIN 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 ELSEWHERE IN THIS REPORT.
OVERVIEW
Since its inception in February 1989, the Company has devoted
substantially all of its resources to the discovery and development of
pharmaceutical products for the treatment of disorders affecting the brain.
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 expenses for
product development and in the timing and amount of revenues to be earned
from the achievement of research and development milestones and sales of
Company products, if any. As of December 31, 1998, the Company's accumulated
deficit was approximately $116.2 million.
RESULTS OF OPERATIONS
1998 AS COMPARED TO 1997
The Company's revenues consist of co-promotion revenues and
co-development revenues. Co-promotion revenues arose from contractual
agreements that called for the Company to promote other pharmaceutical
companies' products in return for commissions. Co-development revenues arise
from contractual agreements with large pharmaceutical 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 Pharmaceuticals, Inc.
("Watson") and, except for certain residual items recognized in fiscal 1998,
is no longer involved in co-promotional activities.
CO-PROMOTION REVENUES were $540,000 for the year ended December 31,
1998, compared to $3.3 million in fiscal 1997. Co-promotion revenues in 1998
resulted from a bonus related to fiscal 1997 activity that was received and
recognized in the first quarter of 1998.
CO-DEVELOPMENT REVENUES were $2.0 million for the year ended
December 31, 1998, compared to $8.6 million in 1997. The decrease in
co-development revenues of $6.6 million, or 77 percent, compared to the prior
year resulted primarily from an agreement with the Wyeth-Ayerst Laboratories
Division of American Home Products Corporation in May 1997, which provided
for a one-time license fee of $5.0 million plus an additional $2.2 million
during 1997 to fund research on a back-up compound in connection with the
Company's anxiolytic program.
29
<PAGE>
RESEARCH AND DEVELOPMENT expenses were $15.7 million in fiscal 1998
compared to $23.3 million in 1997. This decrease of $7.6 million, or 32
percent, is attributable to a lower level of external clinical trials and
certain headcount reductions in the current year in comparison to the prior
year. In fiscal 1997, the Company made significant external expenditures for
the development of compounds treating epilepsy, migraine, acute stroke and
insomnia. In fiscal 1998, external expenditures were focused on clinical
trials of the Company's compound to treat acute migraine and on preclinical
testing of the Company's compound to treat neuropathic pain.
MARKETING, GENERAL AND ADMINISTRATIVE expenses were $3.9 million in
fiscal 1998 compared to $10.0 million in 1997. This decrease of $6.1 million,
or 61 percent, is due to the disposition of the sales and marketing division
in October 1997. As a result of this transaction, the Company incurred nine
months of expense associated with the sales function in fiscal 1997 compared
to no expense in fiscal 1998.
GAIN ON DISPOSITION OF SALES FORCE was $1.0 million in fiscal 1998
compared to a gain of $4.7 million in 1997. The fiscal 1998 gain related to
two deferred payments that were based on Watson's ability to retain certain
percentages of the sales and marketing force at specified dates subsequent to
the sale. No further payments are due to the Company from Watson.
DIVIDENDS ON PREFERRED STOCK were $1.9 million in fiscal 1998
whereas no dividends were recorded in the prior fiscal year. Of the fiscal
1998 total, $562,000 related to dividends on the Company's Series D
Convertible Preferred Stock issued in October 1997 and January 1998 to
Warner-Lambert Company ("Warner-Lambert") in connection with a research and
development program, and $1,381,000 related to the Company's Series E
Convertible Preferred Stock issued in June 1998 to private investors. All
dividends result in an increase in the value of outstanding preferred stock
and do not involve the payment of any cash.
1997 AS COMPARED TO 1996
CO-PROMOTION REVENUES were $3.3 million for the year ended December
31, 1997, compared to $9.1 million in fiscal 1996. This $5.8 million, or 64
percent, decrease in 1997 compared to 1996 resulted from the termination of
the Novartis Pharma, A.G. ("Novartis") co-promotion agreement in December
1996, the loss of co-promotion rights for Cognex(R) in June 1997 and the sale
of the sales and marketing division in October 1997.
CO-DEVELOPMENT REVENUES were $8.6 million for the year ended
December 31, 1997, compared to $6.1 million in 1996. This $2.5 million, or 41
percent, increase in 1997 is primarily attributable to the May 1997 agreement
with the Wyeth-Ayerst mentioned above. In fiscal 1996, the Company recognized
$3.6 million related to the G.D. Searle & Co. ("Searle") Development and
Commercialization Agreement in connection with its insomnia program and $2.5
million related to the Novartis Research and Development Agreement in
connection with its compound to treat stroke and traumatic brain injury. The
program with Searle was terminated in July 1998 and the program with Novartis
was terminated effective October 1997.
RESEARCH AND DEVELOPMENT expenses were $23.3 million in fiscal 1997
compared to $20.9 million in 1996. This increase of $2.4 million, or 11
percent, is attributable to a higher level of clinical activity in the fiscal
1997 in comparison to fiscal 1996. During 1997, the Company conducted
significant clinical trials for ganaxolone in the treatment of migraine and
30
<PAGE>
epilepsy, licostinel in the treatment of stroke and CCD 3693 in the treatment
of insomnia. During 1996, clinical activities were focused mainly on
licostinel for the treatment of stroke and, to a lesser extent, ganaxolone
for the treatment of epilepsy.
MARKETING, GENERAL AND ADMINISTRATIVE expenses were $10.0 million in
fiscal 1997 compared to $13.9 million in 1996. This decrease of $3.9 million,
or 28 percent, is due to the disposition of the sales and marketing division
in October 1997. As a result of this transaction, the Company incurred nine
months of expense associated with the sales function in fiscal 1997 compared
twelve months of expense in fiscal 1996.
GAIN ON DISPOSITION OF SALES FORCE was $4.7 million in fiscal 1997.
This amount relates entirely to the sale of the sales and marketing force
to Watson.
LIQUIDITY AND CAPITAL RESOURCES
From its inception in February 1989 through December 31, 1998, 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 these securities. At December 31, 1998, the
Company's balances of cash, cash equivalents and investments totaled $12.2
million, compared to $13.0 million at December 31, 1997.
As of December 31, 1998, 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 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 million in a private placement pursuant to Regulation D of
the Securities Act of 1933, as amended. See Note 2 of the Notes to Financial
Statements "Private Placement of Preferred Stock," below.
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
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<PAGE>
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 up to three 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 December 31, 1998, the Company had $2.6 million of deferred revenue
recorded on its balance sheet related to the Wyeth-Ayerst back-up program.
Pursuant to the Company's Development and Commercialization
Agreement with Searle, both companies were obligated to pay a portion of the
development costs of CCD 3693 and its back-up compounds for the U.S. market.
In addition, Searle purchased 100,000 shares of the Company's Series B
Convertible Preferred Stock for $7.0 million during 1996. In May 1998, the
preferred stock converted, in accordance with its terms, into 1.6 million
shares of common stock at a conversion price of $4.375 per share. In July
1998, Searle notified CoCensys that it had decided not to participate further
in the development of the Company's proprietary compounds for the treatment
of insomnia. CoCensys intends to continue research and development of its
compounds to treat insomnia and will consider seeking a new partner for the
program in the future.
CoCensys' operations to date have consumed substantial amounts of
cash. While the Company's cash forecasts for the twelve months ending
December 31, 1999, project a positive cash balance, certain cash inflows
included in these forecasts are estimates and are not guaranteed. Should the
Company not receive these anticipated payments, or should the timing or
amount of these payments differ substantially from the forecasted amounts, or
should the Company incur expenses in excess of those currently forecasted,
the ability of the Company to continue funding its operations could be
jeopardized. However, the Company is actively considering three courses of
action that management believes will increase cash inflows, or decrease cash
outflows, sufficiently to ensure adequate funding for its operations through
at least fiscal 1999.
First, the Company is aggressively seeking partners for several of
its compounds. The Company is in negotiations with several pharmaceutical
companies regarding Co 102862 for neuropathic pain. Management is actively
working to sign a licensing agreement within in the next six months for Co
102862 and is attempting to secure initial payments that, when combined with
the current cash balance, will be sufficient to fund operations through at
least fiscal 1999. Other compounds may be licensed later in the year.
Second, the Company is attempting to generate revenues by
selling clinical and preclinical development services either to its
collaboration partners or to third parties. CoCensys currently employs over
thirty individuals in the development area who have extensive
32
<PAGE>
pharmaceutical development expertise in numerous indications.
Third, in the absence of a revenue generating licensing or service
deal, the Company will take steps to reduce expenses through reductions in
headcount and other costs. Cost savings associated with these expense
reductions, when combined with our current cash balance, will be adequate to
fund the Company's operations through at least fiscal 1999.
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 available to it the substantial capital resources necessary to
continue product development and other Company operations.
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 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.
33
<PAGE>
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no financial instruments which are subject to market risk.
Although the Company's earnings and cash flows are subject to fluctuations
due to changes in the interest rates on its investments, a hypothetical 10%
adverse decrease in the interest rates would not have a material adverse
effect on the results of operations because the majority of the Company's
investments are short-term government and corporate obligations. A 10%
reduction in interest rates would reduce interest income by approximately
$91,000 annually. Due to the short period to maturity, the Company believes
that the impact of a 10% reduction in interest rates would not have a
material effect on the carrying value of its available-for-sale securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company are
provided at the pages indicated in Item 14 (a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has not been any change of accountants or any disagreements
with the Company's accountants on any matter of accounting practice or
financial disclosure during the reporting periods.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers and directors of the
Company appearing in the Proxy Statement for the Company's 1999 Annual Meeting
of Stockholders (the "Proxy Statement") under the captions "Election of
Directors", "Management" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation appearing in the
Proxy Statement under the caption "Executive Compensation" is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the information in the Proxy Statement labeled "Security Ownership
of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section in the Proxy Statement labeled "Certain Relationships
and Related Transactions."
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS
The financial statements required by this item are submitted
in a separate section beginning on Page 38 of this report.
FINANCIAL STATEMENTS OF COCENSYS, INC.
Report of Independent Auditors 42
Balance Sheets as of December 31, 1998 and 1997 43
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996; and the period from
inception (February 15, 1989) to December 31, 1998 44
Statements of Stockholders' Equity for the period from
inception (February 15, 1989) to December 31, 1998 45
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996; and the period from
inception (February 15, 1989) to December 31, 1998 48
Notes to Financial Statements 49
Schedules are omitted as the required information is not
present or is not present in amounts sufficient to require
submission of the schedule, or because the information
required is included in the financial statements or notes
thereto.
(B) REPORTS ON FORM 8-K
(i) The Company filed a current report on Form 8-K dated
October 16, 1998, to announce negative results from its Phase
II clinical trial using a tablet formulation of ganaxolone for
acute migraine.
(ii) The Company filed a current report on Form 8-K dated
December 8, 1998, to announce it received notice from the
Nasdaq Stock Market, Inc. that the Company was not in
compliance with the $1.00 minimum closing bid price
requirement for the continued listing of the Company's common
stock on the Nasdaq National Market.
36
<PAGE>
(C) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Notes Description
<S> <C> <C>
3(i).1 (2) Amended and Restated Certificate of Incorporation.
3(i).2 (2) Certificate of Designation of Series A Junior Participating
Preferred Stock.
3(i).3 (2) Certificate of Powers, Designation, Preferences, Rights and
Limitations of Series B
Convertible Preferred Stock.
3(i).4 (2) Certificate of Amendment of Amended and Restated Certificate
Incorporation.
3(i).5 (2) Certificate of Powers, Designation, Preferences, Rights and
Limitations of Series C
Convertible Preferred Stock.
3(i).6 (2) Certificate of Powers, Designation, Preferences,
Rights and Limitations of Series D Convertible Preferred
Stock.
3(i).7 (9) Certificate of Powers, Designation, Preferences,
Rights and Limitations of Series E Convertible
Preferred Stock.
3(ii) (1) By-laws.
10.1 (1) Form of Indemnity Agreement entered into between the
Company and its directors and officers.
10.2 (10)+ Company's 1990 Stock Option Plan, as amended (the "Option
Plan").
10.3 (1) + Form of Incentive Stock Option Agreement under the Option
Plan.
10.4 (1) + Form of Non-qualified Stock Option Agreement under the
Option Plan.
10.5 (1) + Non-qualified Stock Option Agreement between the Company
and Timothy J. Rink, M.D., Sc.D., dated as of September
13, 1991.
10.6 (4) + Company's 1992 Non-Employee Directors' Stock Option
Plan, as amended (the "Directors' Plan").
10.7 (1) + Form of Stock Option Agreement under the Directors' Plan.
10.8 (1) Exclusive License Agreement among the Company, The
Rockefeller University and the University of Southern
California, dated as of August 28, 1990.
10.9 (1) Multi-tenant Lease between the Company and The Irvine
Company, dated as of January 30, 1992.
10.10 (3) Form of First Amendment to the Multi-tenant Lease
between the Company and the Irvine Company, dated April
1, 1994.
10.11 (5) Common Stock and Warrant Purchase Agreement, dated June
6, 1995, between the Company and each of the purchasers
listed on the Schedule of Purchasers attached thereto.
10.12 (6) + Company's 1995 Employee Stock Purchase Plan.
10.13 (8) Stock Purchase Agreement, dated October 26, 1995, between
CoCensys, Inc. and Warner-Lambert Company.
10.14 (10) Form of Amendment to the Multi-tenant Lease between
the Company and The Irvine Company, dated as of February
9, 1996.
10.15 (15)+ Company's 1996 Equity Incentive Plan.
10.16 (15)+ Letter Agreement between F. Richard Nichol, Ph.D. and the
Company, dated as of January 20, 1997.
37
<PAGE>
10.17 (15)+ Form of Incentive Stock Option Agreement under the 1996
Equity Incentive Plan.
10.18 (15)+ Form of Nonstatutory Stock Option Agreement under the 1996
Equity Incentive Plan.
10.19 (12)* Promotion Agreement between the Company and Parke-Davis,
dated as of January 1, 1997.
10.20 (12)* License Agreement between the Company and Massachusetts
General Hospital, dated as of December 15, 1996.
10.21 (13)* Asset Purchase Agreement between the Company and Watson
Pharmaceuticals, dated October 8, 1997.
10.22 (14)* 1997 Promotion Agreement, effective April 7, 1997,
between Somerset Pharmaceuticals, Inc. and the Company.
10.23 (14)* Development and Commercialization Agreement (No. 1),
dated May 12, 1997, between Wyeth-Ayerst Laboratories and
the Company ("Wyeth-Ayerst Agreement No. 1").
10.24 (14)* Development and Commercialization Agreement (No. 2), dated
May 12, 1997, between Wyeth-Ayerst Laboratories and the Company.
10.25 (14) Preferred Stock Purchase Agreement, dated May 12, 1997,
between American Home Products, Inc. and the Company
(included as Exhibit F to Wyeth-Ayerst Agreement No. 1).
10.26 (2)* Amended and Restated Research, Development and
Marketing Collaboration Agreement (II), dated as of
October 13, 1997, between Warner-Lambert Company and the
Company.
10.27 (2) Series D Convertible Preferred Stock Purchase Agreement,
dated October 13, 1997, between Warner-Lambert Company
and the Company.
10.28 (2)* Amended and Restated License Agreement, dated December
16, 1997, between Massachusetts General Hospital and the
Company.
10.29 (9) Securities Purchase Agreement dated June 8, 1998, among
the Company and the purchasers set forth therein.
10.30 (9) Form of Stock Purchase Warrant (Initial Warrants) in
connection with June 8, 1998 Securities Purchase
Agreement.
10.31 (9) Registration Rights Agreement dated June 8, 1998, among
the Company and the purchasers set forth therein.
10.32 (9) Form of Stock Purchase Warrant (Additional Warrants)
in connection with June 8, 1998 Securities Purchase
Agreement.
10.33 (11)+ Company's Executive Officers' Severance Benefit Plan.
10.34 (11)+ Company's Executive Officers' Change of Control Severance
Plan.
10.35 (11)* Agreement with Warner-Lambert Company dated January 8,
1998.
10.36 (7) 1998 Non-Officer Equity Incentive Plan and Form of
Agreement.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule
-------------------
</TABLE>
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1, file number 33-55522, or amendments
thereto.
38
<PAGE>
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(3) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Company's Registration
Statement on Form S-8, file number 33-97258.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995.
(6) Incorporated by reference to the Company's Registration
Statement on Form S-8, file number 33-92760.
(7) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
(8) Incorporated by reference to the Company's Registration
Statement on Form S-3, file number 33-80809.
(9) Incorporated by reference to the Company's Current Report on
Form 8-K dated June 8, 1998.
(10) Incorporated by reference to the Company's Annual Report on
Form 10-K, as amended by Form 10-K/A, for the year ended
December 31, 1995.
(11) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 30, 1998.
(12) Incorporated by reference to the Company's Current Report on
Form 8-K dated December 15, 1996.
(13) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
(14) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
(15) Incorporated by reference to the Company's Annual Report on
Form 10-K, as amended by Form 10-K/A, for the year ended
December 31, 1996.
+ Compensatory plan.
* Confidential treatment granted.
39
<PAGE>
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.
COCENSYS, INC.
Date: March 24, 1999 By: /s/ F. Richard Nichol, Ph.D.
-----------------------------------
(F. Richard Nichol, Ph.D.)
Chairman of the Board,
President and Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ F. Richard Nichol, Ph.D. Chairman of the Board, March 24, 1999
- ----------------------------------- President and
(F. Richard Nichol, Ph.D.) Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
/s/ Robert R. Holmen Vice President and March 24, 1999
- ----------------------------------- General Counsel
(Robert R. Holmen) (PRINCIPAL FINANCIAL OFFICER)
/s/ Thomas B. Miller Director of Finance and March 24, 1999
- ----------------------------------- Controller
(Thomas B. Miller) (PRINCIPAL ACCOUNTING OFFICER)
/s/ Lowell E. Sears Director March 24, 1999
- -----------------------------------
(Lowell E. Sears)
/s/ James C. Blair, Ph.D. Director March 24, 1999
- -----------------------------------
(James C. Blair, Ph.D.)
/s/ Kelvin W. Gee, Ph.D. Director March 24, 1999
- -----------------------------------
(Kelvin W. Gee, Ph.D.)
40
<PAGE>
<CAPTION>
SIGNATURES CONTINUED
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Alan C. Mendelson Director March 24, 1999
- -----------------------------------
(Alan C. Mendelson)
/s/ Timothy J. Rink, M.D., Sc.D. Director March 24, 1999
- -----------------------------------
(Timothy J. Rink, M.D., Sc.D.)
/s/ Robert L. Roe, M.D. Director March 24, 1999
- -----------------------------------
(Robert L. Roe, M.D.)
/s/ Eckard Weber, M.D. Director March 24, 1999
- -----------------------------------
(Eckard Weber, M.D.)
</TABLE>
41
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
CoCensys, Inc.
We have audited the accompanying balance sheets of CoCensys, Inc. (a development
stage company) as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998, and the period from inception (February 15,
1989) to December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CoCensys, Inc. at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, and for the period from
inception (February 15, 1989) to December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
January 29, 1999, except for the
last paragraph of Note 2 as to
which the date is March 24, 1999
42
<PAGE>
COCENSYS, INC.
(A development stage company)
BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,222 $ 3,410
Short-term investments 9,973 9,050
Other current assets 321 898
--------- --------
TOTAL CURRENT ASSETS 12,516 13,358
Property and equipment, net 2,466 2,823
Investments - 500
Notes receivable from officers 56 178
Other noncurrent assets 61 57
--------- --------
$ 15,099 $ 16,916
--------- --------
--------- --------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 534 $ 866
Accrued compensation and benefits 748 1,107
Due to corporate partners 1,322 747
Other accrued liabilities 1,326 1,911
Deferred revenue 2,955 -
Capital lease obligations - current portion 316 353
--------- --------
TOTAL CURRENT LIABILITIES 7,201 4,984
Capital lease obligations, less current portion 366 567
Other liabilities 26 534
Commitments and contingencies
Stockholders' equity:
Convertible nonvoting preferred stock, $.001 par value
Authorized shares - 5,000,000
Issued and outstanding shares - 206,445 at
December 31, 1998 and 214,286 at December 31, 1997 16,386 13,000
Common stock, $.001 par value
Authorized shares - 75,000,000
Issued and outstanding shares - 27,382,187 at
December 31, 1998 and 22,857,506 at December 31, 1997 107,381 97,230
Deficit accumulated during the development stage (116,151) (98,983)
Deferred compensation (138) (430)
Accumulated other comprehensive income 28 14
--------- --------
TOTAL STOCKHOLDERS' EQUITY 7,506 10,831
--------- --------
$ 15,099 $ 16,916
--------- --------
--------- --------
</TABLE>
See accompanying notes
43
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 15,
YEAR ENDED DECEMBER 31, 1989) TO
--------------------------------------- DECEMBER 31,
1998 1997 1996 1998
-------- --------- --------- --------
<S> <C> <C> <C> <C>
REVENUES
Co-promotion revenues from corporate partners $ 540 $ 3,264 $ 9,085 $ 30,705
Co-development revenues from corporate partners 2,046 8,650 6,073 18,739
-------- --------- --------- --------
Total revenues 2,586 11,914 15,158 49,444
-------- --------- --------- --------
OPERATING EXPENSEs
Research and development 15,745 23,308 20,949 106,674
Marketing, general and administrative 3,894 9,975 13,862 52,050
Acquired research and development - - - 14,879
-------- --------- --------- --------
Total operating expenses 19,639 33,283 34,811 173,603
-------- --------- --------- --------
Operating loss (17,053) (21,369) (19,653) (124,159)
Gain on disposition of sales force 1,000 4,728 - 5,728
Interest income 908 898 1,304 5,361
Interest expense (81) (78) (139) (1,139)
-------- --------- --------- --------
Net loss (15,226) (15,821) (18,488) (114,209)
Dividends on preferred stock 1,942 - - 1,942
-------- --------- --------- --------
Net loss applicable to common stockholders $(17,168) $ (15,821) $ (18,488) $(116,151)
-------- --------- --------- --------
-------- --------- --------- --------
Basic and diluted loss per share $ (0.70) $ (0.70) $ (0.85)
-------- --------- ---------
-------- --------- ---------
Shares used in computing basic
and diluted loss per share 24,524 22,574 21,783
-------- --------- ---------
-------- --------- ---------
</TABLE>
See accompanying notes
44
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Net loss -- $ -- -- $ --
Issuance of common stock for
cash at $.005 per share -- -- 980,000 5
--------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1989 -- -- 980,000 5
Net loss -- -- -- --
Issuance of Series A convertible
preferred stock upon conversion
of promissory note, net of offering
costs of $5 at $.25 per share 400,000 95 -- --
Issuance of Series B convertible
preferred stock for $3,110 cash and
conversion of $515 of convertible
promissory notes, net of offering costs
of $46 at $1.50 per share 2,416,666 3,579 -- --
Issuance of warrants to purchase 30,100
shares of Series B convertible preferred
stock in connection with a note payable -- 8 -- --
Common stock issued in connection with
services rendered -- -- 6,668 --
--------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1990 2,816,666 3,682 986,668 5
Net loss -- -- -- --
Common stock issued in connection with
services rendered -- -- 3,332 --
--------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1991 2,816,666 3,682 990,000 5
Net loss -- -- -- --
Issuance of Series C convertible preferred
stock for cash, net of offering costs of
$60 at $5.00 per share 2,631,218 13,096 -- --
Issuance of Series C convertible preferred
stock in exchange for services at $5.00
per share 3,332 17 -- --
Issuance of Series C convertible preferred
stock in exchange for stock purchase
option at $5.00 per share 20,000 100 -- --
Deferred compensation related to the
issuance of certain stock options -- -- -- 2,842
Amortization of deferred compensation -- -- -- --
--------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1992 5,471,216 16,895 990,000 2,847
Net loss -- -- -- --
Issuance of Series B convertible preferred
stock in exchange for noncash exercise
of warrants 25,083 226 -- --
Conversion of convertible preferred stock
into common stock at the close of the
initial public offering (5,496,299) (17,121) 5,496,299 17,121
Issuance of common stock for cash in
initial public offering at $9.00 per share,
net of offering costs and underwriters'
discount of $2,193 -- -- 2,500,000 20,307
Common stock issued in connection with
stock options -- -- 116,798 18
Issuance and termination of certain
stock options -- -- -- 43
Amortization of deferred compensation -- -- -- --
--------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1993 -- -- 9,103,097 40,336
<CAPTION>
DEFICIT ACCUMULATED
ACCUMULATED OTHER
DURING THE DEFERRED COMPREHENSIVE TOTAL
DEVELOPMENT COMPEN- INCOME STOCK HOLDERS'
STAGE SATION (LOSS) EQUITY
----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (147) $ -- $ -- $ (147)
Issuance of common stock for
cash at $.005 per share -- -- -- 5
----------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 1989 (147) -- -- (142)
Net loss (910) -- -- (910)
Issuance of Series A convertible
preferred stock upon conversion
of promissory note, net of offering
costs of $5 at $.25 per share -- -- -- 95
Issuance of Series B convertible
preferred stock for $3,110 cash and
conversion of $515 of convertible
promissory notes, net of offering costs
of $46 at $1.50 per share -- -- -- 3,579
Issuance of warrants to purchase 30,100
shares of Series B convertible preferred
stock in connection with a note payable -- -- -- 8
Common stock issued in connection with
services rendered -- -- -- --
----------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 1990 (1,057) -- -- 2,630
Net loss (2,369) -- -- (2,369)
Common stock issued in connection with
services rendered -- -- --
----------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 1991 (3,426) -- -- 261
Net loss (6,267) -- -- (6,267)
Issuance of Series C convertible preferred
stock for cash, net of offering costs of
$60 at $5.00 per share -- -- -- 13,096
Issuance of Series C convertible preferred
stock in exchange for services at $5.00
per share -- -- -- 17
Issuance of Series C convertible preferred
stock in exchange for stock purchase
option at $5.00 per share -- -- -- 100
Deferred compensation related to the
issuance of certain stock options -- (2,842) -- --
Amortization of deferred compensation -- 152 -- 152
----------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 1992 (9,693) (2,690) -- 7,359
Net loss (10,273) -- -- (10,273)
Issuance of Series B convertible preferred
stock in exchange for noncash exercise
of warrants -- -- -- 226
Conversion of convertible preferred stock
into common stock at the close of the
initial public offering -- -- -- --
Issuance of common stock for cash in
initial public offering at $9.00 per share,
net of offering costs and underwriters'
discount of $2,193 -- -- -- 20,307
Common stock issued in connection with
stock options -- -- -- 18
Issuance and termination of certain
stock options -- (43) -- --
Amortization of deferred compensation -- 760 -- 760
----------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 1993 (19,966) (1,973) -- 18,397
</TABLE>
See accompanying notes
45
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Net loss -- -- -- --
Unrealized loss on investments -- -- -- --
Comprehensive income -- -- -- --
Purchase of common stock by Acea
shareholders pursuant to merger
agreement at $4.56 and $5.11 per share -- -- 415,368 2,002
Acquisition of Acea in exchange for
common stock at $3.00 per share -- -- 3,784,332 11,353
Exchange of Acea options and warrants
for equivalent options and warrants -- -- -- 592
Purchase of common stock by corporate
partner at $4.51 per share -- -- 443,214 2,000
Common stock issued in connection with:
Stock options -- -- 68,380 32
Other employee programs -- -- 20,000 75
Issuance and termination of certain
stock options -- -- -- 110
Amortization of deferred compensation -- -- -- --
--------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1994 -- -- 13,834,391 56,500
Net loss -- -- -- --
Unrealized gain on investments -- -- -- --
Comprehensive income -- -- -- --
Purchase of common stock by corporate
partner at $3.48 per share -- -- 1,434,978 5,000
Issuance of common stock and related
warrants for cash at $3.25 per share,
net of cost of $149 -- -- 3,707,693 11,901
Purchase of common stock by corporate partner
at $7.00 per share, net of costs of $14 -- -- 285,970 1,986
Common stock issued in connection with:
Stock options -- -- 88,579 109
Employee Stock Purchase Plan -- -- 39,730 152
Other employee programs -- -- 4,000 29
Issuance and termination of certain
stock options -- -- -- 619
Amortization of deferred compensation -- -- -- --
--------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1995 -- -- 19,395,341 76,296
Net loss -- -- -- --
Unrealized gain on investments -- -- -- --
Comprehensive income -- -- -- --
Issuance of common stock for cash at
$6.50 per share, net of costs of $1,162 -- -- 2,430,000 14,633
Issuance of Series B convertible preferred
stock for cash to corporate partner 100,000 7,000 -- --
Common stock issued in connection with:
Stock options -- -- 138,762 194
Employee Stock Purchase Plan -- -- 112,743 446
Other employee programs -- -- 6,500 54
Issuance and termination of certain stock
options -- -- -- 2,363
Amortization of deferred compensation -- -- -- --
--------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1996 100,000 7,000 22,083,346 93,986
<CAPTION>
DEFICIT ACCUMULATED
ACCUMULATED OTHER
DURING THE DEFERRED COMPREHENSIVE TOTAL
DEVELOPMENT COMPEN- INCOME STOCK HOLDERS'
STAGE SATION (LOSS) EQUITY
----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss (26,586) -- -- (26,586)
Unrealized loss on investments -- -- (25) (25)
-------------
Comprehensive income -- -- -- (26,611)
Purchase of common stock by Acea
shareholders pursuant to merger
agreement at $4.56 and $5.11 per share -- -- -- 2,002
Acquisition of Acea in exchange for
common stock at $3.00 per share -- -- -- 11,353
Exchange of Acea options and warrants
for equivalent options and warrants -- -- -- 592
Purchase of common stock by corporate
partner at $4.51 per share -- -- -- 2,000
Common stock issued in connection with:
Stock options -- -- -- 32
Other employee programs -- -- -- 75
Issuance and termination of certain
stock options -- (110) -- --
Amortization of deferred compensation -- 707 -- 707
----------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 1994 (46,552) (1,376) (25) 8,547
Net loss (18,122) -- -- (18,122)
Unrealized gain on investments -- -- 3 3
-------------
Comprehensive income -- -- -- (18,119)
Purchase of common stock by corporate
partner at $3.48 per share -- -- -- 5,000
Issuance of common stock and related
warrants for cash at $3.25 per share,
net of cost of $149 -- -- -- 11,901
Purchase of common stock by corporate partner
at $7.00 per share, net of costs of $14 -- -- -- 1,986
Common stock issued in connection with:
Stock options -- -- -- 109
Employee Stock Purchase Plan -- -- -- 152
Other employee programs -- -- -- 29
Issuance and termination of certain
stock options -- (619) -- --
Amortization of deferred compensation -- 1,039 -- 1,039
----------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 1995 (64,674) (956) (22) 10,644
Net loss (18,488) -- -- (18,488)
Unrealized gain on investments -- -- 50 50
-------------
Comprehensive income -- -- -- (18,438)
Issuance of common stock for cash at
$6.50 per share, net of costs of $1,162 -- -- -- 14,633
Issuance of Series B convertible preferred
stock for cash to corporate partner -- -- -- 7,000
Common stock issued in connection with:
Stock options -- -- -- 194
Employee Stock Purchase Plan -- -- -- 446
Other employee programs -- -- -- 54
Issuance and termination of certain stock
options -- (629) -- 1,734
Amortization of deferred compensation -- 680 -- 680
----------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 1996 (83,162) (905) 28 16,947
</TABLE>
See accompanying notes
46
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Net loss -- -- -- --
Unrealized loss on investments -- -- -- --
Comprehensive income -- -- -- --
Issuance of Series C convertible preferred
stock for cash to corporate partner 100,000 5,000 -- --
Issuance of Series D convertible preferred
stock for cash to corporate partner 14,286 1,000 -- --
Issuance of common stock for cash at
$6.16 per share to corporate partner -- -- 324,465 2,000
Common stock issued in connection with:
Services rendered -- -- 23,322 8
Stock options -- -- 335,473 202
Employee Stock Purchase Plan -- -- 90,900 251
Issuance and termination of certain stock
options -- -- -- 783
Amortization of deferred compensation -- -- -- --
---------- --------- ---------- ---------
BALANCE AT DECEMBER 31, 1997 214,286 13,000 22,857,506 97,230
Net loss -- -- -- --
Unrealized gain on investments -- -- -- --
Comprehensive income -- -- -- --
Conversion of Series B convertible preferred
into common stock by corporate partner (100,000) (7,000) 1,600,000 7,000
Issuance of Series D convertible preferred
stock for cash to corporate partner 85,714 3,429 -- --
Issuance of Series E convertible preferred
stock, related warrants and beneficial
conversion feature for cash, less offering costs 8,000 6,611 -- 1,280
Conversion of Series E convertible preferred
into common stock by investors (1,555) (1,596) 2,563,060 1,596
Dividends accrued on preferred stock -- 1,942 -- --
Common stock issued in connection with:
Services rendered -- -- 27,333 126
Stock options -- -- 195,352 48
Employee Stock Purchase Plan -- -- 136,436 135
Other employee programs -- -- 2,500 10
Issuance and termination of certain stock
options -- -- -- (44)
Amortization of deferred compensation -- -- -- --
---------- --------- ---------- ---------
BALANCE AT DECEMBER 31, 1998 206,445 $ 16,386 27,382,187 $ 107,381
---------- --------- ---------- ---------
---------- --------- ---------- ---------
<CAPTION>
DEFICIT ACCUMULATED
ACCUMULATED OTHER
DURING THE DEFERRED COMPREHENSIVE TOTAL
DEVELOPMENT COMPEN- INCOME STOCK HOLDERS'
STAGE SATION (LOSS) EQUITY
----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss (15,821) -- -- (15,821)
Unrealized loss on investments -- -- (14) (14)
----------
Comprehensive income -- -- -- (15,835)
Issuance of Series C convertible preferred
stock for cash to corporate partner -- -- -- 5,000
Issuance of Series D convertible preferred
stock for cash to corporate partner -- -- -- 1,000
Issuance of common stock for cash at
$6.16 per share to corporate partner -- -- -- 2,000
Common stock issued in connection with:
Services rendered -- -- -- 8
Stock options -- -- -- 202
Employee Stock Purchase Plan -- -- -- 251
Issuance and termination of certain stock
options -- 206 -- 989
Amortization of deferred compensation -- 269 -- 269
------- --------- -------- ----------
BALANCE AT DECEMBER 31, 1997 (98,983) (430) 14 10,831
Net loss (17,168) -- -- (17,168)
Unrealized gain on investments -- -- 14 14
----------
Comprehensive income -- -- -- (17,154)
Conversion of Series B convertible preferred
into common stock by corporate partner -- -- -- --
Issuance of Series D convertible preferred
stock for cash to corporate partner -- -- -- 3,429
Issuance of Series E convertible preferred
stock, related warrants and beneficial
conversion feature for cash, less offering costs -- -- -- 7,891
Conversion of Series E convertible preferred
into common stock by investors -- -- -- --
Dividends accrued on preferred stock -- -- -- 1,942
Common stock issued in connection with:
Services rendered -- -- -- 126
Stock options -- -- -- 48
Employee Stock Purchase Plan -- -- -- 135
Other employee programs -- -- -- 10
Issuance and termination of certain stock
options -- 148 -- 104
Amortization of deferred compensation -- 144 -- 144
---------- --------- -------- ----------
BALANCE AT DECEMBER 31, 1998 $ (116,151) $ (138) 28 $ 7,506
---------- --------- -------- ----------
---------- --------- -------- ----------
</TABLE>
See accompanying notes
47
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 15,
YEAR ENDED DECEMBER 31, 1989) TO
----------------------------------- DECEMBER 31,
1998 1997 1996 1998
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (15,226) $ (15,821) $ (18,488) $(114,209)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 907 936 2,072 7,732
Amortization of deferred compensation 144 269 680 3,751
Issuance of stock, stock options and warrants for services 240 419 1,788 2,576
Loss on sale of fixed assets -- 74 -- 100
Gain on disposition of sales force (1,000) (4,728) -- (5,728)
Acquired research and development -- -- -- 12,279
Decrease (increase) in other current assets 191 72 (101) (365)
Decrease (increase) in receivables from partners 386 245 (659) (28)
Increase (decrease) in amounts due to partners 575 301 (2,698) 1,322
Increase in deferred revenue 2,955 -- -- 2,955
Increase (decrease) in accounts payable
and other accrued liabilities (1,784) (991) 685 982
--------- --------- ---------- ---------
NET CASH USED IN OPERATING ACTIVITIES (12,612) (19,224) (16,721) (88,633)
--------- --------- ---------- ---------
INVESTING ACTIVITIES
Decrease (increase) in investments (409) 7,386 (10,343) (9,945)
Purchases of property and equipment (566) (1,475) (812) (7,666)
Decrease (increase) in other assets and
notes receivable from officers 118 (1,083) 199 (1,273)
Cash received on sale of fixed assets 16 1 -- 36
Cash received on disposition of sales force 1,000 8,000 -- 9,000
Increase in deferred costs -- -- -- (2,475)
Acquisition of Acea, net of cash acquired -- -- -- (62)
--------- --------- ---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 159 12,829 (10,956) (12,385)
--------- --------- ---------- ---------
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 183 2,460 15,273 61,428
Net cash proceeds from issuance of preferred stock 11,320 6,000 7,000 40,701
Proceeds from sales/leaseback of fixed assets and notes payable 281 1,002 649 5,516
Payments on capital lease obligations and notes payable (519) (707) (1,090) (4,405)
--------- --------- ---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,265 8,755 21,832 103,240
--------- --------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,188) 2,360 (5,845) 2,222
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,410 1,050 6,895 --
--------- --------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,222 $ 3,410 $ 1,050 $ 2,222
--------- --------- ---------- ---------
--------- --------- ---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 81 $ 66 $ 139 $ 901
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
See accompanying notes
48
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
CoCensys, Inc. ("CoCensys" or the "Company") was incorporated in 1989 for the
purpose of discovering, developing and commercializing novel products to treat
disorders of the brain. Since inception, the Company has devoted substantially
all of its resources to the discovery and development of such products. The
Company has not generated any revenues from the development of its own products
and has sustained continuing operating losses from its development activities.
Such losses could continue for several years. The Company plans to finance its
future development activities through a combination of sales of equity
securities, payments from corporate development partners and revenues from
performing product development services. There can be no assurance that the
Company will be successful in these areas.
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 accompanying notes.
Actual results could differ from those estimates. Significant estimates made in
preparing the financial statements include the determination of co-promotion and
co-development revenues and the valuation allowance for deferred tax assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial investments that subject the Company to concentration of credit risk
consist principally of cash, cash equivalents and investments, of which
$12,095,000 is not federally insured as of December 31, 1998.
CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Short-term investments consist of debt securities classified as "available for
sale" and have maturities greater than three months and less than twelve months
from the date of acquisition. Investments classified as "available for sale" are
reported at fair value with unrealized gains and losses reported as a separate
component of other comprehensive income (loss) in the statement of
stockholders' equity.
The Company invests primarily in U.S. government securities and corporate
obligations. The following table summarized unrealized gains and losses on the
Company's investments:
49
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Fair
Cost loss gain value
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
As of December 31, 1998 $ 11,342,471 $ (15,045) $ 43,433 $ 11,507,135
As of December 31, 1997 $ 11,694,727 $ (3,401) $ 18,150 $ 11,855,580
</TABLE>
Realized gains and losses were not significant for the years ended December 31,
1998, 1997 and 1996.
In October 1998, the Company established an escrow account to hold funds that
are committed to satisfy an obligation related to the purchase of certain
drug marketing rights and new drug approvals (NDAs) in connection with the
disposition of its sales and marketing division in October 1998. The escrow
account held $552,400 and $1,005,900 at December 31, 1998 and 1997,
respectively. Under the terms of the escrow agreement, $500,000 will be paid
in October 1999 to satisfy the remaining obligation and all excess funds will
be released to the Company.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following at
December 31, (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Laboratory equipment $ 2,271 $ 2,218
Computer equipment and software 1,483 1,107
Office equipment 924 930
Leasehold improvements 2,207 2,105
------- -------
6,884 6,360
Less accumulated depreciation (4,418) (3,537)
------- -------
Net property and equipment $ 2,466 $ 2,823
------- -------
------- -------
</TABLE>
The value of leased assets (treated as capital leases) at December 31, 1998 and
1997 were $1,082,000 and $1,007,000 respectively, net of accumulated
amortization of $204,000 and $130,000 respectively.
Depreciation of property and equipment, including assets under capital lease
obligations, has been provided using the straight-line method over the estimated
useful lives of the assets which range from three to five years, except for
leasehold improvements which are amortized over the lease term.
REVENUE AND EXPENSE RECOGNITION
See Notes 4, 5, 6, 7, 8 and 9 for revenue recognition policies related to
co-promotion and co-development revenues from corporate partners.
Co-promotion revenue is a commission earned for marketing products of another
company to a specified class of medical doctors. The amount of commission earned
is, generally, a base fee with a bonus calculated by reference to an agreed upon
measure of activity such as sales volume or prescriptions written. The Company
recognizes revenue from co-promotion activities in the period in which the
promotional services are provided.
Co-development revenue is earned pursuant to agreements with other
pharmaceutical companies to develop and commercialize CoCensys' compounds.
Revenue is earned in the form of licensing fees,
50
<PAGE>
payment for the attainment of developmental milestones or funding for
research. The Company recognizes co-development revenue in the period in
which the underlying event occurs.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on
the Company's net income or stockholders' equity. SFAS 130 requires
unrealized gains and losses on available-for-sale securities, which prior to
adoption were reported separately on stockholders' equity, to be included in
other comprehensive income. Prior financial statements have been restated to
conform to the requirements of SFAS 130.
LOSS PER SHARE
In 1998, Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 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 exclude 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 No. 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 and warrants are excluded from the computation of diluted
earnings per share as their effect would be antidilutive.
STOCK OPTION PLANS
Effective January 1, 1996, the Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") and accordingly,
is continuing to account for its stock-based compensation plans under
previous accounting standards. The adoption of SFAS No. 123 had no impact on
the Company's results of operations or financial position.
NOTES RECEIVABLE FROM OFFICERS
The Company advanced funds to certain officers in exchange for notes secured
by mortgages on real property. Interest on these notes accrues at 8.5% per
annum.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year data to conform to the
1998 presentation.
2. PRIVATE PLACEMENT OF PREFERRED STOCK
In June 1998, the Company raised $8.0 million through the private placement
of Series E Convertible Preferred Stock (the "Series E Preferred"). The
Series E Preferred is convertible into common stock on June 8, 2001, or
earlier at the holder's option at a price which is discounted from the fair
market value of the Company's common stock at the time of conversion, subject
to a maximum price of $3.93 per share. The terms of the private placement
included the issuance of warrants to purchase 350,000 shares of
51
<PAGE>
common stock at $4.50 per share issued in June 1998 and 100,000 shares at
$0.63 per share in November 1998.
The Series E Preferred carries an annual dividend of 7.5 percent of the face
value of the outstanding shares, subject to reductions in the dividend rate
if the market price of Company's common stock increases to certain levels.
Dividends are payable quarterly in cash or, at the election of the Company,
by adding the amount of the dividend to the conversion value of the Series E
Preferred. Additionally, $390,000 of the $8.0 million in proceeds was
allocated to the warrants 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 starting 122 days after issuance. 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 and the $390,000 will be amortized over three years,
in the form of additional noncash preferred dividends.
During fiscal 1998, the holders of the Series E Preferred converted
approximately $1.6 million, including accrued dividends, into approximately
2.6 million shares of common stock. Through March 24 of fiscal 1999, the
holders of the Series E Preferred converted approximately $1.5 million,
including accrued dividends, into approximately 6.6 million shares of common
stock. The impact of the conversion on loss per share would be anti-dilutive.
3. CYTOVIA LICENSING AGREEMENT
In January 1998, the Company licensed certain non-core technology to
Cytovia, Inc., a new company that focuses on the commercialization of
patented drug screening technology, using living cells, in the area of
apoptosis or programmed cell death. In exchange, CoCensys received shares of
common stock of Cytovia, will be entitled to receive certain royalties and
will retain certain rights relating to the development of future therapeutic
agents for central nervous system disorders. As of December 31, 1998,
CoCensys' interest in Cytovia was less than twenty percent and is accounted
for on a cost basis.
4. DISPOSITION OF SALES AND MARKETING FORCE
On October 8, 1997, the Company entered into an Asset Purchase Agreement (the
"Agreement") to sell its sales and marketing force (the "Force") to
Watson Laboratories, Inc. ("Watson"), a wholly owned subsidiary of Watson
Pharmaceuticals, Inc. Under the terms of the Agreement, Watson assumed the
Force's co-promotion agreements, acquired certain of its operating assets
and the right to hire approximately 70 employees of the Force. As
consideration for these assets, the Company received $8.0 million from Watson
in October 1998 with up to $1.0 million more due to the Company if Watson
retained, as of specified future dates, certain percentages of the employees
from the Force. Pursuant to this contingency arrangement, Watson paid
CoCensys $750,000 in April 1998 and $250,000 in October 1998.
In order to satisfy certain provisions of the Agreement, the Company entered
into, and transferred to Watson, agreements with two pharmaceutical companies
for marketing rights and NDAs for two drugs with an aggregate cost of $2.0
million. Of this total, the Company paid $1.0 million in October 1997.
Additionally, $1.0 million of the $8.0 million of proceeds from the sale of
the Force was placed into an escrow account to satisfy the future
obligations related to these acquisitions. In October 1998, the Company made
the first $500,000 payment against this obligation and will make the final
$500,000 payment in October 1999.
52
<PAGE>
5. 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 up to three 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 it for a portion of the back-up funding. As of December 31, 1998,
the Company had $2.6 million recorded as deferred revenue related to the
Wyeth-Ayerst back-up program; this deferred amount will be recognized as
revenue 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 certain minimum and
maximum limits).
6. 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 consists 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(R), 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, both companies share
technology and resources to develop SSNRA candidates. The parties are
obligated to make specified contributions to development costs with respect
to any development candidates. Promotion costs of, and profits from any
products developed under the agreement will be shared equally in the United
States and Japan. Warner-Lambert will have the exclusive right to develop and
market any product, at its own cost, for markets outside the United States
and Japan, subject to a specified royalty payment to the Company.
Warner-Lambert is obligated to pay its specified portion of the development
costs and to make certain milestone payments, upon achievement of certain
clinical development and regulatory milestones, for each development
compound. Payments received under both the 1995 Warner Collaboration
Agreement 1997 Amended Warner Collaboration Agreement are recognized as
co-development revenues and payments made are recognized as expenses.
53
<PAGE>
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.
7. DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH G.D. SEARLE & CO.
In May 1996, the Company entered into an agreement with G.D. Searle & Co.
("Searle") to co-develop and co-promote CCD 3693, the Company's lead compound
for the treatment of insomnia along with its back-up compounds. Pursuant to
the agreement, Searle paid a $3.0 million license fee and purchased 100,000
shares of the Company's Series B Convertible Preferred Stock for $7.0
million. The license fee was recognized as co-development revenue in 1996. In
May 1998, the Series B Convertible Preferred Stock converted, in accordance
with its terms, into 1.6 million shares of common stock at a conversion price
of $4.375 per share.
In July 1998, Searle notified CoCensys that it had decided not to participate
further in the development of the Company's proprietary compounds for the
treatment of insomnia. CoCensys intends to continue research and development
of its compounds to treat insomnia and will seek a new partner for the
program in the future.
8. PROMOTION AGREEMENT WITH SOMERSET PHARMACEUTICALS, INC.
In January 1996, the Company and Somerset Pharmaceuticals, Inc. ("Somerset")
entered into the Somerset Promotion Agreement, pursuant to which the Company,
through its Sales Division, promoted Somerset's drug Eldepryl(R) to
neurologists in the United States for the treatment of Parkinson's disease.
Effective January 1, 1997, the initial agreement was superseded by the 1997
Somerset Promotion Agreement. Under the 1997 Somerset Promotion Agreement,
CoCensys had the exclusive right to detail Eldepryl to certain neurologists
and other physicians in the United States and was compensated based upon the
number of details undertaken and gross sales of Eldepryl. In October 1997 the
Company sold its sales and marketing division, and all related co-promotion
agreements, to Watson.
54
<PAGE>
9. MARKETING AND DEVELOPMENT COLLABORATION WITH NOVARTIS PHARMA, A.G.
In May 1994, the Company entered into a marketing and development
collaboration with Novartis Pharma, A.G. (formerly Ciba-Geigy Limited)
("Novartis") for the co-promotion by the Company of certain Novartis products
and the development and commercialization of ACEA 1021, a compound being
developed by the Company. This collaboration consisted of the Novartis
Promotion Agreement and the Novartis Research and Development Agreement.
Pursuant to the Novartis Promotion Agreement, CoCensys established a sales
force to co-promote and market certain Novartis products in the United States
initially to psychiatrists. The agreement provided for the advance of funds
to the Company to cover a portion of the expenses incurred by the CoCensys
sales force in promoting the Novartis products. CoCensys realized
co-promotion revenues from its share of sales of Novartis products above
certain baseline levels specified in the contract. The Novartis Promotion
Agreement terminated at the end of 1996.
In connection with the Novartis Research and Development Agreement, Novartis
purchased $7.0 million of CoCensys common stock and agreed to make certain
nonrefundable milestone payments in connection with specified events in the
course of the development of ACEA 1021. In April 1999, Novartis advised the
Company that it would not continue the development of ACEA 1021, and the
agreement terminated effective October 1999. The Company is seeking a new
partner to develop ACEA 1021. There can be no assurance that the Company will
be able to secure another partner to continue the development of this
compound.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office and research facilities and certain equipment under
operating leases and capital leases with varying terms extending through July
2002. Annual future minimum payments under operating and capital leases as of
December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31,
1999 $ 890 $ 372
2000 886 320
2001 879 72
2002 548 -
---------- ----------
Total minimum payments $ 3,203 764
----------
----------
Less amount representing interest (82)
----------
Present value of future minimum payments 682
Current portion (316)
----------
Long-term portion $ 366
----------
----------
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$1,006,000, $1,040,000, and $1,082,000, respectively.
55
<PAGE>
CONTINGENT BONUSES
In December 1998, the Board of Directors approved a broad-based 1999 employee
bonus program whereby an aggregate of approximately $390,000 may be paid to
employees contingent upon the occurrence of certain events.
11. COMMON STOCK
The Company has reserved 12.8 million shares of common stock for issuance
upon exercise of options and warrants, for issuance under the 1995 Employee
Stock Purchase Plan and for conversion of all preferred stock except the
Series E Preferred. The Series E Preferred is convertible at a rate based on
the market price of the common stock and is not subject to a minimum
conversion price. Based on the December 31, 1998 closing price for the
Company's common of $0.3125 per share, the Series E Preferred outstanding at
year end, including accrued dividends, was convertible into 23.9 million
shares of common stock.
STOCKHOLDER RIGHTS PLAN
In April 1995, the Company adopted a Stockholder Rights Plan (the "Plan")
which provides for the distribution of rights ("Rights") to holders of
outstanding shares of common stock. Pursuant to the Plan, a portion of
Convertible Preferred Stock was designated as Junior Preferred Stock, of
which 350,000 shares were reserved for issuance upon exercise of the Rights.
The Rights will become exercisable only in the event, with certain
exceptions, that an acquiring party accumulates or announces an offer to
acquire 20 percent or more of the Company's voting stock. Each Right entitles
the holder to buy one-hundredth of a share of Junior Preferred Stock at a
price of $25. In addition, upon the occurrence of certain events, holders of
Rights will be entitled to purchase either CoCensys' stock or shares in an
"acquiring entity" at half of market value. The Company will generally be
entitled to redeem the Rights at $.001 per right at any time until the tenth
day following acquisition of a 20 percent position in its voting stock. The
Rights expire in April 2005.
12. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided under SFAS
No. 123 requires use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, for certain options the
Company recognizes as deferred compensation expense the excess of fair market
value of the common stock at the date of grant over the aggregate exercise
price of such options. This deferred compensation expense is amortized
ratably over the vesting period of each option. During the years ended
December 31, 1998, 1997 and 1996, the Company recorded deferred compensation
of $223,000, $579,000 and $629,000, respectively, in connection with the
issuance and termination of certain stock options.
56
<PAGE>
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company has accounted for
its employee stock options under the fair value method of that Statement. Had
compensation cost for the Company's grants since 1995 under the stock-based
compensation plans been determined based on SFAS No. 123, the Company's pro
forma net income, and pro forma diluted earnings per share for the years
ending December 31, would be as follows (in thousands except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss $ (19,516) $ (17,974) $ (19,745)
--------- --------- ---------
--------- --------- ---------
Net loss per share $ ($0.80) $ ($0.80) $ (0.91)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 85.0% 72.1% 44.2%
Risk-free interest rate 4.8% 6.1% 6.2%
Expected option term 4.5 years 4.6 years 5.0 years
</TABLE>
57
<PAGE>
A summary of the Company's stock option activity, including those issued outside
of plans, and related information is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
WEIGHTED-
AVAILABLE SHARES OPTION AGGREGATE AVERAGE
FOR OUT- PRICE EXERCISE EXERCISE
GRANT STANDING PER SHARE PRICE PRICE
---------- -------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 699 2,409 $0.05 - $8.13 $7,195 $2.99
Authorized 3,800 - - - -
Granted (963) 963 $3.25 - $9.13 5,719 5.94
Exercised - (139) $0.20 - $5.21 (193) 1.39
Canceled and forfeited 184 (184) $0.50 - $8.38 (943) 5.12
------ ------ -------
BALANCE, DECEMBER 31, 1996 3,720 3,049 $0.05 - $9.13 11,778 3.86
Granted (1,703) 1,703 $3.00 - $7.13 8,698 5.11
Exercised - (315) $0.05 - $5.21 (199) 0.63
Canceled and forfeited 209 (209) $2.50 - $8.38 (1,114) 5.37
------ ------ -------
BALANCE, DECEMBER 31, 1997 2,226 4,228 $0.05 - $9.13 19,163 4.53
Authorized 2,000 - - - -
Retired (652) - - - -
Granted (1,961) 1,961 $0.25 - $3.88 3,107 1.58
Exercised - (164) $0.13 - $3.29 (49) 0.30
Canceled and forfeited 1,164 (1,164) $1.53 - $9.13 (5,199) 4.48
------ ------ -------
BALANCE, DECEMBER 31, 1998 2,777 4,861 $0.05 - $9.13 $17,022 $3.50
------ ------ -------
------ ------ -------
</TABLE>
The weighted-average fair value of options granted was $1.59, $3.06 and $3.25
during 1998, 1997 and 1996, respectively. The weighted-average remaining
contract life was 6.4 years, 7.3 years and 6.8 years for 1998, 1997 and 1996,
respectively.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
RANGE WEIGHTED WEIGHTED
OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
-------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05 to 1.50 2,029 7.2 $ 0.87 838 $ 0.57
2.03 to 3.00 163 5.7 2.60 133 2.60
3.07 to 4.50 873 7.5 3.52 446 3.49
4.63 to 9.13 1,801 5.6 6.53 1,397 6.56
</TABLE>
Options to purchase approximately 2.8 million, 1.9 million and 1.5 million
shares of common stock were exercisable as of December 31, 1998, 1997 and
1996, respectively.
1990 STOCK OPTION PLAN
Under the Company's 1990 Stock Option Plan, as amended, options granted to
purchase common stock of the Company may be either incentive stock options to
employees or nonqualified stock options to employees, directors or
consultants, at the discretion of the Board of Directors. The plan permits
the Company to grant incentive stock options at 100% of the fair value at the
date of grant, while statutory
58
<PAGE>
stock options may be granted at 50% of the fair value at the grant date.
Options granted to date generally vest at the rate of 25% of the total shares
upon the first anniversary of the vesting commencement date, and 2.08% of the
total shares per month thereafter. Vesting begins on either the grant date
or, if different, on the vesting commencement date specified by the Board of
Directors. Such vesting is subject to continued employment with the Company.
The options expire ten years from the date of grant or 90 days from
termination, if sooner.
1992 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In December 1992, the Company adopted the 1992 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), as amended, to provide for the automatic
grant of options to purchase shares of common stock to non-employee directors
of the Company. Each such director is granted an option to purchase 20,000
shares of common stock (40,000 shares for the Chairman of the Board). At the
beginning of each fiscal year, each non-employee director will be granted an
option to purchase an additional 8,000 shares of common stock (12,000 for the
Chairman). Vesting on the initial grant occurs in five equal annual
installments from the date of the grant for each year that the optionee
remains a director. Annual grants vest in full one year from the date of
grant. Vesting accelerates upon certain changes in ownership of the Company.
The exercise price of options under the Directors' Plan must equal or exceed
the fair market value of the common stock on the date of the grant.
1995 EMPLOYEE STOCK PURCHASE PLAN
In March 1995, the Company adopted the 1995 Employee Stock Purchase Plan and
reserved 350,000 shares of common stock for issuance thereunder. In June
1997, the Company reserved an additional 200,000 shares for issuance under
the plan, which was approved by shareholders in June 1998. Pursuant to the
provision of the plan, employees purchased 136,436, 90,900 and 112,743 shares
of common stock in 1998, 1997 and 1996, respectively, at $0.24 to $7.12 per
share.
1996 EQUITY INCENTIVE PLAN
In December 1996, the Company adopted the 1996 Equity Incentive Plan to
provide for the issuance of stock options, restricted stock, stock bonuses
and stock appreciation rights to employees, directors or consultants, at the
discretion of the Board of Directors. The plan permits the Company to grant
incentive stock options at 100% of the fair value at the date of grant, while
nonqualified stock options may be granted at 85% of the fair value at the
grant date. Options granted will generally vest at the rate of 25% of the
total shares upon the first anniversary of the vesting commencement date, and
2.08% of the total shares per month thereafter. Vesting will begin on either
the grant date or, if different, on the vesting commencement date specified
by the Board of Directors. Such vesting will be subject to continued
employment with the Company. The options will expire ten years from the date
of grant or 90 days from termination, if sooner. The Company has reserved 2.8
million shares of common stock for issuance under this plan.
1998 NON-OFFICER EQUITY INCENTIVE PLAN
In September 1998, the Company adopted the 1998 Non-Officer Equity Incentive
Plan to provide for the issuance of stock options, restricted stock and stock
bonuses to employees or consultants, at the discretion of the Board of
Directors. Officers of the Company are not eligible to receive any benefits
under this plan. The plan permits the Company to grant nonqualified stock
options with an exercise price of not less than 85% of the fair value at the
grant date. Options granted will generally vest at the rate of 25% of the
total shares upon the first anniversary of the vesting commencement date, and
2.08% of the
59
<PAGE>
total shares per month thereafter. Vesting will begin on either the grant
date or, if different, on the vesting commencement date specified by the
Board of Directors. Such vesting will be subject to continued employment with
the Company. The options will expire ten years from the date of grant or 90
days from termination, if sooner. The Company has reserved 2.0 million shares
of common stock for issuance under this plan.
OTHER OPTIONS AND WARRANTS
In September 1990, the Company granted to a director of the Company an option
to purchase 20,000 shares of common stock at $.05 per share, outside of any
plans. The option is fully vested and expires in September 2001, or three
months after termination as a director, if sooner.
In November 1995, the Company granted to an officer of the Company an option
to purchase 25,000 shares of common stock at $.50 per share, outside of any
plans. The option is fully vested and expires in November 2005.
In connection with the June 1994 purchase of Acea Pharmaceuticals, Inc., the
Company issued warrants to purchase 31,982 shares of common stock at $0.04
per share. The warrants were exercised on October 2, 1998.
In July 1992, the Company issued a warrant to purchase 42,000 shares of
common stock at $5.00 per share in connection with a capital lease agreement.
The warrant expires in July 2002.
As part of a private offering in June 1995 that included the sale of 3.7
million shares of common stock, the Company issued 1.5 million warrants. Each
warrant entitles the holder to purchase one share of common stock at a
pre-determined price ranging from $3.90 per share to $4.40 per share during
the five-year exercise period. As of December 31, 1998, approximately 1.4
million of these warrants were outstanding.
As discussed above in Note 2, as part of a private offering in June 1998 that
included the sale of $8.0 million of convertible preferred stock, the Company
issued warrants in June 1998 to purchase 350,000 shares of common stock at
$4.50 per share and in November 1998 issued warrants to purchase100,000
shares at $0.63 per share.
13. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
60
<PAGE>
Significant components of the Company's deferred tax assets and liabilities at
December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Book/tax depreciation difference $ (117) $ (161)
--------- ----------
Total deferred tax liabilities (117) (161)
DEFERRED TAX ASSETS
Net operating loss carryovers 32,797 27,860
Research and development credit carryovers 5,704 4,822
Capitalized state research and development costs 6,301 5,376
Other 92 152
--------- ----------
Total deferred tax assets 44,894 38,210
Valuation allowance for deferred tax assets (44,777) (38,049)
--------- ----------
Net deferred tax assets 117 161
--------- ----------
Net deferred taxes $ - $ -
--------- ----------
--------- ----------
</TABLE>
At December 31, 1998, the Company had operating loss carryovers of approximately
$96 million for federal income tax purposes. The federal loss carryovers begin
to expire in 2004. For federal and California income tax purposes, the Company
also had unused research and development credits of approximately $4.0 million
and $1.7 million respectively, which expire beginning in 2004. The difference
between the financial reporting and tax loss carryforwards for California
purposes is attributable to the capitalization of research and development
expenses and the 50% limitation on loss carryforwards for California tax
purposes.
The Tax Reform Act of 1986 includes provisions which significantly limit
potential use of net operating losses and tax credit carryovers in situations
where there is a change in ownership, as defined in Internal Revenue Code
Section 382, of more than 50% during a three-year period. Accordingly, if a
change in ownership occurs, the ultimate benefit realized from these
carryovers may be significantly reduced in total, and the amount that may be
utilized in any given year may be significantly limited. California has
enacted similar legislation. The Company has had stock issuances and an
ownership change occurred as a result of the Acea acquisition in June 1994.
The annual limitation is approximately $2.4 million on accumulated net
operating losses of approximately $24.6 million.
14. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan that permits participants to make
contributions by salary reduction pursuant to section 401(k) of the Internal
Revenue Service. During 1996, the Company began matching 50% of a participant's
contribution up to a maximum participant contribution of 4% of eligible
compensation. In connection with this matching contribution, the Company
recognized expense of $63,000, $176,000 and $51,000 in 1998, 1997 and 1996,
respectively.
61
<PAGE>
15. BUSINESS SEGMENTS
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which superseded Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. The adoption of SFAS 131 did
not affect results of operations or financial position, but did affect the
following disclosure of segment information.
Historically, the Company has operated in two business segments, drug
promotion and drug development. Promotion revenues arise from contractual
agreements under which the Company promotes 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 division to Watson and ceased all drug promotion
activities. 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.
Selected financial information for the Company's business segments as of and
for the years ended December 31, 1998, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues from external partners
Drug promotion segment $ 540 $ 3,264 $ 9,085
Drug development segment 2,046 8,650 6,073
------------- ------------- -------------
$ 2,586 $ 11,914 $ 15,158
------------- ------------- -------------
------------- ------------- -------------
Operating income
Drug promotion segment $ 540 $ (4,408) $ (3,140)
Drug development segment (17,593) (16,961) (16,513)
------------- ------------- -------------
$ (17,053) $ (21,369) $ (19,653)
------------- ------------- -------------
------------- ------------- -------------
Assets
Drug promotion segment $ - $ - $ 605
Drug development segment 2,819 3,364 2,663
------------- ------------- -------------
$ 2,819 $ 3,364 $ 3,268
------------- ------------- -------------
------------- ------------- -------------
Depreciation and amortization
Dug promotion segment $ - $ 29 $ 738
Drug development segment 907 907 1,334
------------- ------------- -------------
$ 907 $ 936 $ 2,072
------------- ------------- -------------
------------- ------------- -------------
Expenditures for long-lived assets
Drug promotion segment $ - $ 121 $ 80
Drug development segment 566 1,354 732
------------- ------------- -------------
$ 566 $ 1,475 $ 812
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
In fiscal 1998, three partners represented 96 percent of revenues. In fiscal
1997, three partners represented 88 percent of revenues. In fiscal 1996, four
partners represented 100 percent of revenue.
62
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 Nos. 33-83050, 33-97136 and 333-58663) of CoCensys, Inc. and in
the related Prospectuses; and in the Registration Statements (Forms S-8 Nos.
33-97260, 33-97258, 333-07855, 333-21761, 333-31013 and 333-70435) of
CoCensys, Inc., of our report dated January 29, 1999 (except for the last
paragraph of Note 2 as to which the date is March 24, 1999), with respect to
the financial statements of CoCensys, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Orange County, California
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,222
<SECURITIES> 9,973
<RECEIVABLES> 29
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,516
<PP&E> 6,884
<DEPRECIATION> 4,418
<TOTAL-ASSETS> 15,099
<CURRENT-LIABILITIES> 7,201
<BONDS> 0
0
16,386
<COMMON> 107,381
<OTHER-SE> (116,261)
<TOTAL-LIABILITY-AND-EQUITY> 15,099
<SALES> 0
<TOTAL-REVENUES> 2,586
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> (15,226)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,226)
<EPS-PRIMARY> (0.700)
<EPS-DILUTED> (0.700)
</TABLE>
